Your quick guide to occupational rent
Category Newsletter: Lead Article
An important but often overlooked clause in a property sale agreement is that of occupational rent.
Also called occupational interest, occupational rent is most simply understood as the financial compensation for occupying a property that you do not own - either because, as the buyer, you've moved in before the transfer and registration has been finalised or because, as the seller, you continue to occupy the property after the sales transaction is completed.
Not unlike a tenant paying rent, occupational rent is a mechanism that serves to protect the interests of both the buyer and the seller by ensuring that the parties are in agreement around the occupation of the property and that compensation in this regard happens in a fair and transparent manner. "The only noteworthy difference between 'ordinary' rent and occupational rent is that there is an imminent change of property ownership that will effectively end the rental agreement," Steven van Rooyen, Principal at Leapfrog Milnerton, explains.
Understandably, one of the most contentious issues around occupational rent is around the amount of rent charged. "The accepted norm is that the rental price should be comparable to what the property would fetch on the open market," Van Rooyen says. As such, it is advisable to consult a trusted property advisor for insights into the prevailing market prices for properties that are similar in style and size as the one in question, as well as what the average price is for the area.
Van Rooyen adds that the onus is on the party paying the rent to ensure the rental price is market related, and if it is not to negotiate a rate more in line with the market average before committing by signing the sales agreement. Furthermore, the buyer is advised take out household insurance to cover their possessions as the building is covered by the seller until the transaction is finalised.
Another area of contention is around property rates and taxes, and who bears the responsibility for the payment thereof. "Legally speaking, property rates and taxes are always for the property owner's account, unless the contract stipulates otherwise," Van Rooyen highlights. Other expenses, such as prepaid electricity, water, levies and similar, can be negotiated by the parties in the contract.
Occupational rent must be provided for in the sales agreement. "Even if the date of transfer and the date of occupation is the same, provision must still be made for the chance that the transaction doesn't go 100% according to plan and that one of the parties are forced into a position in which they need to pay occupational rent to the other party," Van Rooyen emphasises. At the end of the day it is a clause designed to protect both parties, and should be regarded with the necessary seriousness.