Purchasing a property with tenants already in place can seem like a smart investment strategy, offering immediate rental income and saving the time and effort associated with finding new tenants.
However, there are several important aspects and legalities you need to understand when you buy a tenanted property. This guide outlines everything you need to know, from tenant rights to the responsibilities of the new landlord.
What’s in the Lease Agreement
When a property is sold, the lease agreement with existing tenants remains in effect, binding the new owner to its terms. Whether it’s a fixed-term or periodic lease, the new landlord must honor the original conditions, including rental rates and duration.
Tenant Protections During Property Sale
Legal Framework Governing Tenant Evictions
Australian states and territories have specific Residential Tenancy Acts that govern the relationship between landlords and tenants. These Acts ensure a level of stability for tenants, even when the ownership of the property they rent changes. Here’s a breakdown of the key protections:
- Tenancy Continues: Upon settlement of the property sale, the existing tenancy agreement automatically transfers to the new owner, who becomes the new landlord. The tenants retain all their rights and obligations outlined in the lease agreement, including rent amount, lease term, and expectations around maintenance and repairs.
- Landlord Disclosure: The seller is obligated to disclose the existence of any tenancies to the buyer during the sale process. This includes providing the buyer with a copy of the current lease agreement.
However, this legal framework varies significantly across different regions, making it essential for potential property buyers to familiarize themselves with the local laws where the property is located.
Key Points to Consider:
- Eviction Notices: Landlords are required to provide tenants with written notice to vacate the property by a specified date, with the notice period varying by jurisdiction and lease type.
- Protection Against Unjust Eviction: Tenants have the right to challenge evictions, especially in cases of alleged retaliatory eviction or improper notice.
- No-Fault Eviction Laws: Some jurisdictions, such as Queensland, Victoria, Tasmania, and the ACT, have introduced laws limiting landlords’ ability to evict tenants without cause, marking a significant shift towards tenant protection.
Eviction Rights and Notice Periods for New Owners
While tenants have strong protections, there are situations where a new owner can seek to regain possession of the property.
However, they must follow the legal eviction process as outlined in their state or territory’s Residential Tenancy Act. Here’s a breakdown of the general conditions and notice periods:
Eviction Grounds:
- Fixed-Term Lease: If the property has a fixed-term lease in place, the new owner cannot evict the tenants before the lease expires unless there are exceptional circumstances outlined in the Act (e.g., the tenant breaches a major condition of the lease).
- Periodic Lease: For periodic leases (often referred to as “month-to-month”), the new owner can serve the tenants with a notice to vacate, provided a valid reason exists under the Act. These reasons can vary by state or territory but might include:
- The new owner intends to occupy the property as their principal place of residence.
- The property requires significant renovations that cannot be done while the property is occupied.
Notice Periods:
The required notice period for eviction also varies by state and territory and depends on the type of lease and the reason for eviction.
Generally, the notice period for a new owner to evict tenants with a periodic lease is longer than the notice period a landlord can give under normal circumstances. Here are some examples:
- New Owner Occupancy: The notice period for a new owner to evict tenants for wanting to occupy the property themselves can range from 30 days (in some circumstances in Tasmania) to 90 days (in New South Wales and Victoria).
- Renovations: The notice period for renovations can be even longer, potentially reaching several months depending on the scale of the renovations.
State and Territory Variations
While the core principles of tenant protection during property sale remain consistent across Australia, the specifics of eviction grounds and notice periods can vary by state and territory. Here’s a glimpse into some of these variations:
- New South Wales (NSW): In NSW, the notice period for a new owner to occupy the property themselves is 90 days. Landlords can also evict tenants for renovations if the work cannot be “reasonably done” while the property is occupied.
- Victoria: Similar to NSW, Victoria requires a 90-day notice for owner occupation. Additionally, landlords can obtain vacant possession for renovations if the work is “extensive” and requires the tenant to vacate for an unreasonable period.
- Queensland (QLD): QLD offers a slightly shorter notice period for owner occupation at 60 days. Landlords can also evict tenants for renovations if the work is “major” and necessitates the tenant vacating for an unreasonable time [Queensland Government website, qld.gov.au].
- Western Australia (WA): WA aligns with the 90-day notice period for owner occupation. Landlords can seek vacant possession for renovations if the work is “substantial” and necessitates the tenant vacating for an unreasonable period [Department of Mines, Industry Regulation and Safety website, dmirs.wa.gov.au].
Additional Considerations:
- Tribunal Intervention: Tenants who receive an eviction notice they believe is unfair can apply to their state or territory’s civil and administrative tribunal for a review. The tribunal can consider the circumstances and potentially order a different outcome.
- Seeking Legal Advice: For both new property owners and tenants facing eviction, consulting a lawyer specializing in tenancy law is highly recommended. They can provide specific guidance based on the relevant state or territory legislation and individual circumstances.
Advantages and Disadvantages of Buying Tenanted Properties
Purchasing a property with existing tenants offers several benefits, such as immediate rental income and avoiding the hassle of finding new tenants. However, it also presents challenges, including inherited legal risks and the requirement to honor existing lease terms.
