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It may seem attractive for property investors to acquire a property where a lease agreement is already in place. After all, investors may see it as a marketable feature of the property as buyers will not need to find a new tenant and therefore will avoid an initial vacancy period when taking transfer of the property.
How does this happen? Well, South Africa's law has a provision that states that "lease goes before sale", better known as "huur gaat voor koop".
This means that when a leased premise 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.
Investors: beware!
This may, at face value, make the investment all the more attractive. But property investors need to beware: it opens you up to a number of risks that would have been negated had you not inherited a tenant with an existing lease agreement.
So what are the problems? In one recent example, a tenant whose lease agreement had been inherited in exactly this manner requested to extend the lease agreement for a further period equal to the initial lease under the same terms.
The property investor was naturally inclined to simply sign the agreement, only to be told 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 Such agreements are notorious in professional circles for being out of date and often in contravention of rental legislation and provincial guidelines.
In breach of law
The property investor, in the old agreement, had taken on a long list of unnecessary obligations while he was also 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.
For one, 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 the start and the 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. Necessary evil? So why did the previous owner enter such a lease in the first place? After all, he had agreed to be bound by it when entering into the agreement. The answer stems from two common perceptions that prevail amongst property investors. Firstly, there is 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. Secondly, there's the belief that the letting agent takes care of the letting part, which means it's not necessary for the property investor to understand it. While many "gurus" often suggest the "hands-off" approach, making buying the focus of property investing, good management and understanding of the letting business increase profitability and therefore return on investment. Each year an investor holds a property without due attention to the letting and management thereof is another year of letting risk — which means property investors need to learn more than just purchasing strategies, but also about the letting business and its consequences. This information is provided by The Property Investor Network.
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