Purchasing a property that is subject to an existing lease

In many if not most cases, upon settlement taking place, a purchaser will be entitled to vacant possession of the property. However, where a contract provides that the property is sold “subject to a lease”, a purchaser becomes the landlord and is bound by the terms of the lease. The vendor’s rights under the lease (as landlord) pass automatically to the purchaser and there is no need to transfer the interests of the vendor or to enter a new lease.

Where a purchaser buys a property with the intention of redeveloping it and, therefore, probably needing to go on to the property to make plans and undertake preliminary works, it is essential for the purchaser to understand that is an underlying tenor of virtually any lease that the tenant is entitled to quiet possession and the new owner has no automatic right to go on to the property. The lease may provide certain rights of inspection etc. but, failing that, the purchaser has no rights of entry. It is essential that a purchaser understand the terms of the lease. The lease might only be for 6 months but the tenant might have options for many years into the future. If the tenant exercises those options, the purchaser will be denied possession of the property.

The vendor is entitled to receive the rent on the day of settlement. If rent is paid in advance, an adjustment (of the purchase price) will be made to compensate the purchaser.

If the rental aspects of the property are being managed by an agent (which may or may not be the same agent who is selling the property), it is important for the purchaser to contemplate how the property is to be managed after settlement. It is open to a purchaser to approach that same agent or to appoint a fresh agent.

Purchasers should also consider their GST status. Whilst residential tenancies do not attract GST, commercial leases generally do and purchasers taking on a property that is earning a rental income should seek the advice of their accountant or tax advisor to ensure that they have adequately considered their accounting structure and, if necessary and appropriate, register for GST.

If you are purchasing a property that is subject to a lease, you should exercise caution and seek the appropriate advice. Unlike a conveyancing firm, our office can assist you with both the conveyancing and leasing aspects of such transactions. Contact us to speak with a lawyer on 03 9450 9400.