It’s not uncommon for a tenant to enter into a contract to buy a property when they are in a lease. In theory, tenants should wait until they are on a periodic arrangement or nearing the end of their fixed-term lease agreement. In practice, this isn’t always possible.
In short, yes, tenants can enter into a contract to buy a property while they are in a lease. However, there are some important considerations to minimise additional costs and legal implications.
Check your current lease term
Before entering into a contract to buy, a tenant should be familiar with their current lease term and conditions. If you have just entered into a lease agreement or signed a lease renewal, note the expiry date of the new fixed-term lease. If the fixed-term lease has expired, likely, the lease is now classified as ‘periodic’. When in doubt, check with your landlord or property manager to clarify your lease position. The lease term is noted on the General Tenancy Agreement and tenants should have a copy on file from the initial handover at the start of the lease.
Can you ‘break the lease?’
‘Break lease’ occurs when a fixed-term tenancy is effectively terminated by the tenant for several reasons. In this instance, there are several obligations by a tenant. Firstly they will need to cover the cost of the inconvenience of breaking the lease and are responsible for paying rent until a new tenant is approved for the property. Secondly, they are also responsible for the costs of re-advertising the property for lease to find another tenant including reimbursement to the owner for the let fee charged by the agency. These costs are referred to as ‘break lease costs’. The landlord will have to agree and in some instances, a mutual termination may be an option provided both parties can reach an agreement. The RTA provides lots of information about the various scenarios and processes around a break lease situation.
Timing and overlaps
If you are successful in securing a property and you have entered into a break lease or mutual termination agreement with the landlord, it may not be possible to settle on your new purchase and complete the vacate of your rental property on the same day. In this instance, we would suggest allowing for a week or two between settlement and the vacate. This will give you enough time to move out, move in and complete the vacate process for the rental property. The overlap may occur with additional fees such as extra rent, but it also gives you more time to complete your obligations for settlement and for the vacate to minimise delays especially with finalising the bond.
Buying tenanted properties
Buying a tenanted property also has additional processes and time considerations compared to a property sold as vacant or owner-occupied. Even though a property is under contract, a tenant living in the property is protected by their lease. If the contract stipulates that the property needs to be vacant (known as ‘vacant possession in legal terms’), then the contract due dates and timeline need to allow for this to happen concerning the applicable notice periods to be served to the tenant.
For periodic leases, the notice period is 4 weeks but for fixed-term leases, it is two months from the fixed term lease expiry date. If the notice period date falls before the purchase contract settlement date, the two months will still apply even if the date is later than the fixed term agreement. The exception is where the seller (owner of the property for sale being purchased) and tenant (in the seller’s property) agree to either break lease or a mutual termination as noted above.
The seller may not be agreeable to serve notice though until the property is unconditional, or push the responsibility onto the purchaser whereby the purchaser may become a landlord to settle the contract.
We recommend you seek independent legal advice about your legal obligations and options with any tenancy or purchase contract in this instance.