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Safe to lease to purchaser before settlement?

Discussion in 'Legal Issues' started by seachange, 26th Feb, 2016.

  1. seachange

    seachange Well-Known Member

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    Hi all, I've been enjoying this forum for a while, but have a specific question so it's time for me to actually jump onboard.
    I've just sold my apartment (ppor) , due to settle in a few weeks. The purchaser would like to move I before settlement, and has offered to lease in the interim.
    I'm happy to help him out, and it's useful extra money.
    This is my first property sale, and I'm a little concerned that letting him in as a tenant before settlement could expose me to hassles . The property is in pretty good nick- certainly no major issues. I'm concerned though having an extra couple of weeks may encourage him to pick up on small things to rectify. One example is a couple of hinges need fixing on a cupboard, one of the toilets half flush sticks, so only full flush works. This is a difficult one to fix- I've already tried with a plumber (it's installed under a marble shelf).
    Would any of you seasoned real estate moguls ( in the making), have experience on this to share with me.
    It's worth a few thousand to lease it so I would like to do so, and he seems like a great young purchaser, who needs to settle in before uni so it's important to him. I'm just concerned it exposes me to more hassles.
     
  2. Hodor

    Hodor Well-Known Member

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    I don't see a problem. Sounds like the contract is already unconditional. I'd get a lease drawn up or other agreement for the period.
     
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  3. Xenia

    Xenia Adelaide Property Manager Business Member

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    Yes it's doable
    Cautions:
    As a landlord you will be responsible for all repairs and maintenance on the property so good opportunity for the purchaser to hold you accountable for everything, even use it to delay settlement.

    If you are going to do it, draw up a lease agreement past the due date for settlement, 6-12 month lease. Anything after settlement will be cancelled out anyway, any overpayments will be apportioned at settlement and it safeguards you against delays on the part of the purchaser.

    There is no right or wrong in this scenario. Use descretion and take note of above cautions.
     
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  4. Propagate

    Propagate Well-Known Member

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    When we sold our PPOR there was a stuff up at settlement. It didn't go through, (on a Friday), problem is the new owners settlement on their sale did go through and they were sat outside our house with a truck full of furniture.

    Settlement was re-booked for the following Tuesday and we let them take the keys on the Friday as they had no where to go.

    To do so though, they had to sign a "license" and insure the property. Basically it meant that they couldn't pick fault with something in those few days and use it to delay settlement or play funny buggers.

    Not sure if you can do a license if they are also leasing? Might be worth running it passed your solicitor.
     
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  5. emza

    emza Well-Known Member

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    I wouldn't do it... as a renter for many years you always find problems in a place when you move in. Leaking taps, the rusty door hinge, the cracks and chips...

    Imo you're essentially setting up a month-long inspection that will knock your price down.
     
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  6. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Yep the risk is that they will find all the problems with the place.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like he is selling Paul.
     
  8. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Yep Its Friday
     
  9. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I would run it past solicitor. I can guess what they will say.
     
  10. seachange

    seachange Well-Known Member

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    Thanks all. It a pre auction offer so deposit is already paid. My solicitor is getting back to me, and has already said they have to take out insurance to cover the two weeks rental period. I think they should be able to make it 'potential trouble ' free, but just thought I'd run it by the forum. I could see it could potentially be exploited. I think there might be an agreement they sign that property is "as is" from commencement of rental . Solicitor didn't seem concerned, and it's their job to think the worst of people and scenarios
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Best not to lease but allow them to occupy under licence. Leases have statutory minim periods of 6 months so if they dont settle youncould be stuck with them
     
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  12. Chilliblue

    Chilliblue Well-Known Member

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    Why cant you settle earlier?
     
  13. seachange

    seachange Well-Known Member

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    They are taking a 4 week settlement, but their finances aren't free until then. ( I proposed early settlement, and I'm sure they would rather not be paying $1300 pw interim rent)
    My solicitor replied
    "

    Possession before completion is provided for in the standard contract terms. It is not an uncommon occurrence. They key provision is clause 18.4 which makes clear that “the risk as to damage to the property passes to the purchaser immediately after the purchaser enters into possession”.
    In addition, we have required that the purchaser maintain tenant’s insurance during the period of early possession."

    I don't think this resolves my concern about nitpicking on property defects though
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What about existing damage which they may not have detected. What about damage that occurs while they are in possession. They will possibly argue that you fix something to the state it was in at exchange.
     
  15. JDM

    JDM Well-Known Member

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    I've had a buyer enter into early possession of the property, fail to settle under the purchase contract and then refuse to leave the property. It took a Court order and a lot of heart ache to have the tenant removed. I would not consider early possession if it were my property unless the contract was unconditional and the buyer had paid a substantial deposit (ie enough to make it worth while should the tenant refuse to leave).
     
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  16. sanj

    sanj Well-Known Member

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    I've seen possession prior clauses where the purchaser takes the property as is once possession is granted so the risk of them nit picking after is minimised from a legal POV but of course that doesn't meant everyone is going to comply with legal requirements.


    @seachange what sort of sums are we talking here? How many weeks at 1300/wk and is it a requirement of the purchaser.? Ie if they don't get early possession are they unable to complete the deal?

    Assuming it is a requirement and has to be accommodated, There are a couple of options, just some thoughts:

    A) if it is say 4 weeks at 1300/week just increase the offer by the relevant amount and allow early possession with no separste say 6 month lease, include in the contract that they take the property as is and there is no requirement from you for maintenance of any kind. I'd be wanting to put a pretty large deposit from them and stipulate that it will be forfeited if they do not settle say within 3-7 days of agreed settlement date and they have to vacate within 7 days of this occurring. You'd need to check with your insurance if they would cover any damage done if the purchaser doesnt settle, I suspect they would probably want a lease drawn up with a bond etc.

    I think the risk of say a 10/20% deposit being forfeited is likely to keep them on their best behaviour and ensure they settle as agreed.

    Get the deposit held by your lawyer with the agreement that funds will be automatically released if they do not settle in time or within a few days.


    b) alternatively if you don't want the headache just wait the extra few weeks for settlement, maybe ask them to meet u halfway. Eg if the extra 4 weeks for example costs you 5.2k in lost rent they pay you an extra 2.6k in purchase price. This way it is cleaner and less chance of something going wrong.

    Either way though if it's a pre auction offer is be wanting a significant deposit to justify taking it off the market prior as you effectively will be well behind the 8 ball if you have to start another auction campaign
     
  17. seachange

    seachange Well-Known Member

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    Thanks @sanj for your detailed answer. I have decided it wasn't worth the risk, and turns out they were able to bring forward the settlement a little. In the end my solicitors Couldn't assure me there would be no issues caused by the "extended inspection prior to settlement " and it wasn't worth the risk
     
  18. sanj

    sanj Well-Known Member

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    yup probably the best move. if you were talking 10s of thousands or it was to accommodate a purchaser willing to pay what you felt was above the odds then maybe it would be worth the hassle. in this case more trouble than it's worth imo.

    congrats on the sale!