Buying a duplex can be appealing to clients for a number of reasons. Your buyers of multi-family homes need to know what happens to tenant agreements when property transfers to a new owner.
CRES Risk Management recently heard from a client who was representing the buyer of a duplex. In this situation, one side of the duplex was vacant and the other was tenant occupied. The tenant was now on a month-to-month agreement from an original lease. To complicate matters, at some point the tenant negotiated with the owner of the duplex (now the seller) to do groundskeeping in return for use of a singular garage, that could go to either unit or be rented separately as storage.
Now the buyer wants the garage for her own storage once the sale is final. What are the buyer’s rights and obligations in this situation?
Do Tenant Agreements Transfer with a Sale?
The bottom line is that yes, tenant agreements transfer. Buyers should always review tenant agreements and estoppels prior to purchase.
Let’s take a closer look at what changes can be made and how to go about it.
Can you raise the rent?
One of the first things new owners may want to do is to raise the rent. In this case, the buyer planned to raise the rent, which she had the right to do—with certain specifications. State law varies, so check the laws in your state. In California, for example, the new owner must provide 30 days notice for a 9% or less rent increase or 60 days notice for 10% or more increase.
Can you change specific terms of the agreement?
Owners may want to renegotiate specific terms. For example, in this case, the buyer would like to end the agreement by which the tenant uses the garage in exchange for doing yard work. In this case, the buyer would have two options upon becoming the new owner:
- She could renegotiate the lease to exclude a specific portion of the square footage (in this case the garage) after the close of escrow. However, the tenant would have to agree to that modification.
- She could give notice to the tenant. Once the property is vacated, she could lease it however she likes.
Ultimately how the buyer decides to handle the situation is up to her, but it is important that she understand her options. Remember not to give legal advice to clients, but help them understand where they should seek legal advice during the buying process.
Do you have other questions about tenants? Learn how to protect yourself by choosing the right tenants, understand how to deal with uncooperative tenants during a sale, and know what to do about malicious damage by a tenant.
Questions about tenant agreements and other legal issues are often specific to your situation. CRES clients can call the CRES ClaimPrevent® Hotline 7 days a week. Clients receive a guaranteed response within 4 hours or next business day, with recommendations confirmed in writing.
What issues have you had with tenant agreements?