COVID-19 has rocked the country over the last few weeks, and its repercussions will be felt for months, if not years to come. Undoubtedly, every New Zealander has been impacted in some way.
As part of the Government’s response to COVID-19, rent increases and termination of residential tenancies have now been prohibited.
This may cause potentially serious, and presumably unintended consequences for a Landlord in the process of selling a tenanted property, and the buyer purchasing it.
As part of the wider COVID-19 Alert Level 4 announcement, the Government has implemented temporary protections for residential tenants. These protections are contained in amendments to the Residential Tenancies Act 1986 – and prevent a tenancy from being terminated, and stop any rent increases, for three months. The three month period began on 26 March 2020 and ends on 26 June 2020, and may be extended. This timeframe applies regardless of whether the country drops down to Alert Levels 3, 2 or 1.
Until 26 June 2020 the only way to terminate a residential tenancy is in the following circumstances;
1. The tenant damages, or threatens to damage, the property;
2. The tenant assaults, or threatens to assault, the landlord, their family, or their neighbours;
3. The tenant abandons the property;
4. The tenant engages in any behavior which intentionally harasses or causes significant alarm, distress, or nuisance; or
5. The tenant is 60 days behind in rent, and the Tenancy Tribunal determines it is fair to end the tenancy.
Importantly, termination of a tenancy due to a pending sale is not included in this list.
If you validly served a termination notice on your tenant prior to 26 March 2020 for a reason that is not included in the above list and the tenant was still residing in the property on 26 March 2020, then that notice is now void and cannot be enforced.
What does this mean for me?
If you are currently in the process of selling your rental property, or were planning on selling in the next few months, you will likely not be able to provide vacant possession of the property to your Purchaser for some time. Following 26 June 2020 (or any extended timeframe), a new termination notice would be required, with the relevant notice timeframe to apply from that point.
If you are the seller under an unconditional Agreement for Sale and Purchase, or a conditional Agreement without the ability for you to cancel – then unless the Purchaser was taking over the tenancy, you likely have a binding agreement to provide vacant possession to the Purchaser on the settlement date. Even if you had provided valid notice to your Tenant prior to the lockdown, and prior to these changes being implemented, if the tenant was living in the property as at 26 March 2020, you may have a problem. On our calculations, if the Tenant does not agree to vacate the property sooner, then the earliest point at which you could provide vacant possession would be 7 August 2020 (being 42 days after 26 June 2020). This is likely to be significantly later than the contractually agreed Settlement Date for Agreements entered into pre-lockdown.
While the Purchaser may agree to take over the Tenancy in the short term allowing settlement to proceed as planned, or agree to defer the Settlement Date until the Vendor can provide vacant possession, they may not. Contractually, the Purchaser has the right to charge penalty interest.
For a property selling at $400,000.00, with a standard penalty interest rate of 14% p.a., this could be accruing at around $150.00 per day and will likely amount to thousands of dollars if the settlement date is delayed by two to three months.
If you are a Purchaser buying a tenanted property, you should begin planning for the fact that you may not be able to move into the property until after 7 August.
What options do I have?
The standard terms of the ADLS Agreement for Sale and Purchase do not provide an escape for the Vendor in situations such as these as provision is only made for damage to, or destruction of, the property. This means that discussion and negotiation between the Purchaser and Vendor is the best way to find a solution.
For a Vendor, your options are to agree with the Purchaser to defer settlement (ideally without charging penalty interest), to settle as planned but take over the tenancy until the Tenant vacates the property, or to endeavor to reach an agreement with your Tenant where they agree to terminate the tenancy earlier.
If the Purchaser is not willing to defer settlement, or your tenant does not agree to terminate the tenancy, then you may be faced with the prospect of having to pay penalty interest. You may be able to negotiate this to a lower penalty interest amount or even a lump sum reduction on the purchase price. However, the Purchaser has no obligation to agree to this.
As a Purchaser, you have the right to insist on settlement taking place on the date specified in the agreement. However, you need to keep in mind that the tenant still has the right to stay in the property until after this 3-month period and any relevant termination notice period has expired. You will become a landlord, even if only for a short period, and will need to be mindful of your obligations in relation to the Tenancy itself, but also the fact you will be receiving rental income.
If, as Purchaser, you want to avoid this, then your best option is to negotiate a change in settlement date until after the tenancy can be brought to an end, and consider what this might look like for you practically and financially. You may also want to keep in mind that a vendor that challenges a purchaser’s entitlement to interest may find support by a sympathetic court or tribunal where, but for the impact COVID-19, the vendor demonstrates that it did everything to comply with its agreement obligations.
No doubt the financial implications of the potential level of penalty interest could be significant for a Vendor. If the Vendor and Purchaser are unable to agree on a way forward, the Vendor might look to argue frustration of the Agreement, however whether that would be successful would be something to consider by both parties and their advisors at the time.
If you are facing a situation like this, then you should speak to your lawyer or conveyancing professional to discuss the options available to you.
If you are concerned about the impact which a residential tenancy may have on your conveyancing transaction, feel free to contact us at firstname.lastname@example.org or phone us on (06) 353 5210.