Buying a tenanted property? Vacant possession vs tenancy explained

You've found a property you like, but there's a tenant living in it. Does that change anything? The short answer: yes, quite a lot. Whether a Victorian property is sold with vacant possession or subject to existing tenancy affects when you can move in, what obligations you inherit, and even your eligibility for first home buyer concessions.

Here's what each option means and what to watch for in the contract.

What does vacant possession mean?

When a contract of sale is marked vacant possession, it means the property must be empty and free of all occupants by settlement day. No tenants, no leftover furniture, no rubbish. The vendor is responsible for making sure the property is cleared and ready for you to move into (or do whatever you like with) from the moment settlement completes.

In practice, this means the vendor needs to end any existing tenancy before settlement. If there's a tenant on a periodic (month-to-month) lease, the vendor must issue a notice to vacate. Under the Residential Tenancies Act 1997, a landlord who has entered into a contract of sale must give the tenant at least 90 days' notice to vacate. If the tenant is on a fixed-term lease that hasn't expired, things get more complicated, as the tenant generally has a right to stay until the term ends.

What this means for you: If the contract says vacant possession but the tenant is still there on settlement day, the vendor is in breach. You're not obligated to settle until the property is actually vacant.

What does subject to existing tenancy mean?

If the contract is marked subject to existing tenancy, the tenant stays. You become their new landlord from the moment settlement occurs. The existing Residential Tenancy Agreement (RTA) transfers to you, and you inherit all its terms: the rent amount, the lease period, any special conditions.

The current RTA should be attached to the contract of sale, so you can review the terms before signing. This is worth reading carefully. You'll want to know the rent being paid, when the lease expires, whether there are any arrears, and what the bond amount is.

You won't be able to move into the property until the tenancy ends, either when the fixed term expires or when the tenancy is lawfully terminated under the Residential Tenancies Act 1997.

What if neither box is ticked?

The standard Victorian contract of sale has tick boxes for both options. If neither is marked, the default legal position is that the purchaser is entitled to vacant possession at settlement. But relying on defaults is risky – it's always better to have this clearly specified in the contract before you sign.

Key considerations for buyers

Your plans for the property

If you're buying to live in the property, vacant possession is almost always what you want. If you're buying as an investment, subject to tenancy might actually be appealing – you inherit a tenant and rental income from day one.

First home buyer implications

This is a detail that catches people off guard. If you're a first home buyer relying on the stamp duty exemption or the First Home Owner Grant, you need to move into the property within 12 months and live there for a continuous period of at least 12 months. A long-term tenancy could complicate that timeline. Have your lawyer check the specific requirements before signing.

Fixed-term vs periodic tenancies

The type of tenancy matters. A fixed-term lease (say, 12 months from a specific start date) gives the tenant a right to stay until the term ends – neither you nor the vendor can force them out early without grounds. A periodic tenancy (where the original fixed term has expired and the tenant is continuing month-to-month) is more flexible. The vendor can issue a notice to vacate with appropriate notice (currently 90 days where the property has been sold) and negotiate vacant possession at settlement.

Rent and bond adjustments

If you're buying subject to tenancy, the statement of adjustments will account for any rent the tenant has paid in advance and the bond held with the Residential Tenancies Bond Authority (RTBA). The bond doesn't transfer automatically – your lawyer will handle the paperwork to ensure the RTBA records are updated.

What vendors need to know

If you're selling a tenanted property and the buyer wants vacant possession, you'll need to arrange for the tenant to leave before settlement. The notice period depends on the type of tenancy and the reason for the notice. Getting this wrong, or leaving it too late, can put you in breach of the contract.

If you're selling subject to tenancy, make sure the RTA and any amendments are attached to the contract. Failing to disclose tenancy details can create disputes down the track.

How Nextstep Legal can help

Whether you're buying or selling, having a property lawyer review the tenancy arrangements before exchange is one of the simplest ways to avoid problems at settlement. At Nextstep Legal, we check the tenancy details as part of every contract review, including the lease terms, notice periods, and whether the contract correctly reflects what's been agreed.

If you're a buyer, we'll flag anything that could affect your plans or your eligibility for concessions. If you're a vendor, we'll make sure the tenancy documentation is complete and properly attached.

Need a contract reviewed? Nextstep Legal offers free same-day contract reviews for Victorian buyers. We'll check the tenancy terms, flag any issues, and explain what it all means for your situation.

This article provides general information about Victorian property law. It's not a substitute for legal advice on your specific situation. If you'd like to discuss your circumstances, get in touch.