Buying A Tenant Occupied Property
Wednesday Oct 26th, 2022
A recent news story has been making headlines about a mother and young daughter who currently face homelessness in Ottawa after purchasing a home where the current tenants refuse to leave, even after the change in ownership. Is this possible and what has gone wrong?
Unfortunately, this is a situation that is not unique yet also would be the absolute worst-case scenario when purchasing a home that is tenant occupied. During the height of the pandemic in 2020, the risk of this happening had increased, when all hearings/actions by the Landlord Tenant Board were on hold, but since hearings have resumed, the backlog of cases and staff shortages have resulted in a 7-8 month wait time for Board decisions.
Here are 3 key strategies to best protect against a situation like this from occurring:
- REPRESENTATION DURING PURCHASE – this particular buyer bought the property through a real estate wholesaler, without a Realtor to guide her through the potential risks of purchasing a property with a tenant. The average buyer would not be expected to understand the rights of a tenant, nor the eviction process should a tenant “overhold” (when the tenant retains possession of the property past the expiry/termination date). However, according to a local paralegal who specializes in landlord/tenant disputes, often times a Realtor is involved in the transaction, but lacks the experience or knowledge required to navigate these situations, so in the end, the Buyer are not always protected.
- CONDITIONS AND CLAUSES – Including conditions in an offer in a hot real estate market does make a buyer’s offer less competitive, but conditions are meant to protect a buyer from certain risks and losses. In this situation, 3 non-standard conditions and 3 clauses could have been included in the offer submitted by the buyer in this news story:
- BUYER SHOWING CONDITION – in situations where buyers submit an offer on a property that they have not physically seen, there is a condition you can include so that the buyer agrees to move forward with the purchase only if they are satisfied with their initial personal inspection. This would have given this Ottawa buyer an opportunity to void the sale if she was not able to arrange for a visit, or if the conditions were not satisfactory.
- APPRAISAL CONDITION – slightly different from a financing condition, this does not allow the buyer to void the agreement if they do not qualify for financing, but simply if the appraisal comes through at an unacceptable value to the buyer. Since the financing company was unable to enter the property for the appraisal, this would’ve tipped off the buyer that there was a non-cooperative tenant, and she could have walked away from the deal since an appraisal was unable to be performed.
- TENANT ACKNOWLEDGEMENT CONDITION – this would have allowed the buyer to receive a document signed by the tenants confirming the terms and conditions of the current existing lease. If the tenant was completely non-cooperative, it is likely that they would not agree to sign this document and without it, the buyer could have voided the purchase contract. As a part of this condition, the seller/landlord is required to provide some warranties on the condition of the property and payments of rent. If the seller did not disclose that the current tenants had not been paying their rent, there may be legal means to pursue the seller for damages.
- BUYER RE-VISIT CLAUSE – typically, buyers return to the property they have purchased at some point before closing, for inspections, measurements, quotes from contractors, or simply for a final walk-through to assess for damage etc. It’s a bit tricky when a tenant is involved – the Agreement of Purchase and Sale is a contract between the buyer and seller; the tenant doesn’t care what has been agreed to in terms of the number of permitted re-visits. Selling landlords may want to set the expectation with their tenants up front that in addition to potential buyers touring the property in advance of making an offer, the buyer may return 1 or 2 times prior to closing.
- NOTICE TO TERMINATE LEASE CLAUSE – the buyer could have required that the seller/landlord provide the notice of lease termination to the tenant much sooner than after closing. This way, there could have been more time for the buyer to realize that there was a problem, which could have allowed her to potentially delay the closing until vacant possession could be obtained.
- OVERHOLDING CLAUSE – there is a clause that can be included where the seller would have indemnified the buyer of any costs, damages or penalty incurred as a result of the tenant’s failure to vacate. If the seller was unwilling to agree to something like this, again, another red flag that they may not be disclosing what is going on with the current status of the tenancy.
- PREVIOUS LANDLORD’S HANDLING OF THE TENANT – the news that your landlord is selling is not likely going to be well received by most tenants, especially those who have been living in the property for 10 years. Giving the tenant ample notice of your plans will help them assess their options. A bottle of wine or a discount in the rent goes a long way in getting tenants on board with showings, even if they’re not happy about possibly being displaced. The seller had issues with collecting rent from the tenants during the pandemic and never followed through with the eviction process at that time. Instead, he made it the buyer’s problem.
As rents increase over time, it becomes increasingly difficult to find a comparable property at a similar rent when you’ve been living somewhere for 10 years. It becomes important for landlords to increase the rent on an annual basis to try to keep up with market rental rates. If the rent has remained the same over 10 years, it provides very little incentive for the tenants to move.
Lastly, over the pandemic when there was a pause in eviction hearings, landlords were resorting to tactics like “cash for keys”, and tenants were certainly taking advantage in some situations. Understanding the stakes at hand for sellers/landlords if tenants were still living in the property at the closing of a sale, tenants would wait for a financial incentive to move. And some payouts were hefty. However, it allowed for many landlords to sell their properties during a challenging time for tenants and take advantage of rising prices.
In hindsight, the buyer has learned an expensive lesson. The story is unfortunate, and although atypical, not unique either. Working with an experienced Realtor who can explain the risks of purchasing a property with an existing tenant, as well as understanding which clauses and conditions to include in an offer (even if it makes your offer less competitive) to best protect you as a buyer is so very important. As a landlord, fostering good relationships with your tenants as well as including the right clauses in your lease agreement to address some of these matters in advance should you decide to sell your rental property in the future, will also help to prevent some of these challenges.
Even after the Landlord Tenant Board grants a hearing date, it could take many more months for the hearing to occur, and if they rule in favour of the landlord, there are more months still before action will be taken to evict. Even then, the only jurisdiction or legal claim would be against the actual tenant – the other occupant not listed on the lease could continue to squat on the property indefinitely.
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