Reader Question: Taking Over An Existing Rental Property With Tenants

DuplexsoldOne of the issues that real estate investors, particularily new investors face, when purchasing a rental property is whether to take on the old tenants or fill the property with new tenants.  There are times when there really isn’t much choice, and you are forced to take on the existing tenants.  An example, is when you are in a Sellers Markets (where there are much more buyers than there are people who are selling properties), competition from buyers who include less conditions in their purchase agreements leads to taking on exisiting tenants.

Here’s a question that I recieved last week from a Real Estate Agent in Port Perry, Ontario.

“I am representing a buyer wanting to purchase a property in Port Perry (privately) that includes an apartment (not legal) that is tenanted. There is no lease in place~(month to month basis) tenant has been there for 8 months and pays $875.00 month inclusive.

My buyer is agreeing to allow the tenant to stay upon purchasing the property but will be putting a written lease in place. What is the proper way to address this in an offer~do I put a clause in requesting the seller serve notice to the tenant (N11) (although we aren’t really asking for vacant possession) so that it protects my buyer and he can proceed with a new lease.”

There are a number of components that could be addressed in the question asked above, but I will stick to tenancy question. I’m only speaking from experience when purchasing properties that were tenanted.  A couple of caveats here, I am not a lawyer, paralegal, or realtor. If you are looking for specific legal advice I suggest that you contact a paralegal or lawyer who specializes in the Residential Tenancies Act. My other caveat is that this comes from my experience on purchasing properties privately, which may not conform to OREA/RECO guidelines. As in any situation, people can approach your questions differently.

Now, keep in mind, it always depends on the use of the property. If you are purchasing a rental property for personal use, then you would have the seller issue an N12 from the Landlord Tenant Board (Notice to Terminate the Tenancy at the End of the Term for Landlord’s or Purchaser’s Own Use) on the buyers behalf, so that you or your family member could move in to the property. This could be done in a situation where the lease is month-to-month like yours. But if you are in the middle of an annual lease with a tenant, you will have to wait until the end of the lease period. I would never say that I’m going to use a property personally if I wasn’t going to do so, as there are some large fines that are associated with this.

Now if I were looking to rent out the property again instead of using it for myself or a direct family member. I would take a couple of different approaches depending on if I wanted to continue with the existing tenants or start the tenancy process again.

1. If I am purchasing a property that is already tenanted and did not want to continue with the tenants. I might approach it by asking the seller for the property to be vacant.   This is particular easier in single family home or duplex rental situations. If you are asking for vacant possession it is upon the seller to give you that vacant possession. What that really means is a seller would have to offer the tenant money to end the lease, usually with an N11, in order for you to have the property vacant. The question will be if the sellers have not got vacant possession on closing, are you still going to close on the transaction. That’s where you might also use a tenant acknowledgment, if vacant possession cannot be given.

2. In the Schedule A, I would insist that the seller on or before closing provide a signed tenant acknowledgment for each tenant. I would then attach the tenant acknowledgement form as Schedule B in the purchase agreement. The tenant acknowledgment basically states what the current rents are, any side agreements that the tenant might have with the landlord (this could relate to rent rebates for cutting the lawn or shoveling the snow) and any other details of the tenancy.

In addition to the tenant acknowledgment, if the tenants are cooperative, I have also asked new tenants in buildings that I am taking over complete a rental application form and a new lease. This allows me to collect a number of bits of information that I like to keep in my documentation file for each tenant.

The challenge that you would have if you were not asking for vacant possession from the seller is that the tenant does not have to sign a rental application or new lease. But you would want to discuss with the tenant why it would be in their best interest to sign a lease with the new landlord. If the tenant were to offer signing a lease with the new landlord you would not have to ask the seller for vacant possession.

3. Another option would be for the new buyer to work with the tenants and offer them cash for keys approach for signing an N11 agreement in order to ensure an end of tenancy. Just be careful when the N11 agreement is going to take place and the right landlord is on the agreement at the time of when the lease has ended.

There are a few other methods that you can use in order to get the property vacant, but they are much more complex and require more time and effort to complete.

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