L4. Selling with a tenancy

Selling a property presently let to tenants can be very difficult. Buyers often lose interest very quickly when they hear a property is occupied by tenants. They’ve read scary stories in newspapers and magazines of property buyers who have struggled for up to a year to evict existing tenants. There are a number of things agents can do in assisting sellers to sell rented properties and, needless to say will make it easier for them to get the properties sold.

1. When is the Best Time to Sell a Rented Property?

There is very little wisdom in trying to sell a property more than three months before the existing lease expires. Most landlords try to synchronise selling with the termination of their leases in such a way as to have occupation available to their buyers at the same time as their tenants vacate the premises. This is not easy to achieve as there are so many factors that can slow down the sale but, without some special foresight as to when occupation will be needed, most sellers have to guess their sale dates and a three-month period from first marketing the property is usually the best option.

A difficulty arises when the property is left vacant for a while. Putting short-term tenants in is usually unwise, but the dangers of having an empty home are that its condition may deteriorate, maintenance will be necessary, squatters may move in, the premises may be vandalised, and monthly rental will be lost in the meantime. It is not easy to find the perfect fit, especially in times when the market is depressed, and homes can take any number of months to sell.

Another potential problem is that some buyers will be looking for early occupation fairly soon after a sale and may walk away if the tenant is going to remain in the property for a few months. Getting a sale of a rented property right, especially its vacation and occupational time frames, is never easy. Agents know all too well what the problems are with rented properties and their sellers need to be encouraged to get their act together upfront as far as possible to prevent tenancy hassles later.

2. Huur Gaat Voor Koop – the Tenant’s Privileges

It is also very important to know what the legal rights of tenants are before rushing into the selling market. A Roman-Dutch legal principle, huur gaat voor koop, still applies in our law and it gives tenants a few advantages.

When selling a property an owner cannot summarily decide to cancel or shorten the existing lease simply by giving notice of the sale to the tenant. A buyer also cannot do this when he becomes the new owner of the home. The tenant’s rights take preference over any new buyer’s rights to occupy a property – this applies to sales of repossessed properties as well. The buyer takes an automatic cession of the existing lease and becomes substituted as the new landlord on registration of transfer of the property, but he remains bound by the lease and the tenant can sleep peacefully, knowing his rights take preference and his lease will not be affected by the sale.

Then there is the possible problem of having to evict a tenant who refuses to vacate when his lease expires. About sixteen years ago a decision of the Appellate Division, the highest Court in the land, decided that the Prevention of Illegal Eviction Act (commonly known as ‘the PIE Act’) applies to normal landlord and tenant lease contracts. Legal analysts have long argued that the decision was wrong, but it has stood and no new legislation has been introduced to remedy the errors which imbalanced the rights of landlords and tenants when the latter decides to stay on unlawfully. The landlord has to institute a normal action for eviction and must first give the local authority 14 days’ notice before doing so. Landlords may no longer take the traditional shortcut route of going to the High Court on the motion for an immediate eviction order.

3. Other Issues Affecting Tenancy Sales

Most agents wouldn’t think to check a seller’s existing contract to see if there might be any conditions in it restricting his right to sell.

If the landlord granted an option to purchase the property to the tenant, or a right of first refusal, these take preference over any sale to a third party. If the right is overlooked, it can cause huge problems when the property is prematurely sold to another person. In Washington DC tenants have an automatic right of the first refusal, but that right does not exist here (except in the sale of rented flats and apartments newly sectionalised).

It is always wise to exercise caution when selling properties currently occupied by tenants and all agents should check the existing lease agreement first to ensure that they can freely put the property on the open market.

An inspection of a lease will also disclose if there are any other preferential rights in the lease agreement, such as an option to renew the lease which the tenant could still exercise.

Agents should never just take their seller’s verbal assurances for granted.

Often a seller will confidently confirm that there are no ancillary rights in the lease restraining his right to sell, and he may innocently believe this to be the case, but all too often property owners are blissfully ignorant of rights that were given to the tenant when the lease was originally concluded. It is crucial to check all lease contracts before marketing a tenanted property for sale. The consequences of ignoring tenants’ rights can, as said before, create headaches for the agent and the landlord later.

4. How can Sellers Improve their Selling Prospects?

The most important issue here is to gain co-operation from the tenant.

The seller needs to ensure his tenant will be willing to vacate when his lease terminates. Alternatively, he may need to approach his tenant to see if he is willing to reduce the period of his lease so that the seller can proceed to sell his property. There are a number of ways of achieving this. Firstly, a good relationship must be maintained with the tenant throughout his tenancy. When the tenant genuinely reports property defects or other issues like burst pipes to the landlord, the latter must take steps to ensure that these are attended to quickly and properly. It helps to maintain the goodwill of the tenant.

When an agent does send potential buyers around to view a tenanted property, the rights of the tenant must be respected, especially his right not to be disturbed at inconvenient times or too often in a short period of time. The landlord should advise the tenant well in advance that he intends to sell his property so that the tenant can make adequate provision for this and will not assume he can vacate at his leisure. In the USA some landlords even offer their tenants a 50% discount off their last monthly rental payment just to secure their co-operation, but this practice is not recommended here. It may have the reverse effect by making the tenant feel he does not have to comply with all his obligations when the landlord wants to sell the property.

Landlords learn the hard way that the tenant is likely to do more damage to the property when preparing to vacate it than he has done at any time during the lease. By building a good relationship with the tenant during the tenancy landlords are likely to find that the tenant will reciprocate the goodwill when the time comes for the landlord to sell his property.

Compare listings