Understanding Occupational Rent: And What You Need To Know

You've just bought your first property. You've signed an Agreement of Sale, set your dates, and you're ready to move  - but transfer hasn't taken place yet.

This is where the occupational rent clause comes into effect, which allows you to occupy your soon-to-be property before you officially own it.

But, the occupational rent clause in your Agreement of Sale can become a major point of contention. Here's what you should know about occupational rent, and what to look out for before you sign.

What is Occupational Rent?

When a property is sold it can take up to 12 weeks for transfer to be finalised.

Occupational rent is an amount payable by the occupant of a property to the owner, before transfer of the property has taken place. This makes occupational rent similar to a tenant paying rent. The amount is agreed upon in the Agreement of Sale, and is usually equal to the amount the property can be leased for (about 1 percent of the purchase price).

The differences between occupational rent and ordinary rent lies in the expectation of a change of ownership, because the property is in the process of being sold.

Why Pay Occupational Rent?

The occupational rent clause in an Agreement of Sale is to make sure that the seller will be financially compensated if the buyer moves into a property before registration and transfer occurs, and vice versa. The logic behind this arrangement is that irrespective of an impending change of ownership, the current owner is still required to service their bond repayment, and manage costs associated with the upkeep of the property until ownership is transferred.

Occupational rent can come into effect for a number of reasons, but usually because there is some delay between moving dates and the finalising of the property transfer. Sometimes it's more feasible to pay occupational rent, especially if the buyer is moving from rented accommodation. Rather than renewing a rental contract, the buyer can occupy the property and pay occupational rent until transfer is finalised.

What Does Occupational Rent Cover?

Occupational rent is a flat rate for occupation, and does not include water and electricity which is usually for the occupant's account. Rates and taxes are normally the responsibility of the owner, unless otherwise specified in the Agreement of Sale.

Depending on the length of time before transfer is finalised occupational rent can be calculated on a monthly or pro-rata basis, and the occupant charged accordingly. In general, the amount of occupational rent should not be higher or lower than standard rental rates for a similar property. If the amounts vary drastically, these can usually be negotiated before signing the Agreement of Sale.

Tip: Research rental prices for similar properties in your neighbourhood and use that to negotiate your occupational rent amount before signing the Agreement of Sale.

Sectional Title and Off-Plan Developments

The occupational rent clause applies to freehold and sectional title purchases, whether you're buying a home from an individual or as part of a new off-plan development. In the case of new (off-plan) sectional title developments, the developer will normally require the buyer to move into the property as soon as the occupational certificate is issued by the council. In this case, occupational rent has to be paid whether or not the buyer chooses to physically move into the property.

This means that when buying in sectional title developments, you could potentially be left paying twice - for the property you occupy, and the newly built property. This is important, and should be budgeted for, because the occupational certificate can be issued well before the expected date of transfer, despite delays in completing the property on the developer's end.

In the case of new developments, you should always make sure that what makes up the purchase price of a property is clear in the contract - particularly when it comes to optional extras. In most cases, optional extras (that corner bath, extra kitchen storage, or optional finishes) are considered additions to the purchase price, and will increase your occupational rent. To avoid this, try to pay for any extras in cash, and negotiate occupational rent as a percentage of the initial purchase price only.

Tip: When buying from a new off-plan development, it might be possible to negotiate your occupational rent rates with the developer.

What to include in your Occupational Rent Agreement

Because the Agreement of Sale is a legally binding document, signed by both parties, there is nothing either party can do to change the agreement after the fact. In certain cases the party in breach can be sued for damages.

Your occupational rent clause should include:

• The occupational rent amount, as calculated on a monthly and pro-rata basis. 
• An indication of where responsibility lies for rate and taxes, and for consumables like water and electricity. 
• A statement that the owner cannot store any items on the property, as damage disputes can arise later.
• An indication that homeowners cover (HOC) will be maintained until the date of transfer, to insure the property against major damage (e.g. flood, fire, or inclement weather).  

Avoiding the Occupational Rent Trap

The occupational rent trap happens when the occupational rent clause comes into effect, and some element of the agreement is contested by either buyer or seller, costing one party extra money, or delaying the sale process. The only way to avoid the trap is to scrutinise your agreement of sale before signing, and ensure that all clauses are agreed upon by both parties (buyer and seller). Trouble can be avoided if you and your estate agent insist on a clause in the Agreement of Sale clearly stipulating the amount of occupational rent to be paid, and how it is calculated.

When in Doubt

As with any contract, you should fully understand all of the implications before signing. The legalities around occupational rent can become a point of contention and cause administrative or legal delays in finalising the sale and transfer of a property.

If you're in any doubt, contact us at Rawson and we'll walk you through the process.