Buying property subject to lease: key considerations
If you are buying property subject to lease, it’s important to understand the implications and your role as the new landlord. Whether it’s a residential or commercial property, there are several key considerations to keep in mind. This comprehensive guide will provide you with valuable insights and information to navigate this process effectively.
Residential properties:
When buying a residential property with the intention of residing there, it’s important to note that you’ll need to honour the existing lease agreement. When buying property subject to lease and as the new landlord, you must comply with the existing lease agreement.
According to the Residential Tenancies Act 1997 the tenant has a right to stay in the property until the end of the fix term lease. If the seller is providing vacant possession the date in the notice to vacate cannot be before the end of the fixed term lease, unless the tenant has agreed to leave earlier.
The tenant must allow entry into the property to allow the seller to show the property to prospective buyers, including arranging open for inspections [section 86 – Residential Tenancies Act 1997]. The tenant must allow the seller to take photos or videos for advertising the property for sale [section 89A – Residential Tenancies Act 1997].
The tenant must be provided with proper written notice with the minimum required notice period stating they wish to enter the property and they must not enter the property outside the hours of 8am and 6pm or on public holidays [section 85 & Sectoin 86 – Residential Tenancies Act 1997].
The Residential Tenancies Act 1997 sets strict legal requirements on both tenants, sellers and buyers of property subject to lease. These legal requirements must be followed and the tenant must be compensated if the rental provider wants to hold a sales inspections.
Commercial properties:
The purchase of commercial property is subject to Goods and Services Tax (GST). However, when buying a commercial property subject to a lease, the seller (if registered for GST) may classify the contract as a “going concern“. This means that if you, as the purchaser, are also registered for GST, you won’t have to pay GST on the contract price. Further information on the going concern exemption to GST can be found on our “going concern” article.
Adjustments when buying property subject to lease
All outgoings such as water rates, council rates and land tax (in some circumstances) are adjusted at the time of settlement. Further information on adjustments can be found here. When buying property subject to lease the parties must also adjust for the rent income, Your property lawyer or conveyancer will obtain a copy of the rental ledger from the property manager and adjust for rental income on a pro-rata basis.
Professional property management when buying property subject to lease:
You may consider hiring a property manager to handle the property and tenant professionally. If the seller has an existing property manager, you can choose to continue with their services or engage a new property manager.
The managing agent real estate agent will oversee the day-to-day operations and management of the property. They will be responsible for handling various task related to the property. Some key responsibilities include:
- Tenant acquisition and screening
If you have purchased property subject to lease and the tenant decides to vacate the property the managing agent will be responsible for attracting and selecting suitable tenants for your property.
They advertise vacancies, conduct property showings, screen potential tenants, and verify their background, credit history, and references. This process helps ensure that qualified and responsible tenants are selected.
- Drafting lease agreement and legal documents
Managing agents are responsible for preparing and executing lease agreements between property owners and tenants. They ensure that all necessary legal documentation is in place, including terms and conditions, rent amounts, security deposits, and any additional clauses required by law.
- Collecting rent and paying outgoings
One of the primary responsibilities of a managing agent is collecting rent from tenants. They ensure that rent is paid on time and enforce late payment policies when necessary. Managing agents also handle financial matters related to the property, such as budgeting, accounting, and maintaining financial records.
- Property maintenance and arranging repairs
Managing real estate agents oversee the maintenance and repairs of the properties under their management. They coordinate necessary repairs, schedule routine maintenance tasks, and address any tenant-reported maintenance issues promptly. They may work with contractors and vendors to ensure that repairs are done in a timely and cost-effective manner.
- Property inspections
Regular inspections of the property are conducted by managing agents to ensure compliance with safety standards and lease agreements. They also ensure that the property meets all legal and regulatory requirements, such as obtaining necessary permits and adhering to building codes.
Managing residential properties yourself:
If you decide to manage a residential property and the tenant on your own, you’ll need to receive a transfer of the bond held by the Residential Tenancies Bond Authority (RTBA). This ensures that you’re recorded as the responsible landlord for the bond.
As a landlord you or your property manager has an obligation to lodge the tenant’s bond with the RTBA. The RTBA is an independent government body that holds bonds in trust during the rental period.
Buying property subject to lease places significant responsibility on the purchaser. For more detailed information on buying property subject to lease, seek professional advice from experts in real estate and legal matters.
Read our other articles on recent property conveyancing matters in Melbourne:
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