Adjustment of rent
Rental properties present challenges at settlement and care must be taken when adjusting rent and dealing with a security deposit.
The starting point is GC. 15 of the standard contract. But for an “adjustment” condition in the contract, no adjustment of the purchase price would occur and the parties would simply have to accept that rent is in arrears or advance. But an adjustment condition allows the parties to adjust rent as at the settlement date on the basis that the vendor is entitled to the rent up to the settlement date and the purchaser is entitled thereafter.
No formal assignment of the landlord’s rights is required as s. 141 Property Law Act confers upon the owner from time to time the right to recover rent due in respect of the property. Whilst it is common to enter into a Deed of Assignment or Transfer of the tenant’s rights under a lease, no such formality is required in the case of the transfer of the landlord’s rights to a new owner.
In the unusual situation where rent is paid up to the day of settlement, no adjustment between the parties is required. Where rent is paid in advance, the vendor must allow to the purchaser the amount of the prepayment beyond settlement day. Rent is deemed to accrue from day to day (s.54 Supreme Court Act) so rent is to be reduced to a daily rate and the rent for the number of days pre-paid is to be adjusted against the vendor. If rent is payable monthly, the monthly rent is multiplied by 12 and divided by 365 to give a daily rate. If rent is payable weekly, the amount is divided by 7 to give a daily rate.
Rent in arrears tends to present greater difficulties, not so much for the purchaser but for the vendor. In the absence of a Special Condition in the contract, the vendor cannot require the purchaser to allow to the vendor by way of an adjustment any rent due, but unpaid, at settlement. If the rent is in arrears, no adjustment is required. It is for the vendor to seek to recover arrears from the tenant and the vendor is aided by s. 56 Supreme Court Act in this regard. This section provides that if the purchaser recovers arrears from the tenant, then the landlord is entitled to the arrears that relate to the pre-contract period. However a purchaser might not be inclined to issue proceedings against the tenant and the vendor would be wise to include a Special Condition requiring the purchaser to do so.
Alternatively, the vendor might issue proceedings against the tenant for arrears BEFORE settlement, as the vendor has the right to rely on the terms of the lease until settlement.
A lease will regularly provide for the payment by the tenant of a security deposit to be held by the landlord to secure the performance of the tenant’s obligations under the lease. It is important that the purchaser makes arrangements for the transfer of this security deposit as the tenant will be entitled at the end of the lease to have the purchaser (as landlord) account for that security deposit. If the vendor holds that security deposit in the form of a cash bond, then adjustment may be achieved by the vendor allowing as an adjustment in favour of the purchaser the amount of the bond and the purchaser depositing that amount in an account under the control of the purchaser. Section 24 Retail Leases Act requires the landlord to hold the security deposit in an interest bearing account on behalf of the tenant and interest must be considered when undertaking this adjustment.
The tenant may satisfy the security deposit requirement by providing a bank guarantee. This presents particular difficulties upon the sale of the freehold. The guarantee will be made out in favour of the vendor and such guarantees CANNOT be assigned. Banks will only make payment to the NAMED beneficiary, so a NEW guarantee must be put in place to take effect from the date of settlement. This creates logistical difficulties, particularly if the lease does not include a clause requiring the tenant to provide a replacement guarantee in the case of a sale.