Inherited tenant signed lease after sellers agreement
Investor · Reading, PA · Member since 2014 · 4 posts · 1 vote
Hello All, I thought I’d give this a shot, first time posting on here. I recently signed and agreement to purchase a property the old landlord did not have any leases with the tenants as they were all family (property is a 4 unit) one tenant will be inherited and now has a lease with the old landlord for five yrs signed after I signed the sales contract that stated that I had to keep him there for one yr. is this valid? I live in Pa
Another vote for an estoppel letter. I have seen Sellers do ultra-funky stuff with tenants after signing a sales agreement, and the estoppel letter basically says, "Here's the whole deal, and current land lord and tenant agree not to make any other deals." That's how you get protected. But the good news is if you purchase agreement calls for "review and approval of all leases" (basic, it should!), then you simply review the lease and if you like it, proceed. If you don't like it refuse to approve that lease and tell the Seller he can fix it or find another Buyer.
Too, if the rent was set at some ridiculous amount or some other odd conditions (i.e. 99 year lease with no increases), I think you could argue in court that the Seller was committing economic "waste" of the property, and just like if they decided to rip out all the plumbing the day before you close, you could back out without penalty. They can't make a major alteration to the value of the property and still expect you to go thru with it. Courts may favor the Buyer over the Seller when shenanigans like this come into play. But you should still always insist on estoppel letters and right to inspect and approve all active lease agreements, and insist that there are no "side" agreements other than what are disclosed to you for approval after the purchase contract is signed.
Check out your Purchase and sale contract to see what it says. If you close with a 5 year lease in place for $1.00 a month then I would expect you to be locked in for 5 years. Do you have lawyer review in that state? If so reach out to them and get it fixed now.
ask for estoppel letters signed by tenants and current owner. It will confirm rent, security, and any other agreements whether written or verbal.
Another vote for an estoppel letter. I have seen Sellers do ultra-funky stuff with tenants after signing a sales agreement, and the estoppel letter basically says, "Here's the whole deal, and current land lord and tenant agree not to make any other deals." That's how you get protected. But the good news is if you purchase agreement calls for "review and approval of all leases" (basic, it should!), then you simply review the lease and if you like it, proceed. If you don't like it refuse to approve that lease and tell the Seller he can fix it or find another Buyer.
Too, if the rent was set at some ridiculous amount or some other odd conditions (i.e. 99 year lease with no increases), I think you could argue in court that the Seller was committing economic "waste" of the property, and just like if they decided to rip out all the plumbing the day before you close, you could back out without penalty. They can't make a major alteration to the value of the property and still expect you to go thru with it. Courts may favor the Buyer over the Seller when shenanigans like this come into play. But you should still always insist on estoppel letters and right to inspect and approve all active lease agreements, and insist that there are no "side" agreements other than what are disclosed to you for approval after the purchase contract is signed.
Another vote for an estoppel letter. I have seen Sellers do ultra-funky stuff with tenants after signing a sales agreement, and the estoppel letter basically says, "Here's the whole deal, and current land lord and tenant agree not to make any other deals." That's how you get protected. But the good news is if you purchase agreement calls for "review and approval of all leases" (basic, it should!), then you simply review the lease and if you like it, proceed. If you don't like it refuse to approve that lease and tell the Seller he can fix it or find another Buyer.
Too, if the rent was set at some ridiculous amount or some other odd conditions (i.e. 99 year lease with no increases), I think you could argue in court that the Seller was committing economic "waste" of the property, and just like if they decided to rip out all the plumbing the day before you close, you could back out without penalty. They can't make a major alteration to the value of the property and still expect you to go thru with it. Courts may favor the Buyer over the Seller when shenanigans like this come into play. But you should still always insist on estoppel letters and right to inspect and approve all active lease agreements, and insist that there are no "side" agreements other than what are disclosed to you for approval after the purchase contract is signed.
This is a really wonderful answer. I think if the lease happened after the PSA and after attorney review, this might be a material change in the liens on the property that allows you to back out. When the seller gives someone an interest in the property during the pendency of sale is something that you, as the buyer, probably have to ratify for it to be effective.
If the lease is for far below market rate, this is probably an exception as the lease is not a bona fide lease. Bona Fide leases need to be done at market value and at arm's length, and usually need to be done without notice of divesture (the landlord can't make a new lease with the knowledge that he won't be the one enforcing it because he's losing ownership). We see these often in foreclosure where we ask the court in a declaratory judgment action to hold that the leases aren't valid and to strike the agreement between the parties because it's not good faith and fair dealing.
There's likely precedent to that effect in your state, but it's so much harder to cure a bad lease than to not buy the property with a bad lease on it. I second the idea that you want to tell the seller to fix it or find a new buyer, but I wanted to let you know that real estate attorneys might be able to help you in the future with this kind of deal.
@Rene Placido I just did some quick research and it looks like the 5-year lease the seller signed might not be a valid lease in your state.
According to the Pennsylvania Landlord Tenant Act of 1951, Section 250.201:
Real property, including any personal property thereon, may be leased for a term of not more than three years by a landlord or his agent to a tenant or his agent, by oral or written contract or agreement.
I’d consult with a local landlord-tenant attorney in your state and confirm, but it seems pretty clear cut.
If you used the standard agreement of sale doc used by realtors for PA, section 4(H), it says seller will not enter into new leases, or extend existing leases without buyer approval, so you have your out right there. If you used a custom agreement of sale doc, then you have to go by what the doc says. If you have your out, take it, unless its an incredible deal, seller is obviously a scumbag if he's going to pull something like that, especially if his entire family is in the building, you'll be miserable.
@Kyle J. Thank you for this information, yes I have contantes an attorney but I will bring this up when I speak with them
@Gregory Hiban, Great I will look into the sales agreement thank you!
@Erik Whiting Thank you for this information gentlemen, I didn’t know what to expect, I really appreciate all your inputs
I recently discovered the previous owner of my property did pretty much the exact same thing to me. 30 units were on a month to month lease, and all due diligence checked out.
The day before we closed, he issues a lease renewal to his buddy for 18 months. Plus he lowered the rent by $50 a month. I find its ironic he made sure he got full rate, but not me. He also did not notify me at all.
I figured it out when I tried to terminate his month to month status and out comes this lease. Surprise!!! But in the end I won against the tenant, I did successfully evict the tenant because of lease violations (he tried strangling another tenant and he was harassing others, but that is a different story).
As for the owner, I followed up with my lawyer. She thinks I have a good case against him. But all I could really get from him would be the difference per month than what he disclosed. This would really only be about $600. Although I would like to punish him myself in court, I did take others advice and let Karma take care of him. The $600 just isn't worth the time.
So I think you will have to figure out what the real damages are from the lease extension and if it is worth the time. Also, if you want them out, can you find a place in the lease that they are violating, then use the process to get them removed?