Rent Arrears at Settlement: What Buyers Should Check

A rent ledger can show money owing even when a Victorian property purchase is ready for settlement. If the renter is staying on, that unpaid balance needs to be explained before you approve the settlement figures.

The short answer: Don’t treat unpaid rent as an automatic extra payment you owe the seller. Your conveyancer needs to check the lease, sale contract and current ledger to establish how the arrears are treated, whether any amount is payable between buyer and seller, and what happens to rent received later. The right to receive rent and an obligation to pay the seller at settlement are separate questions.

Separate unpaid rent from money already received

Rent arrears means rent that hasn’t been paid by the due date. A rent ledger records the rent charged and the payments actually received, so ask for a version showing the dates and periods behind the balance rather than relying on a single total.

Rent already received for a period extending beyond settlement is different from rent that remains unpaid. A promise to catch up later, including under an instalment arrangement, isn’t money already received.

The documents should identify:

the rent payable under the lease and any changes;
the period covered by each actual payment;
the amount still unpaid and when it fell due;
any payment plan, variation or relevant order affecting that amount.

These checks are about the purchase documents and settlement figures. They don’t require you to negotiate directly with the renter.

Check the right to rent separately from the settlement payment

Victorian law provides for rent and the benefit of relevant lease promises to go with the landlord’s interest in the property. That interest is sometimes called the ‘reversion’, meaning the owner’s interest subject to the lease.

Separate rules generally treat rent as accruing from day to day and apportionable over time, unless there is an express stipulation excluding apportionment. Those rules concern how rent is allocated between people entitled to it. They don’t, by themselves, establish that a figure described as ‘arrears’ must be added to the amount a buyer pays at settlement.

Your conveyancer should therefore read the sale contract’s rent provisions and any special condition dealing with arrears alongside the applicable law.

Check whether the contract:

reserves a particular entitlement to the seller;
requires the buyer to account for specified rent received later;
requires a payment or credit between buyer and seller at settlement; or
provides another agreed way of recording the arrears treatment.

An adjustment is a credit or charge between the parties used when calculating the completion payment. The important point is to identify separately what must be paid at settlement and how any later rent receipts are to be dealt with.

Read any payment plan with the ledger

If old arrears are being paid by instalments, obtain the actual payment plan and any related order as well as the ledger. The ledger may identify the outstanding debt without explaining how or when it is expected to be paid.

Suppose the ledger records $900 of unpaid rent from before settlement and there is an arrangement for the renter to pay that amount in later instalments. The $900 establishes an unpaid balance. It doesn’t establish that you must pay the seller $900 at settlement, and it doesn’t determine how later instalments should be allocated once received.

That treatment has to be worked out from the actual contract, lease, plan or order and the applicable law. Don’t approve a reimbursement simply because a payment plan exists, and don’t assume all later payments belong to you merely because they arrive after settlement.

Get an updated ledger before approving the figures

A payment made after the first ledger was prepared can change the arrears balance. When the settlement figures are being finalised, ask for current payment records and have any difference reconciled against the earlier ledger.

Also confirm who supplied the rent information and how its treatment under the sale contract has been checked. If the parties intend to deal with an arrears amount separately from the usual settlement figures, your conveyancer should see the proposed arrangement and check how it is documented.

Keep the agreed figures, the ledger relied on and the explanation of any later-receipt arrangement together for the property handover. Recovering unpaid rent or dealing with a tenancy dispute is a separate issue with its own rules.

For broader lease and handover matters, see our guide to buying a tenanted property.

About the Pearson Chambers Conveyancing team

Pearson Chambers Conveyancing assists with residential purchases, sales and title transfers in Melbourne and across Victoria. The team can review the sale contract, Section 32 and relevant tenancy documents together and explain how the agreed treatment of rent affects the settlement figures.

Sources we consulted

Have the rent terms checked before you commit

Contact Pearson Chambers Conveyancing for a complimentary contract and Section 32 review before signing. If settlement is already approaching, send the contract, lease, latest rent ledger and any payment-plan documents promptly so the team can discuss the figures, deadlines and next steps.

Email contact@pearsonchambers.com.au.

General information only, current as at the date of publication. Victorian conveyancing rules and legislation change frequently. Please contact the Pearson Chambers Conveyancing team for advice on your specific contract.