Selling an investment property that already has tenants adds a few steps to settlement. As the seller, you need to think about more than the transfer of the property. Rent, the bond, the tenancy itself and who has possession all need to be dealt with when ownership changes.
Most of it comes down to one question. Is the property being sold with the tenancy continuing, or does the contract require vacant possession at settlement?
Getting that clear early is what keeps the transaction simple.
Can you sell a property while it is tenanted?
Yes. A property in Western Australia can be sold while tenants are living in it.
If the tenancy continues after settlement, the new owner takes on the landlord responsibilities once ownership changes. This is common when an investment property is sold to another investor, and it is often the easiest version of this transaction.
A fixed-term tenancy does not end simply because the property has been sold. That single fact drives most of what follows.
What tenancy information is needed for settlement?
Once your settlement agent knows the property is tenanted, they will need the tenancy details to prepare the transaction correctly.
Relevant information includes:
- the tenancy agreement
- the amount of rent being paid
- the date rent has been paid up to
- details of the rental bond
- whether there are any rent arrears
- the property condition report
- property management details.
Where the property is sold subject to the lease, the standard General Conditions attached to most WA contracts also require the seller to hand over a signed notice to the tenant, advising them of the sale and directing them to pay rent to the buyer from the possession date.
Providing accurate information early helps the buyer understand exactly what they are taking on. Your settlement agent can confirm what is required for your particular transaction. If you have not appointed one yet, see how SettleHQ works and how you can compare WA settlement firms based on your needs.
What happens to rent at settlement?
Rent is adjusted between the parties, and the dividing line is the possession date rather than the settlement date. These are usually the same day, but not always, so it is worth knowing which one your contract works to.
The seller is generally entitled to rent up to and including the possession date. The buyer is entitled to rent from the day after.
If you have already received rent covering days the buyer will own the property, that amount is paid to the buyer at settlement as part of the settlement figures.
Arrears work differently. If a tenant owes rent that was due but unpaid at the possession date, the seller is generally not required to make that up to the buyer, and the right to chase it stays with the seller. Tell your settlement agent about any arrears rather than leaving them to surface later.
What happens to the tenant's bond?
In Western Australia, the bond is the tenant's money and is held by the Bond Administrator, not by you. So it is not simply handed over at settlement like any other adjustment.
Where the tenancy continues, the change of owner is recorded by updating the lessor details held with the Bond Administrator, using a Variation of Security Bond form. Your property manager usually handles this, but it needs to happen, and it needs the correct details.
Your contract will also set out how the bond is dealt with between you and the buyer. This is another reason your settlement agent and property manager should have accurate tenancy information well before settlement.
If you are preparing to sell, a complimentary contract review is available when proceeding with a settlement firm through SettleHQ, and can help identify important conditions before you commit.
What if the buyer wants vacant possession?
This is where the type of tenancy really matters, and where sellers most often run into trouble.
Periodic tenancy. If there is no fixed end date and the contract of sale requires vacant premises, the landlord must give the tenant 30 days' notice using a Notice of termination, Form 1C.
Fixed-term tenancy. This is harder. Selling does not end a fixed-term agreement, and a tenant cannot be forced to leave early. If vacant possession is required, there are two paths. Either the tenant agrees in writing to end the tenancy early, or the settlement date needs to fall on or after the end of the fixed term, with 30 days' notice or more given using Form 1C.
Where a tenant agrees to leave early, landlords sometimes offer compensation such as a rent-free period or covering moving costs.
The practical point for sellers is this. Check the tenancy end date before you agree to a settlement date, not after. Agreeing to vacant possession on a 45-day settlement when the lease has six months to run creates a problem that is difficult to unwind.
Because tenancy agreements and sale contracts vary, get appropriate advice before making decisions about ending a tenancy early.
What about land tax and outgoings?
On a tenanted investment property, land tax is generally apportioned between the seller and buyer as an outgoing at settlement. This is different from the position on an owner-occupied home, where the buyer is usually not liable for land tax at all.
It is a small point that catches investors out, particularly on settlements falling near the end of the financial year. Your settlement agent will calculate the apportionment as part of your settlement figures.
How can your settlement agent help?
A tenanted property needs coordination between the seller, the buyer, both settlement representatives and the property manager.
Your settlement agent can confirm what tenancy documentation is required, calculate the rent and outgoings adjustments, make sure the bond and lessor details are dealt with correctly, and identify anything that needs attention before ownership transfers.
Just as importantly, they can tell you when a matter has moved beyond the normal settlement process and needs tenancy or legal advice.
If you are still deciding who should handle the transaction, compare settlement agents in our WA network and find a firm suited to your requirements.
Prepare early for a smoother settlement
Selling a tenanted property does not have to complicate settlement. It does require preparation.
- Confirm whether the tenancy is fixed-term or periodic, and note the end date.
- Check what the contract says about vacant possession before you sign it.
- Gather the lease, rent records, property condition report and bond details.
- Identify any arrears.
- Tell your settlement agent the property is tenanted from the very beginning.
If the buyer is taking over as landlord, having the tenancy information organised makes the transition clearer for everyone, including the tenant.
Settle Smart.
This article provides general information about property settlement and residential tenancies in Western Australia. It is not legal advice. Tenancy agreements, sale contracts and individual circumstances vary, so seek professional advice about your particular transaction.
