If you are the owner of a tenanted property, don't forget to "put your house in order" before you sign up to sell it. As part of its pre-sale checklist, a vendor should check that tenant payments under the leases are up to date, otherwise the vendor could lose their rights to receive these payments.

Under s 112 Property Law Act 1952, the benefit of every lessee covenant (including rent reserved by a lease) shall go with the reversionary estate in the land and may be recovered by the person entitled, from time to time, to the income of the land leased.

The leading case in this area is Paramoor Nine Ltd v Pacific Dunlop Holdings (New Zealand) Ltd (1990) 1 NZ ConvC 190,449. The Court held that the result of this section is that only the person currently entitled to the income of the land can enforce covenants such as payment of rent against the tenant. This is the case even for breaches of lease and lease debts that arose before the purchaser (being the person now currently entitled to the income) was the owner of the land.

Section 112 is described as being procedural only. That is, the vendor and the purchaser can agree between themselves that the vendor retains the rights to enforce any breaches of the lease occurring before the sale. Standard agreements such as the Auckland District Law Society (7th ed) Agreement for Sale and Purchase of Real Estate, and the Real Estate Institute of New Zealand (Inc) and Auctioneers Association of New Zealand (Inc) Sale of Real Estate by Auction Agreement do not contain this reservation of rights.

If there are likely to be current debts or other breaches of lease by the tenant, legal advice should be sought on the inclusion of an appropriate clause before the sale and purchase agreement is signed.

Even if the vendor's rights for pre-settlement breaches are reserved, any action taken against the tenant must be taken in the name of the purchaser. Clauses reserving the vendor's rights will also therefore need to put a positive obligation on the purchaser to co-operate with the enforcement of the vendor's reserved rights.

This is a general summary only and should not be taken as a substitute for specific advice.

Mike Scannell is a partner and Valerie Bland is an associate at Simpson Grierson.

Web site: Simpson Grierson
Mike Scannell email: michael.scannel@simpsongrierson.com
Valerie Bland email: valerie.bland@simpsongrierson.com

March 2001