First home buyers beware: Buying a house with an existing tenancy

A first home buyer put in an unconditional offer by tender on a property.  They had obtained pre-approval from their bank and thought this was sufficient to put in the offer. 

After the offer was accepted the bank asked for a copy of the agreement for sale and purchase.  The bank queried the tenancy on the front page, which was a fixed term tenancy that would not expire until after the settlement date.  The buyer had known about this but did not realise it was relevant to the pre-approval.  The bank advised that if the property was still tenanted on the settlement date the buyer would be considered an “investor” and would be required to contribute 40% equity to the purchase.  The buyer was shocked and sought urgent legal advice.

Make early enquiries

When looking at a property, ask the agent if the property is tenanted as early as possible.  If it is, find out if the tenancy is “periodic” or “fixed term”.

A periodic tenancy runs from month to month, so can be terminated by the landlord with at least 42 days’ notice.  This would allow the seller to notify their tenant that the property is for sale and specify a date for them to leave.

A fixed term tenancy has a specific end date, and can only be terminated early by agreement between the parties, meaning that the seller cannot simply notify their tenant that the property is for sale and expect them to leave.

What if it is a fixed term tenancy?

Make sure that you do not make an unconditional offer, or confirm your offer as unconditional, until you are sure what terms your bank will apply to your finance.

You will need to let your bank know about a tenancy as part of getting finance approval.  They may deem you an investor (in which case the 40% equity requirement will apply) if the settlement date falls before the tenancy expires. 

You should know that a property is subject to a fixed term tenancy before you submit your offer.  That way you could include a settlement date beyond the expiry of the fixed term tenancy.

If that does not suit you and you want to investigate whether the tenancy could be terminated early then make sure that your offer is conditional (for example on obtaining satisfactory finance). 

When your offer is accepted, you can negotiate with the seller.  They may be able to negotiate with the tenant to end the tenancy early, or agree to a later settlement date.

What if I have already gone unconditional?

If your bank’s requirements change due to an existing tenancy once your offer is unconditional, see your legal advisor as soon as possible.