A property owner does not necessarily have to wait until a tenancy expires before selling the property.
A residential, commercial or industrial property can be sold while it is occupied by a tenant. However, an important question must be addressed at the beginning of the transaction:
Is the property being sold with vacant possession, or is the purchaser buying the property subject to the existing tenancy?
The answer affects the vendor, purchaser and tenant, as well as the terms that should be included in the Sale and Purchase Agreement (“SPA”).
Simply selling the property does not mean that everyone should assume the tenancy automatically disappears.
Can a Landlord Sell a Property While It Is Tenanted?
Generally, yes.
The existence of a tenancy does not necessarily prevent the property owner from selling the property.
However, before agreeing to the sale, the vendor should disclose to the prospective purchaser that the property is presently tenanted and provide details of the tenancy.
The purchaser should also be given an opportunity to review the tenancy agreement.
Important information may include:
- the duration of the tenancy;
- the expiry date;
- the monthly rental;
- the amount of the security and utility deposits;
- whether there is an option to renew;
- whether the tenant has exercised any renewal option;
- whether there are rent arrears;
- whether the tenant is entitled to terminate early;
- whether the landlord has a right to terminate the tenancy upon sale;
- whether subletting is permitted;
- whether there are any side agreements with the tenant; and
- whether the property must be reinstated when the tenancy ends.
The purchaser should understand the existing arrangement before agreeing to take over the property.
Two Common Ways a Tenanted Property May Be Sold
A tenanted property will commonly be sold in one of two ways.
1. The property is sold with vacant possession
Under this arrangement, the purchaser expects the property to be delivered without the existing tenant in occupation.
The vendor will therefore be responsible for ensuring that the tenancy is properly brought to an end and that vacant possession can be delivered in accordance with the SPA.
2. The property is sold subject to the existing tenancy
Under this arrangement, the purchaser is aware of the tenancy and agrees to acquire the property together with the existing tenancy.
The tenant remains in occupation, and arrangements will normally be made for the purchaser to take over the landlord’s position following completion of the sale.
These two arrangements should not be confused because the vendor’s obligations are very different.
Scenario 1: The Property Is Sold With Vacant Possession
Where the SPA requires the vendor to deliver vacant possession, it is generally the vendor’s responsibility to ensure that the tenant has vacated the property by the time vacant possession is contractually required to be delivered.
This means that the vendor should first review the existing tenancy agreement carefully.
A property owner should not assume that selling the property automatically gives the landlord the right to terminate the tenancy immediately.
Whether the tenancy may be terminated because the property is being sold will depend on the terms of the tenancy agreement and the applicable legal position.
For example, the tenancy agreement may provide:
- for a fixed tenancy period without an early termination right;
- for termination upon a specified period of notice;
- for early termination upon sale of the property;
- for termination only upon breach by the tenant; or
- for other agreed circumstances.
If there is no contractual right allowing the landlord to terminate simply because the property is sold, the vendor may have difficulty promising vacant possession before the tenancy expires.
Do Not Promise Vacant Possession Before Checking the Tenancy
This is particularly important at the Offer to Purchase stage.
Suppose the vendor signs an Offer to Purchase agreeing to deliver vacant possession three months later.
The vendor then discovers that the tenant has another eight months remaining under a fixed-term tenancy and the tenancy agreement does not give the landlord a right to terminate because of the sale.
The vendor may now have a problem.
The vendor’s obligation to the purchaser under the property sale and the vendor’s obligations to the tenant under the tenancy agreement are separate contractual matters.
For this reason, the existing tenancy should be reviewed before the vendor agrees to a vacant possession requirement that may be impossible to fulfil.
What If the Tenant Refuses to Vacate?
If the SPA requires vacant possession but the tenant remains in occupation, the vendor may not be able to deliver vacant possession as required by the SPA.
The consequences will depend on the terms of the SPA.
This may potentially result in:
- delay in completion or delivery of possession;
- a request for an extension of time;
- claims arising from breach of the SPA;
- termination rights, depending on the contractual terms; or
- other consequences agreed between the vendor and purchaser.
A vendor should therefore resolve the tenancy position as early as possible rather than waiting until the completion date.
Scenario 2: The Property Is Sold Subject to the Existing Tenancy
Sometimes the purchaser does not want vacant possession.
This is common where the property is being purchased as an investment.
For example, a purchaser may specifically prefer a property that already has a tenant paying RM3,000 per month.
In that situation, the parties may agree that the property is sold subject to the existing tenancy.
Where property is sold subject to an existing tenancy, the particulars of the tenant and monthly rental should be identified in the SPA, and the purchaser should obtain and review the tenancy agreement. The SPA should also provide for matters such as taking over the tenancy and handing over deposits.
What Happens to the Tenant After Completion?
Where the purchaser has agreed to acquire the property subject to the tenancy, the intention will ordinarily be for the tenancy to continue after completion.
