Buying a Property With a Current Tenant - What Do I Need To Know?
If you are looking to buy an investment property, there may be a situation where the property has a tenant already in situ. This process is slightly more complicated and can be tricky to get sorted out if you do not know what to do. In this blog, we detail the things to consider to help you purchase the property.
If you are considering buying a buy-to-let property where there is a tenant already renting it and who will remain in place when ownership is transferred from the previous landlord to the buyer, there are some pro's and con's that you will need to consider.
Landlords often decide to sell with a tenant in situ simply because they prefer not to evict the tenant - maybe they have had a good relationship in the past. In certain instances, the tenant cannot be evicted anyway, for example, if the sale is due to complete during the initial tenancy term.
The Legal Stuff
We would highly recommended that you use a solicitor with the necessary experience when purchasing a property with a tenant in situ. In addition to the standard conveyancing checks, there are a lot of legal processes involved in taking over ownership of the property.
Note also that a Section 48 notice must be served to inform the tenant that the property has been legally transferred to a new buyer. If this is not done - and we have seen lots of instances where it hasn't been - you will not be able to claim for any future rent arrears, property damage, and service charges, as any legal proceedings will not be enforceable.
Also, you will need to carry out due diligence regarding the property, the tenants, and the tenancy agreement. This would usually be done by a competent letting agent if you use one, otherwise, it is something you will need to do yourself.
Specifically, you’ll be looking at:
Property Safety and Condition
Does the property adhere to UK safety regulations?
Does it have the required safety certificates; gas and electric?
Are there smoke alarms and carbon monoxide detectors in place, and are they working?
Does the property meet the requirements of FFHH (Fit for Human Habitation)?
Have portable appliances been tested?
Has the correct 'How to Rent' guide been given to the tenant when they moved in?
Property Inventory
A detailed, photographic property inventory should have been carried out when the current tenant first moved in. If not, there may be issues when the tenancy deposit is to be repaid.
Tenancy Deposit
Talking of tenancy deposits... is there one? Has it been correctly registered with a government scheme? Your legal representative should deal with the transfer of the tenancy deposit from the seller upon completion.
Tenancy Agreement
Ensure that you have a copy of the tenancy agreement and study it so you know the tenancy terms. Your legal advisor will do this as part of the legal work.
Tenant Checks
Even if the tenant was thoroughly vetted by the previous landlord, you should always run your own checks. Look into their rental history to see if they take good care of properties. Check the references and acquire your own if necessary. Are they using a guarantor? Any there any disputes with neighbours? The more you know, the less likely you’ll face a nasty surprise later down the line.
The Pro's of a Tenant in Situ
Properties with a tenant in situ are usually cheaper than ones with vacant possession, simply because they are harder to sell. This is particularly good for cash buyers who do not need a mortgage.
With a tenant in place on the day that you take ownership of the property, rental income is received immediately. There is also no need to find a new tenant. Finding a new tenant takes time and will extend the void period (time when the property is empty and you are not receiving rent).
If there is a tenant in situ, then there is a better chance that the property is in good condition. It is unlikely the property will need any immediate refurbishment as rental properties are usually refreshed between tenancies.
The Con's of a Tenant in Situ
Mortgage lenders are often reluctant to finance a property with a tenant in situ as they are considered a higher risk - why, we do not know! We recommend using a mortgage broker to access more specialist lenders. The alternative is that you may need to pay a higher deposit.
Landlords who do sell with a tenant in situ usually do this to achieve a quick sale. There could well be no detrimental reason for this, however, it could be because there are issues with the property or the tenant which could result in unexpected bills when you take ownership.
The tenant in situ might not be a good fit. Remember, you haven’t chosen the tenant yourself so they may not fit your expectations of what a good tenant should be.
It can be difficult and expensive to evict a tenant in situ; check the status of their tenancy agreement before you commit to buying the property. The majority of tenancy agreements are Assured Shorthold Tenancy agreements (AST). Under an AST, landlords can evict using Section 21 or Section 8 notice. It is much harder to evict a sitting tenant.
Tenants in situ are protected under the Rent Act 1977. If they moved into the property before 27 February 1997 and this can be proved, Section 21 notices cannot be used to evict the tenant. In very extreme circumstances, a tenancy dating back to pre-1989 means that the sitting tenant has security of tenure (the real definition of ‘sitting tenant’). In a ‘secure tenancy’, Section 21 notices do not apply. It’s extremely difficult to evict these tenants.
Introduce Yourself
We always recommend meeting the tenant in person as soon as you can, especially if you are not using a letting agent to manage your property. Ideally, you want to have a good, ongoing mutual relationship with the tenant.
Reassure them, confirm that the tenancy deposit has been transferred over properly, discuss any maintenance works that you plan to undertake, ask them about their plans moving forward so you can plan ahead too.
If you wish to discuss any aspect of buying an investment property, please contact me on 07989 858850.
