Transfer of rental deposit to new landlord requires tenant's consent

June 3, 2007

YOUR PERSONAL ADVISER: FINANCE

Transfer of rental deposit to new landlord requires tenant's consent

Q IF I buy a property with an existing tenancy, what are the legal implications, given all of the following circumstances:

1. The option specifies that the property is sold with an existing tenancy.

2. However, the existing tenancy agreement between tenant and property owner does not incorporate an explicit clause to allow the owner to transfer all rights and obligations under the tenancy agreement to the new owner or purchaser via a simple notification to the tenant of a change of ownership of property.

3. I had proposed to pay all legal costs in respect of a deed of assignment to be executed for the existing tenancy agreement so that I would assume all current rights and obligations of a landlord owner in the tenancy agreement.

This would have freed the existing landlord owner from the tenancy contract. But for some inexplicable reason, the seller does not regard this as necessary and refused to sell his property on that basis.

I had proposed that the deed of assignment be prepared by a lawyer. His estate agent advised him against this - even though I thought I was being fair to all parties: buyer, seller and tenant.

If I agree to buy his property on his terms, no deed of assignment will be executed between seller and buyer in respect of the tenancy agreement.

4. The seller is agreeable to transferring the balance of the rental deposit to me upon completion of the sale, after first deducting all dues owed by the tenant to him as the existing owner.

If the tenant refused to allow the transfer of deposit to me as the new owner, the balance would be transferred to my lawyer as stakeholder and it would be held till completion of the tenancy.

However, my lawyer does not want the responsibility of being the stakeholder.

Please advise me of the legal implications if I proceed with the purchase of the property under the vendor's terms.

Is it implicit that all rights and obligations of a tenancy agreement are still binding between the property buyer and tenant even though there is no deed of assignment executed between buyer and seller in respect of the agreement?

Moreover, the existing tenancy agreement does not explicitly allow the transfer of tenancy contract to the new owner - it is silent on this point.

If there is a breach of the tenancy agreement, can I pursue legal action against the tenant?

Can the tenant pursue legal action against me as landlord if I fail to honour terms of the agreement?

A NORMALLY, the tenancy agreement does not incorporate an explicit clause to allow the owner to transfer all rights and obligations under the agreement to the new owner via a simple notification to the tenant of the change of ownership of property.

However, the law does recognise that with the transfer in ownership, all rights and obligations under the tenancy agreement will pass to and be binding on the new owner and the tenant.

There is therefore no need to execute a deed of assignment.

As the new landlord, you could pursue legal action against the tenant if he breached the terms of the tenancy agreement.

Similarly, the tenant could take action against you if you breached the terms.

However, the situation would be different for the rental deposit.

The court has held that the obligation in respect of the rental deposit does not pass as it is a personal contractual obligation.

Hence, the owner cannot transfer the rental deposit to the new owner unless he does so with the tenant's consent.

In some cases, a three-party agreement called a Deed of Novation is executed by the previous owner, the new owner and the tenant to provide for the transfer of the rental deposit.

Again, this would require the consent of the tenant. The seller has suggested that your lawyer be the stakeholder for the rental deposit till completion of the tenancy.

This is one way to resolve the problem. If your lawyer refuses to be the stakeholder, you might want to suggest that the seller's lawyer be the stakeholder instead.

Ang Kim Lan
Director
Goodwins Law Corporation

Advice provided in this column is not meant as a substitute for comprehensive professional advice. E-mail questions to [email protected]