Pros:
- Immediate rental income.
- No need for immediate tenant search.
- Potential compliance with habitability requirements.
Cons:
- Inherited legal and maintenance issues.
- Lease terms must be honored.
- Possible difficulties in tenant eviction.
The Role of VCAT in Victoria
In Victoria, the Victorian Civil and Administrative Tribunal (VCAT) exemplifies the process and considerations involved in tenant evictions.
VCAT’s decisions are based on whether eviction is “reasonable and proportionate,” taking into account the impact on tenants, landlords, and even neighbours. This illustrates the careful consideration of hardships and the pursuit of alternative resolutions where possible.
Financial and Legal Considerations
When purchasing a tenanted property in Australia, you need to be aware of the financial and legal implications, specifically regarding the contract of sale and your tax obligations related to rental income.
Conveyancing and Contract of Sale
Conveyancing is the legal process that you’ll undergo when transferring the property into your name.
It’s essential to examine the contract of sale carefully to understand your rights, particularly concerning existing tenants:
- Vacant Possession: If the contract stipulates that you’re to receive vacant possession, the tenants may need to move out before settlement.
- Transfer Duty (Stamp Duty): You will be required to pay transfer duty, which can significantly impact your budget and should be calculated in advance.
- Bond: It’s also crucial to check if there’s a bond held with a government authority, as this will be transferred to you upon settlement.
Rental Income and Taxes
Owning a rental property comes with specific tax considerations:
- Rental Income: As a new owner, you’re entitled to the rental income from the settlement date, which will be considered taxable income.
- Capital Gains Tax (CGT): When you eventually sell the property, be mindful that CGT may apply to any profit made, as it is considered an investment property.
- Investment Home Loan: If you’ve taken out an investment home loan, the interest paid can typically be deducted from your rental income, thereby reducing your taxable income.
Strategies for Investors
As an investor acquiring an investment property with existing tenants in Australia, you must navigate the landscape with precision. This is to optimise your returns and comply with tenancy laws.
Maximising Rental Yield
To maximise your investment property’s rental yield, consider the following:
- Assess the Current Lease: Review the lease agreement thoroughly. If rents are below market value, you may need to plan for future rent reviews.
- Market Conditions: Keep abreast of vacancy rates and rental trends in the area. These factors could influence your strategy for rent adjustments and tenant retention.
- Maintenance: Regular maintenance can preserve property value and justify higher rent, but ensure costs don’t outweigh the benefits.
- Options for Rent Increase: According to the existing tenancy agreement, you might have options to increase rent, but this must be done within the confines of the law and with proper notice.
Insurance and Property Management
Securing the right insurance and effective property management can safeguard your investment:
- Landlord Insurance: Invest in a robust landlord insurance policy. Make sure it covers potential property damage and loss of rental income.
- Choosing an Agent: A competent property management agent can ensure that your property is well-managed. They can also make sure tenancy issues are promptly addressed. This can mitigate the risk of vacancies and streamline your investment experience.
- Rental Market Analysis: Stay informed about the rental market’s performance in your property’s area. A knowledgeable agent can provide insights on how to position your property competitively.
Understanding Additional Costs
When investing in a property with a body corporate, it’s essential to understand all associated costs, including whether body corporate fees include council rates, to accurately budget for your investment.
Council rates are a significant expense associated with property ownership in Australia, and their inclusion or exclusion in body corporate fees can impact your overall costs. Understanding these details ensures you can plan effectively for both your short-term expenses and long-term investment strategy.
Final Considerations
Buying a property with tenants offers advantages, like instant rental income and saving on costs associated with finding new tenants.
However, it also comes with its challenges. Understanding the lease agreement, respecting tenant rights, and being aware of the legal obligations are critical steps in ensuring a smooth transition and a successful investment.
Whether you’re navigating the sale of a property in Queensland or any other Australian state, thorough preparation and knowledge are key to managing your new property effectively.
Suggested reading: Got more questions? Our in-depth resource on how to buy a house in Australia has all the answers!
FAQ Section
How much notice does a landlord have to give a tenant to move out in Australia?
A landlord must provide at least 30 days’ notice before the end of the fixed term. This notice must include the last day of the term to legally end a tenancy agreement.
How do I evict a tenant in Australia?
To evict a tenant, follow these steps: identify valid grounds for eviction, provide written notice, serve the notice correctly, allow time for the tenant to remedy the situation if applicable, and submit an eviction application to the court if necessary.
What are the tenant rights in Australia?
Tenants have the right to live in a safe and well-maintained property. Landlords are responsible for ensuring the property is free from hazards like mold from structural issues, asbestos, and pests, and that all appliances and fixtures are in working order.
How much notice do you need to give a tenant when selling in Queensland (Qld)?
For selling a property with vacant possession, you must give two months’ notice to end a tenancy if there is a fixed-term lease at the end of the agreement or at any time during a periodic lease.
