Thursday, June 23, 2011

Selling Property with fixed term tenants in place

Lets take a hypothetical situation here, where you have your tenants are on fixed term contract to 10/3/2012, with the expectation if things work out, they would renew the contract annually. Due to the changes in the Residential Tenancies Act which came into force 1st October 2010, you must offer them a lease renewal at any time from 90 days before this date, so from the 10th December you should be looking at sending out a new fixed term offer. If you want to look at selling your property in the new year, you need to decide what you are doing before this date, assuming the property would sell to an owner occupier rather than an investor. Here are your options around the lease renewal process while the property is on the market:

1. Delaying re-contracting the tenants for a fixed term until the last possible moment - under the changes to the Act, this would now be 18th February (you need to confirm a fixed term contract 21 days before the lease end date). In other words, list it for sale late in the year, and if it hasn't sold by 18th February, take it off the market until the next year and fix the term of the tenancy contract again for a year. Downside is marketing a property for sale makes tenants nervous, and they may decide to exercise their right to not renew, and move out at the lease end date.

2. Allowing the tenancy to go periodic - this would mean you could give the tenants 42 day's notice that the property had sold and give it to the new owner with vacant possession, or the tenants could give you 21 days notice at any time. While this allows greater flexibility for your sales plans, the risk is the tenants give notice before you have sold the property, and you need to decide whether to allow it to sit empty, or re-let it, possibly for a very short term. The latter is not a great idea, as new tenants must be told if a property is on the market, and not many would like to take that risk of moving in then back out again in only 6 weeks time, so it may be hard to fill. Long and short of it, you lose great tenants, have a vacancy, have unknown tenants move in, and might still not sell it.

3. Put it on the market at any time of year, and if it sells, make the tenants an offer they can't refuse to move out on a date which suits the purchaser (officially known as 'ending a fixed term by mutual agreement'). No guarantees on this one as they could just refuse to move until their lease expires, or it could be very expensive. A friend of mine tell of when he tried this with the offer of "I'll pay all your moving expenses" thinking it would be a few hundred for a moving truck across town. The tenant decided to move from Christchurch, to Australia. It pays to be specific.

4. Offer the property to the tenants to buy (private sale). Saves you agents fees, and you can sell it to them at whatever date suit you both, the fixed term tenancy being ended by mutual agreement on possession day. Downside is establishing a fair price as you won't necessarily have competing offers from other parties as you would if you listed it with an agent, so your net result may be less than selling it conventionally. Of course, you could list it with an agent who sells it to the tenants, but this might also result in only the agent making something out of it... If you want to try a private sale, I'd recommend getting a valuation to establish price, and having your lawyer do the negotiation for you. (That’s my way of saying you will probably be too kind to the tenants at your expense).

Do talk to your property manager before you engage an agent - they should be happy to liaise with the salesperson regarding access and information they need about the tenancy, and should also discuss with them reasonable access to keep your tenants happy in case it does not sell. Your property manager should be able to recommend a salesperson they have found to be good.

Of course, you also have a legal obligation to tell the tenants the property is on the market. A client of ours who ignored our (oft-repeated) advice and listed her property for sale without telling us first found herself managing her own tenants through the sales process from out of town, and then having a very long vacancy when it did not sell (about 5 months!). Last I heard, she rented her property to Housing New Zealand. Shame, as it was a beautiful property. I am sure you wouldn't be so foolhardy.

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