Buying A Tenanted Residential Property In NZ

8 November, 2022 | Jennifer Edwards

Buying a residential property that is currently tenanted is slightly more complicated than buying property from someone who is living there and will move out on settlement day.

What are your intentions for the property?

Firstly, consider your intentions for the property.  Do you or your family members want to live in the property?  Do you want to keep the existing tenants?  Or do you want to rent the property to someone else?

If you do not want to keep the current tenants in the property

You will need to ensure that the sale and purchase agreement provides for vacant possession.  The words “Vacant possession” must be inserted in the Tenancies box on the front page of the Agreement for Sale and Purchase.

An important point to check is whether the Residential Tenancy is a periodic tenancy or a fixed term tenancy.

Fixed term tenancies

If the existing tenancy is fixed term, the landlord/vendor cannot give notice to the tenant to vacate early. A fixed term can only be terminated early if the tenant agrees to end the fixed term contract, and the tenant’s agreement is in writing.

However, if the tenants are on a fixed-term tenancy that was granted on or after 11 February 2021, the landlord can end the tenancy on expiry of the fixed-term (or later) with 90 days’ written notice, if the sale of the property has a requirement that the landlord gives the purchaser vacant possession.

Periodic tenancies

If the existing tenancy is periodic, then the vendor can terminate the tenancy by giving 90 days’ notice to the tenant stating that they are required under an unconditional agreement for the sale of the premises to give the purchaser vacant possession.

The notice to terminate must comply with the requirements of the Residential Tenancies Act, including that the notice is in writing, specifies the timeframe within which the tenant must vacate, provides the reason for termination, and is properly served on the tenant.

You should verify that there are at least 90 days between the unconditional date and the settlement date.  If you are unsure, we recommend that you check the dates with your lawyer before signing the Agreement for Sale and Purchase.

If you have already signed the agreement and it is does not provide for vacant possession – you will need to either:

• Ask the current owner to serve notice to terminate the tenancy (providing at least 90 days) on the tenant;  or
• Wait until settlement has been completed, after which time you can provide notice to the tenant to terminate the tenancy (in your role as the new landlord).

Acceptable reasons to end a tenancy

Note however that there are limited reasons which permit a landlord to terminate a tenancy. Acceptable reasons to terminate include if the owner requires the property for themselves or for a family member as a principal place of residence. In these instances, at least 63 days’ notice must be provided to the tenant.

Note again, if it is a fixed term tenancy, you will have to wait until the end of the fixed term tenancy to terminate (and only limited reasons), unless the tenant agrees to end the fixed term tenancy and vacate early. Often, the tenant may request payment from you in exchange for agreeing to end the fixed term before expiry of the term. The tenant is under no obligation to agree to cancel the contract early.

If you are using a KiwiSaver Withdrawal and/or the FirstHome Grant to purchase the property

If you are using KiwiSaver Withdrawal (link to KiwiSaver article) or the FirstHome Grant (link to article on First Home Grants) to assist you with your purchase, there are requirements for you to live in the property.

If you do not have vacant possession on settlement – the property may be classified as an investment property

All buyers, but particularly first home buyers should be aware that if the property is still tenanted on settlement day it may be classified as an investment property, even if the tenants are due to move out soon, or if you intend to give them notice.

This would mean that your mortgage/lending would be subject to the same rules as an investment property – which often requires are higher loan to value ratio (i.e. more equity/deposit). The rate for investment properties is usually 40% equity, to a 60% loan.

If you want to rent the property to someone else

You will need to ensure that the Agreement for sale and purchase provides for vacant possession. You can’t give notice to terminate for this reason.

If you want to keep the existing tenants:

If you want to keep the existing tenants your lawyer will ensure that the appropriate paperwork is completed prior to settling.

If you are taking over the existing tenant you do not need to enter into a new residential tenancy agreement, however the vendor must tell the tenant who the new owner is and when they will take over. You should also obtain a copy of the tenancy agreement from the vendor.  Once the new owner takes over, they must tell the tenant their name, contact details and address for service, and how to pay rent including new bank account number. This is important as it will ensure future rentals payments are made to you.

Both the vendor and purchaser should sign a Change of Landlord Form, this will record the change in ownership with Tenancy Services and enable the bond to be transferred from the current owner to the new owner. This must be lodged with Tenancy Services within 10 working days of the change of ownership.

As the new landlord you must ensure that the property meets the requirements of the residential tenancies act, including that the property can be legally rented and that it complies with the mandatory healthy homes criteria. You cannot assume that the previous owner was already meeting their legal obligations as a landlord.

You will also need to ensure that you have the appropriate Landlord’s insurance in place.

Are you looking to buy a residential property that is currently tenanted? Get the right advice to make sure your paperwork is in order, contact property law expert, Jennifer Edwards by phone on 09 837 6889 or email jennifer.edwards@smithpartners.co.nz today to set up a time to discuss.