Buying or selling a property that is already occupied by a tenant requires additional consideration compared with a property that is vacant.
The existing tenancy does not simply disappear because the property is sold. Depending on the terms of the tenancy agreement and the Sale and Purchase Agreement (“SPA”), the purchaser may take over the property together with the existing tenancy, or the vendor may be required to deliver the property with vacant possession.
This distinction is important for both parties.
A purchaser buying the property as an investment may be perfectly happy to retain the existing tenant and continue receiving rental after completion. On the other hand, a purchaser buying the property for their own occupation may expect the tenant to vacate before possession is delivered.
Before signing the SPA, the parties should therefore establish the status of the existing tenancy, review the tenancy documents and clearly agree on how the tenancy, rental, deposits and possession of the property will be dealt with.
This article explains some of the matters purchasers and vendors should consider when a tenanted property is being sold in Malaysia.
Table of Contents
What Should a Purchaser Check Before Buying a Tenanted Property?
Before signing the Sale and Purchase Agreement, a purchaser should consider requesting a copy of the tenancy agreement and checking at least the following matters.
1. When does the tenancy expire?
The purchaser should know how long the tenant is entitled to remain in occupation.
2. Is there an option to renew?
A two-year tenancy with an additional two-year renewal option may have very different implications from a tenancy that expires in three months.
The terms of any renewal option should be checked carefully.
3. How much rent is being paid?
The purchaser should verify the actual contractual rental and, where relevant, whether rental has been paid regularly.
4. How much deposit is being held?
The SPA should properly account for the tenant’s security and utility deposits.
5. Are there any arrears?
Outstanding rent or other breaches should be identified before the purchaser takes over the property.
6. Are there any special arrangements?
For example:
- rent-free periods;
- renovation rights;
- subletting arrangements;
- parking allocations;
- furniture provided by the landlord;
- repair obligations;
- special termination rights; or
- side letters varying the tenancy.
The purchaser should not rely solely on a summary given by the vendor or property agent.
The actual tenancy documents should be reviewed.
What Should a Vendor Do Before Selling a Tenanted Property?
A vendor intending to sell should first locate the tenancy agreement and provide it to the vendor’s conveyancing lawyer.
The vendor should also inform the lawyer if:
- the tenant has exercised an option to renew;
- there are rent arrears;
- any deposit has been used or deducted;
- a termination notice has been issued;
- the tenant has complained about defects;
- there are ongoing disputes;
- any oral or written side agreements exist;
- the tenant has sublet the premises; or
- the vendor has promised anything to the tenant that is not contained in the tenancy agreement.
This allows the SPA to properly reflect the actual tenancy position.
What Should Be Included in the SPA?
Where a property is sold subject to an existing tenancy, the SPA may need to address matters such as:
- details of the tenancy;
- confirmation that the purchaser has received and reviewed the tenancy agreement;
- whether the purchaser takes the property subject to the tenancy;
- the effective date for the purchaser to receive rental;
- apportionment of rent;
- treatment of advance rent;
- transfer of security and utility deposits;
- handling of existing rent arrears;
- notification to the tenant;
- delivery of the original tenancy documents;
- responsibility for disputes arising before completion; and
- the respective rights and liabilities of the vendor and purchaser.
Where the property is instead sold with vacant possession, the SPA should clearly state the vendor’s obligation to deliver the property free from the tenant’s occupation.
Should the Tenant Be Told That the Property Is Being Sold?
From a practical perspective, communication with the tenant should be properly managed.
Where the purchaser is taking over the tenancy, the tenant should ultimately be informed of matters such as:
- the change of ownership;
- when the change takes effect;
- the identity and contact details of the new landlord or authorised representative;
- where future rent should be paid; and
- how the existing security deposit will be dealt with.
The tenant should not simply receive an unexplained message telling them to start transferring rent to a different bank account.
Proper documentation helps prevent later disputes over rent and deposits.
Example: Purchaser Buying as an Investment
Consider the following example.
A condominium is sold for RM1.2 million.
The property is presently rented at RM4,000 per month and the existing tenancy still has 14 months remaining.
The purchaser is purchasing the property as an investment and agrees to continue with the existing tenant.
The SPA may therefore provide that:
- the sale is subject to the existing tenancy;
- the purchaser has been provided with the tenancy agreement;
- rental is apportioned as at the relevant completion or possession date;
- the security and utility deposits are transferred to the purchaser;
- the vendor hands over the tenancy documents; and
- the tenant is notified that future rental is to be paid to the purchaser.
The tenant does not necessarily have to move out merely because ownership has changed.
Example: Purchaser Wants to Move Into the Property
Now consider a different situation.
A purchaser is buying a condominium as the purchaser’s own home.
The existing tenant still has six months remaining under the tenancy.
The purchaser expects to move into the property immediately after paying the purchase price.
This should be addressed before the SPA is signed.
The purchaser should not simply assume that the vendor can remove the tenant immediately.
If vacant possession is required, the vendor must consider whether the tenancy can lawfully and contractually be brought to an end in time for the agreed delivery of vacant possession.
If not, the parties may need to adjust the transaction or the timing.
Conclusion
The sale of a tenanted property is not necessarily complicated, but the existing tenancy should be properly addressed before the SPA is signed.
A purchaser should understand whether the property is being purchased subject to the existing tenancy or with vacant possession, and should review the tenancy agreement, rental arrangements, deposits, expiry date, renewal rights and any outstanding disputes or special arrangements.
Similarly, a vendor should disclose the actual tenancy position to the conveyancing lawyer so that the SPA can accurately reflect the parties’ agreement.
Most importantly, the parties should not assume that a tenant must automatically vacate merely because the property has been sold.
Where vacant possession is required, the vendor’s ability to deliver the property free from occupation should be considered at an early stage. Where the purchaser is taking over the existing tenancy, the SPA should clearly deal with matters such as rental apportionment, deposits, tenancy documents and notification to the tenant.
Addressing these matters clearly at the beginning of the transaction can help avoid disputes between the vendor, purchaser and tenant after completion.
Disclaimer: This article provides general information on property transactions and tenancies in Malaysia and does not constitute legal advice. The legal position may depend on the tenancy agreement, Sale and Purchase Agreement, nature of the interest in the property and the particular circumstances of the transaction.
View our Conveyancing Services or read more:
Offer to Purchase in Malaysia: What You Should Know Before Signing
Should a Vendor Appoint Their Own Lawyer When Selling a Property in Malaysia?
Private Caveat in Property Purchases in Malaysia: What Buyers Should Know
Tenant Refuses to Vacate in Malaysia: What Can a Landlord Do?