The purchaser effectively takes over the property with the tenant remaining in occupation, subject to the relevant contractual arrangements and legal position.
Arrangements should therefore be made to deal with matters such as:
- notifying the tenant of the change of ownership;
- directing future rent to the purchaser;
- handing over the security deposit;
- handing over the utility deposit;
- transferring records relating to the tenancy;
- dealing with outstanding rent;
- dealing with prepaid rent; and
- confirming the respective responsibilities of the outgoing and incoming owner.
These matters should be expressly addressed in the SPA rather than left to informal arrangements after completion.
What Happens to the Tenant’s Security Deposit?
This is an important issue.
Suppose the vendor received:
- two months’ security deposit;
- half a month’s utility deposit; and
- one month’s advance rental.
If the purchaser is taking over the existing tenancy, the parties need to determine how the deposits are to be dealt with.
Generally, the SPA should provide for the relevant tenancy deposits to be accounted for and transferred or credited to the purchaser upon completion.
Why?
Because when the tenancy subsequently ends, the new landlord has to account to the tenant for the security deposit, subject to any permitted deductions under the tenancy agreement.
The purchaser should therefore not take over responsibility for a tenant’s deposit without ensuring that the corresponding money has also been properly accounted for.
What Happens to Rent During the Month of Completion?
The rental may also need to be apportioned.
For example, assume:
- monthly rent is RM3,000;
- rent for September has already been paid to the vendor;
- completion of the sale takes place on 15 September.
The vendor and purchaser may need to apportion the September rental between themselves based on the agreed completion arrangements.
The precise treatment should follow the SPA.
Similar adjustments may be required for other property-related outgoings such as:
- quit rent;
- assessment;
- maintenance charges;
- sinking fund contributions; and
- other recurring payments.
What If the Tenant Has Not Paid the Rent?
The purchaser should find out whether the tenant is actually paying the rent before agreeing to purchase the property subject to the tenancy.
A tenancy producing RM5,000 per month on paper is very different from a tenancy where the tenant has not paid rent for the last six months.
The SPA should therefore address any rental arrears.
Questions may include:
- Who is entitled to recover rent that became due before completion?
- Is the purchaser taking over any right to recover existing arrears?
- Has the vendor already commenced recovery proceedings?
- Has the tenant committed any breach of the tenancy?
- Has any termination notice already been issued?
These matters should be clarified before completion.
Does a Sale Automatically Terminate the Tenancy?
Not necessarily.
The legal position depends on several factors, including the nature of the tenancy or lease, its terms, how the sale is structured and what the purchaser knows about the existing occupation.
Under the National Land Code, there is also a distinction between a tenancy exempt from registration and a registered lease.
Generally, a tenancy for a term not exceeding three years is treated as a tenancy exempt from registration under the National Land Code.
A lease for a longer term may be registered against the title, subject to the applicable requirements.
A registered lease provides greater protection because the registered interest appears on the title and may bind a subsequent purchaser.
The position of a short-term tenancy can therefore be more fact-sensitive than simply saying:
“The property has been sold, therefore the tenancy is cancelled.”
Both purchasers and vendors should obtain advice based on the actual tenancy and transaction.
Can the New Purchaser Immediately Ask the Tenant to Leave?
A purchaser buying a tenanted property should not assume that becoming the new owner automatically gives the purchaser the right to demand immediate vacant possession.
If the property was expressly purchased subject to the existing tenancy, the purchaser has generally agreed to acquire the property with the tenant remaining in occupation under the existing arrangement.
The purchaser should therefore review the tenancy agreement before purchasing.
This is particularly important if the purchaser intends to occupy the property personally.
A purchaser who intends to move into the property should generally consider purchasing with vacant possession rather than agreeing to take over a tenancy that still has a substantial period remaining.
Conclusion
A property can be sold while it is rented to a tenant, but the existing tenancy should never be ignored.
The first question should always be:
Is the property being sold with vacant possession or subject to the existing tenancy?
If vacant possession is required, the vendor should ensure that the existing tenancy can properly be brought to an end before promising a particular possession date.
If the property is being sold subject to the tenancy, the purchaser should review the tenancy agreement and ensure that the SPA properly deals with the continuation of the tenancy, rental, deposits and the change of landlord.
For purchasers, buying a tenanted property without examining the tenancy agreement can result in unexpected obligations.
For vendors, agreeing to deliver vacant possession without first checking the tenancy can result in difficulty completing the sale.
The tenancy position should therefore be considered at the beginning of the conveyancing transaction, rather than only when completion is approaching.
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:
Private Caveat in Property Purchases in Malaysia: What Buyers Should Know
Should a Vendor Appoint Their Own Lawyer When Selling a Property in Malaysia?
Offer to Purchase in Malaysia: What You Should Know Before Signing
Tenant Refuses to Vacate in Malaysia: What Can a Landlord Do?
Buying or Selling a Tenanted / Rented Property: Here’s What You Need To Know