A recent judgment of the Dublin Circuit Court in Wow Investments Limited v. Residential Tenancies Board [2022] WECC3 has emphasised the importance of due diligence on current and past rental levels on the acquisition of investment residential property.
Wow Investments Limited ("Wow"), the appellant in this particular case, acquired an investment property from Permanent TSB. The property was sold with vacant possession and when Wow asked about prior tenancies, the bank advised that it was not aware of any – as is often the case in a distressed sale by a lender where the bank's knowledge of the property is limited. Wow acquired the property, went on to lease it to a new residential tenant and registered the tenancy and the rent with the Residential Tenancies Board ("RTB").
Unknown to Wow, a previous letting of the property had in fact been registered with the RTB in December 2017 at a rent of €1,150 per month. As the property was located in the Rent Pressure Zone ("RPZ"), Wow was only permitted by law to increase the rent by 4% in a 12 month period. When the post-acquisition tenancy was registered in December 2019 with a rent of €1,850, this represented an increase of 61% in a 24 month period and therefore the Residential Tenancies Act 2004 (the "Act") had been breached.
This matter arose following an investigation instigated by the RTB as opposed to any complaint from the tenant.
The outcome was not favourable to Wow. Even though the company relied on the responses provided by the vendor as part of the acquisition process, this was no defence to a breach of the legislation whose purpose was effectively to protect tenants. The court pointed out that had Wow reviewed the register of tenancies on the RTB website itself, it would have identified the existence of the 2017 tenancy and the failure of the bank to provide this information was no excuse.
Typically in any acquisition of a residential investment property, the buyer asks questions about the tenant in situ – the terms of the tenancy including the level of rent at the time of sale. Where the property is vacant, a query is also asked about residential tenancies in the previous two years. These responses are generally provided. The outcome of this case emphasises the importance of making sure that adequate answers are provided and where they are not, that as a buyer, steps are taken to gather its own intel about a particular property and its letting history - or carry the risk of proceeding without it.
A party can be fined up to €15k for breaching the Act. Following overcharging, a refund may be due to tenants where rent is not calculated in accordance with the Act. In addition, the investment value of a property can be impacted where the rental return is less than budgeted as it cannot be increased by more than 4% every 12 months. In short, the absence of adequate information about the letting history of a residential investment property can cost money and so it is important to carry out thorough investigations – either through lawyers or commercially – to ensure a property is acquired with full disclosure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
