Understanding occupational rent
Buyers and sellers might gloss over this detail in the excitement of seeing a property change hands but it should not be ignored
OCCUPATIONAL rent: a concept that most buyers and sellers have some idea about – but they are not always certain of the nitty gritty. Who pays the rent to whom? How is this rent calculated? And when does it become payable?
These questions can be answered in the sales agreement between the buyer and seller – but the details are often overlooked in the excitement of finalising the transaction. This can lead to friction down the line.
Craig Mott, Cape Town regional sales manager for the Rawson Property Group, says occupational rent is an amount payable by the occupant of a property before transfer of the property has taken place. This makes occupational rent similar to a tenant paying rent. The amount is stipulated in the agreement of sale and is usually equal to the amount the property can be let for.
“The differences between occupational rent and ordinary rent lie in the expectation of a change of ownership because the property is in the process of being sold.”
WHO PAYS IT? AND WHY?
Mott says the occupational rent clause in an agreement of sale is to make sure that the seller is financially compensated if the buyer moves into a property before registration and transfer occurs. It can also protect the buyer if the seller stays on in the property after transfer.
“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.”
Mott says this rent becomes payable for a number of reasons but usually because there is some delay between moving dates and the finalising of the property transfer.
WHERE TO FIND THE DETAILS?
Occupational rent – or occupational interest, as it is sometimes called – is usually mentioned in the agreement of sale, says Basil Moraitis, Pam Golding Properties regional head in the Western Cape. The most obvious exception is when the buyer will take occupation of the property only on transfer.
It becomes “very difficult” for a resident seller and buyer to time and book a move if the occupation date is not stipulated.
“Where the occupation date is stipulated, then occupational rental is a must. This is to ensure that the party enjoying occupation of the property, while not being the registered owner, pays an appropriate amount to the registered owner.”
Ynnis Willson, branch manager at Jawitz Properties Randburg, says in some instances, such as when the date of occupation is stipulated as “on registration”, the amount of occupational rent will be deleted or left blank because it is not applicable. However, it is not best practice to leave this blank or delete it as the transfer process is often unpredictable in terms of timing, and circumstances might change along the way.
“Therefore, even if occupation is on registration, it is always best to negotiate the rental amount when negotiating the sale,” she says.
RISKS OF NOT PAYING ATTENTION TO THE CLAUSE
If occupational rent is not discussed at the time of the sale negotiation, and circumstances change during the course of registration, Willson says the party who needs occupation could be at a disadvantage as the price negotiated at this stage could be in favour of the other party.
“It can be that a seller might need to retain occupation after registration, or the purchaser may need to move in prior to taking ownership of the property.”
If occupational rent is not included in an agreement and, the need arises to reinstate it, says Lisa Connellan, sales and rental manager at Knight Frank, then negotiations between the parties is “a lot tougher”.
“On occasion, it has resulted in a situation where parties cannot agree and one party needs to seek interim accommodation.”
While agents and conveyancing attorneys can do their utmost to register a transfer on the date agreed to in the contract, she says the Deeds Office turnaround time does fluctuate and there may be situations where a buyer or seller intended to only move on the selected transfer date but now needs to move sooner or later.
SETTING THE AMOUNT
There are a few schools of thought on this, Connellan says, emphasising whichever method is used, the amount needs to encourage the parties to either move out as soon as possible (in the case of the seller) or want the transfer to register as soon as possible (for the buyer).
“A starting point to establish the amount of occupational interest would be 1% of the purchase price but this can be negotiated by parties to a figure to which they both agree.”
Echoing this, Moraitis says the rate is usually determined by what the parties agree to be reasonable but, as a guideline, may be calculated in accordance with the rent the property would fetch on the open market, possibly with a slight premium.
This does depend on the parties though, Willson adds.
“It is very seldom that an amount cannot be agreed, but should that occur, then the parties will need to agree to only move on registration.”
Connellan adds: “Be fair and reasonable when negotiating and be sure to include this clause in your contracts upfront, even if occupation is only on date of transfer. This is for the benefit of both parties and may never come into effect but is best negotiated upfront.”
HOW FLEXIBLE IS THE DATE?
The conveyancing attorneys will keep the parties up to date on the progress of the transfer, once the property has been lodged in the Deeds Office and Willson says the turnaround time is usually between six and 10 days, which gives both parties time to plan accordingly.
If the seller is unable to move out by that date, they are liable to pay occupational rent from the day after transfer.
“In terms of the contract, the clause is enforceable, however, in most circumstances, both parties come to an amicable arrangement.”
Moraitis agrees: “Property transfer is planned and logged in the Deeds Office, so it will never come as a surprise that transfer was registered. Therefore, the party responsible for paying occupational rent should be adequately prepared to do so from the date of transfer. The agreement would also stipulate the method of computation of the rent and how it is to be paid.”
HOW IS IT PAID?
Willson says occupational rent is prorata based on the number of days of occupation. Should the purchasers take occupation before registration then the rent will be due and payable prior to them taking occupation.
“Normally, we request that this be processed through the conveyancing attorneys as this will allow them to do the pro-rata calculations on registration. In the event of the seller retaining occupation post registration, the conveyancing attorneys may assist again by deducting the pro-rata occupational rent from proceeds of sale.”