Dont Unknowingly Take on Unnecessarily Liability

by : Sean Wheller

When it comes to letting, it's amazing how many property investors unknowingly take on obligations without ever knowing that they have done so. It happens in away that is so accidental, so transparent that in many cases tenants come and tenants go without either party ever knowing that this was the case.

How does this happen? In our law we have a provision that states that 'Lease goes before sale', better known as 'Huur Gaat Voor Koop'. Which means that when a leased premises is sold before the lease of a current tenant has expired, the tenant may in terms of the huur gaat voor koop rule remain in occupation of the premises until the lease expires.

It is common practice for property investors to acquire property where lease agreements are already in place. Often, the fact that there is a tenant is perceived as a marketable feature of the property. After all, the buyer will not have to market for and secure a new tenant and will therefore not experience an initial vacancy period when taking transfer of the property.

While, at face value, the prospect of taking over an existing tenant may seem attractive. This situation can often be a trojan horse, opening the property investor to potential risks that would otherwise have been negated had the investor not inherited the tenant with an existing lease agreement.

We recently encountered a case in which a tenant whose lease agreement had been inherited in exactly this manner, approached one of our clients with a request to extend the lease agreement for a further period equal to the initial lease under the same terms. At first our Client was inclined just to sign the existing lease agreement, making changes as required. Fortunately, the client mentioned this to us in passing, at which point we requested that we first review the existing agreement before he did anything.

Thank goodness we did, for we discovered that the agreement in place was one which had been purchased at a local stationary store. Such agreements are notorious in professional circles for being out of date and often in contravention of rental legislation and provincial guidelines.

Unbeknownst to our client he had taken on a long list of unnecessary obligations and was, in breach of the law on a number of points. He had also taken on some risks that could have presented significant financial risk considering the age of the property, the nature of the tenant, and the duration for which the tenant had resided at the property.

To start with, there had been no written inspection on commencement date for this tenant. This put the investor in a situation in which he could not lay claim for any damages caused directly by the tenant at the end of the lease period. Ordinarily, with proper procedure and adherence with Clause 5 Section (7) of the Rental Housing Act, the Landlord would be able to claim for damages from the deposit, if such damage should occur, on the basis of a joint inspection of the property both on start and end of the lease period.

This is just one example of how a landlord may assume risks and responsibilities when taking over an existing tenant lease. In this case, it was fortunate that the tenant landlord relationship was amicable. The tenant agreed to enter into a new agreement based on the fact that the new agreement was current with local legislation and actually served to improve his rights as a tenant. Nevertheless, our client was somewhat shaken that he had unknowingly taken on such liability, yet relieved that nothing untoward had come of it.

While this case serves to illustrate how liability can be unknowing transferred, it also begs the question, 'Why did the previous owner allow enter such a lease in the first place?' After all, he had agreed to be bound by it when entering into the agreement.

We believe the answer stems from two common perceptions that prevail amongst property investors:

1.The prevailing perception that tenancy in a buy to let investment is a by-product of the property investing business, a necessary evil if you like. Many investors want to buy the right properties, at the right price, and so they do. However, the irony is that the the act of buying is the shortest period of a property investors relationship with a property. The owning and renting stage is significantly longer. It is also the stage, where the return on investment is often calculated, after all its the income from rentals that pay the Bond or part of thereof. Yet, this stage is often given the least consideration despite carrying the majority of the risk. So, investors learn as much as possible about purchasing strategies but very little about the letting business and its' consequences.

2.The second perception is that letting agent takes care of the letting part and therefore they don't really need to understand much about it. True to say, many 'gurus' very often suggest the 'hands-off' approach making buying the focus of property investing. Though buying increases portfolio and net worth, it must be remembered that good management and understanding of the letting business increase profitability and therefore return on investment. Often the 'hands off' approach minimizes the importance of the letting part with the result that for every five minutes it takes to sign an Offer to Purchase, between six and twelve months of risk is acquired in the hands off investor with every new lease.

Each year an investor holds a property without due attention to the letting and management thereof, is another year of letting risk. Therefore, it is safe to assume that the importance of understanding and having solid fundamental letting knowledge is highly disregarded amongst many investors, to their detriment.

Perceptions such as this should create great cause for concern if one is to be successful and maximize return on investment. To increase profitability, reduce risk and enjoy peace of mind an investor should be conversant at least in the fundamentals of the rental agreements they sign and the landlord/tenant rights and regulations upon which such agreements reside. At a minimum, this will afford them the peace of mind that their letting business is run with the least amount of risk and that they can guide their agents to ensure best practices are enforced.