Buy-To-Let Investors Beware

Private Property South Africa
Lea Jacobs

We recently received a letter from one of our readers asking about the pitfalls of renting out a property they had bought, before transfer had taken place. In other words, the buyer would be leasing the home to a third party while paying the seller occupational rent.

It may be a somewhat unusual situation, but it's certainly not the first time something of this nature has cropped up and buyers who find themselves in the same position could do well to heed our legal expert's advice.

We spoke to Advocate Carine De Beer from Legal2Landlords, who made a number of interesting observations. Firstly, she notes that it is essential to distinguish between the buy-to-let buyer and the landlord. A buyer only becomes the registered owner of the property once transfer has taken place and cannot be called the landlord before then.

"Equally, if they are acting as an agent for the present registered owner (in this case the seller), they are still not the landlord and cannot enter into a legally binding agreement with the tenant."

In other words a rental agreement is one between the owner or an appointed agent acting on his behalf, and the tenant.

De Beer says that in South Africa the "huur-gaat-voor-koop" rule prevails and all rights and duties of the landlord are transferred to the buyer on date of transfer, when the buyer becomes the landlord.

Nothing in life is a certainty and things can and often do go wrong. Property sales collapse all the time and things could become very interesting if transfer doesn't go through. The tenant in this case would not have a rental agreement with the owner and, unless the owner was willing to sign a new lease, the tenant could be evicted.

Other important questions need to be asked. What would happen in this circumstance if the tenant damaged the property or refused to move out at the request of the owner? Who would be liable for the costs of repairs and the legal costs in the case of an eviction? The obvious answer is the person who rented out the flat, but if the sale has fallen through, this could become extremely complicated and messy.

De Beer says that in her opinion, it would be extremely unwise for a buyer to lease out a property before transfer has taken place. "It would not be a binding rental agreement as the landlord (the current owner) is not party to the contract.

"As there is no binding rental agreement between landlord and tenant, the "tenant" is illegally occupying the premises, and the buyer has entered into an agreement with no authority as landlord. If the occupier then chooses not to pay the 'rent' there are no grounds on which the buyer can claim specific performance."

De Beer states that while it is understandable that a buy-to-let buyer will want a return on their investment as soon as possible, as they may have paid a deposit and liquidated other investments to keep the balance at the ready for date of transfer, there are ways to achieve this, with the most obvious being to come to an agreement with the seller.

In this situation, the seller enters into the lease agreement with the buyer's lined-up tenant. Rental income is owed to the seller before transfer, but the seller may be willing to pay a percentage of the rental income to the buyer (for example the 10 percent which the buyer has paid and which is in trust with the transferring attorney, earning very little interest) to the buyer on transfer, thereby easing the blow slightly.

Of course once transfer has taken place, the "huur-gaat-voor-koop" rule applies and the buyer automatically replaces the seller as landlord.

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