PROPERTY: Risks For Unwary Landlords
Recent Western Cape Business News
When applying for finance, buy-to-let owners and rental consortiums need to guard against signing away their rights to rental income by agreeing to a clause that effectively passes these to the financial institution concerned.
That’s the advice of Aidan Kenny director and property specialist at Werksmans Attorneys, who cautions those purchasing property for rental purposes to pay special attention to phrasing of rental income cession clauses in finance agreements.
A cession can basically be described as the transfer of claims. In terms of a rental income cession clause the rights to rental income is ceded from the lessor (the cedent) to the cessionary (financial institution). The cession clause to rental income is normally worded in such a way that the lessor remains entitled to the rental income and the financial institution only becomes entitled to the rental income when the lessor defaults. However, this does not mean that a cession of rental income to the financial institution has not occurred, the operation of which has just been suspended on the default of the lessor.
While this may seem like the proverbial six of the one and half a dozen of another, Kenny points out that recent legal proceedings have demonstrated that rental income cession clauses can have dire consequences for lessors, because they could be prevented from suing their tenants if they do not pay their rent.
“Depending on the wording of the rental income cession clause, lessors may discover that by ceding their rental income rights to a financial institution, they may also release their rights to take legal action against a non-paying tenant,” depending on the wording of the clause he says, “because the tenant can argue in court, the owner ceded his or her right to rental income and the owner does not have the right to institute legal proceedings against the tenant.
If this is the case, the lessor will then have to go through the often lengthy process of applying to the financial institution to re-cede the right, title and interest to rental income back to him or her just so that he or she can institute legal proceedings against the defaulting tenant. Alternatively, he or she will need to request the financial institution to institute proceedings against the defaulting tenant.
Kenny explains that the cession of the rights, title and interest to rental income has become a widely accepted form of security by institutions providing finance. As the primary risk takers in the transactions, these financial institutions have every right to insist on this type of protection. However, he urges the buyers in such transactions to consult their attorneys regarding the full implications of rental income cession clauses to ensure that they fully understand what their rights are when signing the finance agreement.
“By simply taking a little more time at the outset to fully understand the rental cession clauses in their finance contracts,” concludes Kenny, “lessors will not only save themselves the administrative burden of potentially having to get their rental income rights re-ceded to them, but will also avoid the potentially devastating impact that the resultant delays in legal proceedings could have on both their financial situation and their business cash flow.”
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