Channelling your entrepreneurial spirit, you decide to purchase a residential property with a tenant occupying the property. For a first-time investment property owner, this is a momentous occasion.
However, when purchasing a tenanted property, there are some important procedures and pitfalls that should be considered.
1. Assumption of tenancy
When purchasing a tenanted property, whoever is drafting your Agreement of Purchase and Sale (your lawyer or realtor) should always include a clause stating that you as the buyer will be assuming the existing tenant, subject to any lease agreement in place.
An important side note: if you are selling a property, most standard OREA Agreements of Purchase and Sale state that you are to provide vacant possession on closing unless otherwise indicated. Without the inclusion of an assumption of tenancy clause, you may be in a bind where you have agreed to provide vacant possession even though you still have the tenant residing in the property. I have seen this happen where sellers are then required to pay off the tenant and assist them in finding alternative housing to ensure the tenant is out of the property prior to the closing date.
Always make your intentions clear by including a clause in your agreement dealing with the assumption of any tenancy.
2. Terms of the existing lease
Before firming up your Agreement of Purchase and Sale, you should always ask the seller for a copy of the existing lease agreement, or if the property is month-to-month, confirmation of the existing lease terms. You do not want to be in a position where you are assuming a lease agreement with onerous provisions.
You should also note that effective April 30, 2018, landlords of most residential rental units must use the Government of Ontario’s standard lease template for all new leases. See more information here.
When I act for purchasers who are assuming a tenanted property, I always insist that the seller provide a tenant acknowledgement, which has the tenant confirm the amount of monthly rent, the term of the lease, any deposits provided by the tenant to the landlord, and who pays for utilities. This ensures that the terms of the lease agreement are clear to all parties involved.
In my standard assumption of lease clause, I also state that the seller is required to sign my standard form of lease documents. Generally, we will require the seller to sign a direction to the tenant that states that the buyer will be the new landlord as of the closing date, and for the tenant to direct all future rent cheques to the buyer. I also ask the seller to sign an assignment of lease, which assigns the lease agreement from the seller to the buyer. The buyer should also request the destruction of any post-dated cheques in the possession of the seller.
Finally, there are generally adjustments relating to the tenancy that should be considered.
For instance, depending on the closing date, the buyer is usually credited for any deposits provided by the tenant to the seller – as well as interest on the deposits. There is also an adjustment for the buyer and seller’s pro rata share of the current month’s rent.
In conclusion, you should always consult with a legal expert when there is a tenancy involved. This will save you time and money in the future.
Should you require further information, please do not hesitate to contact one of the knowledgeable lawyers from our Real Estate and Development Group.