Vacant Possession vs Subject to Existing Tenancies

KEY TAKE-OUTS:

• What is Vacant Possession?
• What is Subject to Existing Tenancies?
• Understanding the importance of how your Contract should be marked when selling.
• Understanding the importance of how you are purchasing a property.

What is Vacant Possession?

Whether you’re buying or selling, ‘Vacant Possession’ means that the property is being sold unoccupied by any person and empty of all personal items and furniture.

So, does that mean the property must be professionally cleaned?  

The standard terms of a Contract for Sale do not require the property to be professionally cleaned. The property just needs to be in a reasonably clean state. As the standard of cleanliness can differ, we advise sellers to ensure the property is vacuumed, mopped and that the counters/cupboards are wiped down as a show of good faith to avoid potential issues at settlement. This does not need to be done by a professional cleaner.

If the property being sold is vacant land, the property must be cleared of all debris i.e. any building materials or piles of dirt on the land.

The Vendor has an obligation to ensure the condition of the property is the same as it was at the time of exchange (subject to fair wear and tear).

What is Subject to Existing Tenancies?

‘Subject to Existing Tenancies’ means that the property is sold subject to a Lease. Whether that be a residential tenancy, commercial tenancy or a business lease it means that the tenant will remain in the property once settlement occurs and the lease terms remain. When buying a property, it means as well as becoming the owner, you become a landlord.

So, does that mean I can’t give the tenant notice to vacate the property?

If you wish to have the property available to be moved into at settlement or after settlement, you can request for the tenants to be provided with a notice to vacate the property within the timeframes required by law and as per any lease agreement.

Know the importance of how your Contract should be marked when selling

If you are selling the property as vacant possession, you need to ensure that at settlement the property is cleared of any items that are not fixtures to the property. So, if the item can be removed without causing damage to the property and it is not noted as an inclusion on the front page of the Contract, it must be removed.

This includes building materials such as spare flooring, roof tiles or paint. If you want to leave items like these for your buyer, ensure you advise your legal representative that these items are to be noted as an inclusion on your contract for sale.

If items are left at the property that are not noted as inclusions or the property is left with rubbish or holes in the walls the buyer may have the right to delay settlement as the property is not in the same condition that it was at the time of the original inspection and arguably vacant possession has not been provided.

If as the seller you have a tenant in the property and the contract is marked as vacant possession, you will be required to have your tenant vacate the premises prior to settlement. If your tenant does not vacate by the settlement date, you will be at risk of breaching the contract as you have not provided vacant possession.

You will be required to formally notify your tenant that the property is being sold with vacant possession and that you will need them to vacate prior to the settlement date.

Where a residential tenancy agreement is a continuing agreement (for example, where the tenant is in possession under an expired residential lease) you can end the agreement by giving a notice of termination. If a landlord requires vacant possession because of the sale of the property, the landlord must give the tenant at least 30 days’ notice.

Contents of notice. A notice of termination must:

• Be in writing,
• Be signed by you or by your agent,
• Give the address of the rented property,
• Specify the date the tenant is to move out,
• State the grounds on which the notice is given, and
• Include a statement that information about the tenant’s rights and obligations can be found in the residential tenancy agreement.

Method of service.  A notice of termination to your tenant must:

• Be posted to the tenant’s residence, or
• Be given to the tenant personally, or
• Be given to the person who normally pays the rent (but only if that person is at least 16 years old), or
• Be delivered to the residential premises and left there for the tenant (but it must be left with a person who is at least 16 years old).

If settlement is delayed due to the fault of you as the seller or your bank, the buyer will not be liable for any penalties under the contract. However, the buyer will have the right to issue you with a notice to complete which requires you to settle within 14 days, meaning you are required to make the property vacant and rectify any issues at the property to ensure it is in the same condition as it was at the time of the original inspection within that 14 day period. Please note that the following day after the notice to complete period, the buyer can terminate the contract and recover their full deposit and possibly claim damages should you not be in a position to settle.

If the contract is marked subject to existing tenancies, it is up to you as the seller to advise your managing agent that the property has been sold and that any rent in arrears is collected prior to settlement as no adjustments will be made for rent in arrears. It is important that you instruct your leasing agent to distribute between you and your buyer any rent paid in advance, and to oversee the transfer of the rental bond.

Your legal representative will prepare letters addressed to your tenant’s authorising payment of further rent to the new owners, dated on the date of completion. Again, it is important to make sure that you have collected all your rent as it may be difficult if not impossible to chase outstanding payments once settlement occurs.

Know the importance of how you are purchasing the property

When purchasing a property, knowing if the property is being sold with vacant possession or subject to existing tenancies can have an effect on your future plans.

For example, if you are a first home buyer and want to move into the property to satisfy the eligibility criteria for any first home incentives but the property is sold subject to existing tenancies. You can request that the seller provides vacant possession at settlement, however, the seller is not obliged to agree. You can further request that they provide a notice to vacate to the tenant however again, they are not obliged to agree and if they do agree the tenant may not vacate prior to settlement.

If you are eligible for the First Home Buyers Choice – Property Tax and opt in for the initiative and the tenants remain in the property after settlement, then this can affect your property tax assessment. In the current financial year 2023/2024 the fee and rate for a property that is used as an investment is $1,500 plus a rate of an unimproved land value of 1.1% compared to if the property was owner occupied straight away at a rate of $400 plus an unimproved land value of 0.3%.

Therefore, if the tenant remains at the property for 3 months, you as the First Home Buyer will be paying the higher rate for those 3 months until such time as you move into the property in accordance with your first home buyer eligibility requirements.

If the property is being sold as vacant possession, it is important to complete a final inspection on the day of settlement or the day before settlement to ensure that the home is left clear of all personal items and rubbish, and that there is no damage to the property.

Should the property not be cleared of personal items and rubbish or there is damage to the property, you as the buyer may have the right to delay settlement without penalty until such time as these items are rectified. You may also have the right to issue the seller with a notice to complete which will require them to rectify these issues and settle within 14 days from the date the notice is issued.

If you have any questions regarding the information provided above, please feel free to contact the Conveyancing team at Coutts. Our experienced team of professionals is always ready to assist you and provide you with the guidance and support you need throughout the conveyancing process. You can reach us by phone, email, or in person at one of our offices.