Buying or selling a property that is tenanted can raise many issues and pose many challenges for a realtor and its clients. This column will examine a number of issues that need to be considered when either buying or selling a property with tenants.
From the Buyer’s perspective, it is first important to determine if the Buyer is purchasing the property with the intention of assuming the tenants in the property. If the Buyer is buying the property as an investment, then obviously, the Buyer will want this reflected in the Agreement of Purchase and Sale. In this case, it is important for the realtor to insert a clause making it clear that the Buyer will be assuming the tenants. The clause should state the details of the tenancy including, whether or not a lease exists, the amount of the monthlyrental, what is included in the rent and the amount of any prepaid rent. The clause should also require the seller to execute documents on closing such as tenant’s acknowledgments, assignment of the tenancy and a direction to the tenants to pay rent to the new Buyer. I have seen situations where the Buyer’s lender will not fund the mortgage without signed tenant acknowledgments.
I also recommend that the Buyer review a copy of the lease prior to finalizing the Agreement of Purchase and Sale. If the Buyer is arranging a mortgage, it is important to know that many lenders, as a condition of the mortgage loan, will require proof that the Buyer will be residing in the property following closing. If this will not be the case, the Buyer should advise the lender of this before waiving any financing conditions. Failing to do this can result in the lender advising after the deal becomes firm that it will not fund the mortgage because the property will not be owner occupied.
If the Buyer intends to purchase a tenanted property and does not want to assume the tenants, then the Agreement of Purchase and Sale should clearly state that the property should be vacant on closing. In this scenario, the new Buyer cannot evict the tenant simply because the Buyer is becoming the new owner of the property. If the tenant has a lease, the tenant cannot be evicted before the end of their lease. As such, a clause should be inserted into the Agreement which states that the Seller shall give the tenant(s) the requisite notice to vacate the property prior to closing. In some situations it would be advisable to have the tenant sign a form wherein it agrees to terminate a tenancy on a specific date.
In some cases, the tenant can be difficult and uncooperative and refuse to vacate the property. To avoid this, it is best for the seller to inform the tenant in advance of its plans to sell the property. Working with the tenant and keeping the tenant informed can avoid problems which could otherwise lead to difficulties in closing the transaction.