Purchasing a property can be an exciting investment opportunity, particularly where the property already generates rental income.
However, buying a property with tenants in occupation involves additional legal considerations that should not be overlooked.
Unlike purchasing a vacant property, a tenanted investment may come with existing agreements, legal obligations and restrictions that affect how the new owner can use the property.
Before committing to the purchase, it is important to understand exactly what you are buying.
What Happens to Existing Tenants When a Property Is Sold?
A common misconception is that tenants must leave when their landlord sells the property.
In most circumstances, this is not the case.
Where a property is sold subject to an existing tenancy, the tenancy will generally continue, and the purchaser becomes the new landlord.
This means the buyer may inherit the rights and responsibilities associated with the existing tenancy.
The precise position depends on the type of tenancy, its terms and the applicable law.
Why Is Reviewing the Tenancy Agreement Important?
Before exchanging contracts, buyers should obtain and review the relevant tenancy documentation.
This may include tenancy agreements, deposit information, rent schedules and correspondence relating to disputes or outstanding obligations.
A solicitor can help identify matters that may affect the purchase, including:
- The type and duration of the tenancy.
- The rent payable and any arrears.
- Whether deposits have been protected where required.
- Repair and maintenance responsibilities.
- Any disputes with existing tenants.
- Restrictions affecting the landlord’s ability to recover possession.
Understanding these matters before completion can reduce the risk of unexpected problems.
Can You Increase the Rent After Buying the Property?
Purchasing a tenanted property does not automatically entitle the new landlord to increase the rent.
Any proposed increase must comply with the tenancy agreement and the applicable statutory requirements.
The procedure will depend on the type of tenancy and the legal framework in force at the relevant time.
A buyer should therefore avoid assuming that rental income can immediately be increased following completion.
Can You Ask the Tenants to Leave?
If you intend to occupy the property yourself, renovate it or sell it with vacant possession, the existing tenancy may present complications.
A change of ownership does not, by itself, terminate a tenancy.
Landlords must follow the relevant legal procedure when seeking possession, and the grounds and notice requirements depend on the tenancy and applicable legislation.
Buyers should obtain advice before committing to a purchase that depends on securing vacant possession.
What About the Tenant’s Deposit?
Where a tenancy deposit has been paid, the purchaser should establish how it will be dealt with on completion.
Depending on the tenancy and applicable requirements, the deposit may need to be transferred or otherwise accounted for, and the new landlord may have obligations concerning deposit protection and prescribed information.
Failure to comply with relevant deposit requirements can result in financial penalties and complications when seeking possession.
What Property Checks Should Be Carried Out?
A tenanted property purchase requires careful investigation beyond the purchase price and anticipated rental yield.
Relevant considerations may include:
Property condition: Are there outstanding repairs or maintenance issues?
Safety compliance: Are the required gas, electrical and other safety obligations being met?
Licensing: Does the property require a house in multiple occupation licence or another form of local authority licensing?
Planning: Is the property being used lawfully for its current purpose?
Service charges: If the property is leasehold, what additional financial obligations apply?
Tenancy history: Are there any ongoing disputes, complaints or enforcement notices?
These matters can significantly affect the profitability and legal risk of the investment.
What If You Are Purchasing Through a Limited Company?
Some investors choose to purchase property through a limited company or special purpose vehicle.
This may offer commercial or tax-planning advantages in certain circumstances, but it also introduces additional considerations.
The purchase structure can affect financing, taxation, company administration and future disposal arrangements.
Buyers should obtain appropriate legal and tax advice before deciding how to structure their investment.
Why Is Legal Due Diligence Important?
Legal due diligence involves reviewing the documents and circumstances affecting the property before the buyer becomes contractually committed.
For a tenanted property, this includes understanding not only the legal title but also the rights of the people occupying it.
Identifying potential issues early may allow a buyer to negotiate appropriate contractual protections, request further information or reconsider the transaction.
How Can Penerley Solicitors Help?
At Penerley Solicitors, our property team assists clients with residential and commercial property transactions, including purchases involving existing occupiers.
We can review title documentation, examine relevant tenancy agreements, raise enquiries and advise on legal risks arising from the transaction.
Whether you are purchasing your first investment property or expanding an existing portfolio, obtaining legal advice before exchange can help protect your interests.
Contact Penerley Solicitors to discuss your proposed property purchase.
