Changing Tenancy Terms
What are a landlord’s rights if a tenant asks to change the length of their term at the end of the tenancy and the property manager agrees?
1 April 2019
The tenant that I have in my rental property (which is managed by a property manager) signed a tenancy agreement for six months. A few weeks before the tenant was due to leave she said that she would like to stay for as long as possible. My property manager extended the tenancy for a further three months and confirmed it by email.
I changed my flight home to New Zealand to arrive three days after the tenant was due to leave. But the tenant then changed her mind, after starting the new term, and asked the tenancy term to be returned back to the original one. This means I’ve had to change my flight again. My questions are: 1 ) Is an email confirmation of a new tenancy term legally binding?
2 ) As my property manager confirmed the change, should they have got a written and signed addendum to the original contract?
3) Among other things, I’m out of pocket by nearly $300 for flight changes that I didn’t need to make.
Given the circumstances, can I claim for a refund of these costs?
When the tenancy was extended and confirmed by email that became a fixed term. Usually a property manager will confirm that extension with the tenant, either in writing or by exchange of emails. If that was done, the fixed term remains and cannot be changed by the tenant changing her mind.
The second change was a cost that you could have avoided if the property manager had not accepted the tenant changing her mind. I suggest that you talk to your property manager about the costs that you have incurred, and ask for reimbursement.
- Bernard Parker
We have recently been approved finance to buy our new home — based on the LVRs of our two rentals, our own home and the new home. We planned to sell the home in which we currently live, which is almost mortgage free, and pay down most of the mortgage on the new home.
However, we have been toying with the idea of keeping the current home as our third rental. Should we: a) set up a lookthrough company (LTC) to buy the property or b) discuss with the bank a restructure of the lending so that we put most of the lending back onto the new third rental, thereby lowering our mortgage and being able to deduct interest on the rental as an expense against income. Or would this be seen as tax avoidance?
A taxpayer’s ability to deduct interest hinges on the purpose they use the money for; the focus is not what properties your lender holds as security, but on who is borrowing the money and what for.
Let’s consider your second scenario first. If you borrow the new funds and secure as much as possible against your existing home, but continue to hold that property personally, you will not be able to claim the interest on the new borrowing as deductible. This is because when you borrow that money you will not be borrowing it to buy a rental – you already personally own it. The fact that the borrowing is secured against the existing home does not alter the fact the money is not used to buy a rental. However, if your existing home is sold to an LTC, there is an opportunity for the LTC to borrow money to buy the property from you. This generates a different tax position. The LTC can be seen as borrowing money to buy a rental. Accordingly, interest can be claimed by the LTC on the funds it borrows. So your first option of setting up an LTC and moving the property into it is likely to be the more attractive tax-wise.
There are potential tax consequences of selling property into new entities. Seek advice before proceeding.
- Matthew Gilligan
I have been hearing lots of different opinions on whether you should invest for capital growth or invest for positive cash flow. What do you think is the best strategy and why? Or do you think it’s best to do a bit of both?
I think in most cases capital growth creates more actual wealth. However, the cash flow component can’t be avoided as I have seen many capital growth investors put in forced sale situations due to not focusing on that part enough.
Ideally, using a combination of strategies can work well. Many investors focus on three to four regional investments, which can achieve higher returns and then use this to offset some of the negative cash flow component of a capital growth property in an area like Auckland.
But note your personal position is very important here as well. If you have a high (and secure) income it might be okay to focus on some capital growth properties, whereas if your income is on the low side this could be dangerous.
- Kris Pedersen
I bought a three-bedroom house in Pakuranga Heights under my personal name in early 2013. It is a 140m2 house on a 1,434m2 section. Subsequent to purchase, I renovated to open plan kitchen/dining/living and made the dining room the fourth bedroom.
By the end of 2016, I had money to repay in full the mortgage on this property. In early 2017, I transferred this property to a family trust. (I am the settlor and one of the trustees.) On the same date, this property was used as equity to purchase another two properties under the same family trust. The amount recorded in the transfer was $650,000 which was the CV at that time of transfer.
My situation has now changed and I would like to consolidate my investments and cash up some equity by May 2019. My questions are: Will the family trust be taxed for income if I sell for $1.1 million? Am I able to transfer this back to personal at $650,000?
Your factual statement does not make it clear whether the house in question is your home or not. The bright-line rules that can tax a disposal gain on residential property do contain a principal home exemption this can still apply to trusts if the home is the residence of the principal settlor.
There are no exemptions for associated party transfers with the bright-line test so the clock was essentially re-set when the trust acquired the property. This acquisition occurred when the bright-line test had a two year hold period so there is the risk of being taxed on a gain if the property is not held by the trust for two years, subject to the principal home exemption.
Remember also that when counting days the bright-line period starts from when title changes and runs to the date the sale and purchase agreement for disposal is signed. Because you are proposing a related party transfer this is deemed to occur at market value so you must determine the disposal based on the property’s market value. That means you can’t transfer it at the original cost price in an attempt to avoid tax under the bright-line test.
- Mark Withers
Purchasing With Existing Tenants
I’m purchasing a property with existing long-term tenants who have no written tenancy agreement and don’t have a bond lodged. The property is on two titles. We purchased with the aim of using the rear section ourselves as we will build a new shed (the area is lawn and some garden at the moment). There is an existing double garage at the front of the rear section which we intend to divide and allow the tenants to continue using half of and we will use the other half. They seem agreeable to the rear garden being given up as long as they have it until autumn, but the garage is contentious.
What rights do I have in regards to this? They have a low rent of $220 per week for this three-bedroom house, which I will not increase if they stay. Realistically, it’s worth $250 per week even with the reduced space. I don’t want to have to resort to giving 90 days’ notice to start fresh, but I am feeling like there are limited options if they become difficult. I am planning to have a written tenancy agreement.
If you purchase a property and existing tenants remain in the property, the terms and conditions of the existing tenancy will normally continue with the new property owner (the landlord) inheriting the original tenancy agreement. This applies even if the tenancy was a verbal agreement with the former landlord.
It is recommended you speak to both the former landlord and the tenants to get an understanding of what was agreed to and confirm whether there is a written agreement in place. In the absence of an existing written agreement the current tenant might also agree to document those terms into a written agreement with you.
Where a landlord wishes to vary the terms of the tenancy agreement this may only be done with the consent of the tenant(s). If the tenant was to lose access to a part of the property or its facilities, the tenant may wish to negotiate the terms associated with the varied agreement (for example, by way of a rent-reduction or compensation) for the loss of amenities.
If you decide you want to end the tenancy arrangement, you must provide the tenants with 90 days’ notice in writing and specify the date by which the tenant is to vacate. If both parties cannot reach an agreement around the compensation that will apply to the change of the agreement and loss of amenity, the tenant may apply to the Tenancy Tribunal to have the matter resolved.
- Jennifer Sykes