Question - what to do about new rental agreement signed right before closing?

Question

So here's the scenario (hope it's not too confusing):

I'm purchasing a house that's scheduled to close tomorrow. It's a regular sale (not a short sale or REO) that's been in escrow since November. I have already signed all the purchase paperwork with the title company and fully funded escrow.

Today, I started arranging for utilties to be turned on in my name starting tomorrow so that there's no lapse in service. However, the city advised me that they already activated services in a tenant's name on 1-10-13. This was news to me since the house is vacant and I haven't even talked to anyone about renting it. I asked them what proof were they given from the "tenant" who started service. They said they had a rental agreement signed by the current property owner and dated 1-9-13 (well after escrow had been opened).

I immediately contacted the listing agent (since I don't have an agent) and asked her what was going on. It was the first she'd heard about it. She contacted the seller who denied that she signed a rental agreement. However, she stated that the "tenant" listed on the rental agreement is her business partner who also supposedly has power of attorney for her. The seller is claiming that service was started in her partner's name so the utilities stayed on while they completed some repairs that they agreed to do.

I've never run across this before, but I'm concerned that there is a rental agreement out there essentially giving someone else the right to occupy the property (whether or not they actual intend to). It's a moot point now, but it seems like - rather than use a rental agreement to start service - they should have either just had the property owner start it in her own name or had the business partner do it via a power of attorney form. I can't imagine why they chose to use a rental agreement.

In any event, I'd rather not walk away from the deal. So I'm trying to find a way to assure myself that this problem won't come back to bite me after close of escrow.

For the time being, I've already instructed the title company to not disburse any funds until they hear back from me and get my approval. They assured me funds will not be disbursed.

Anyone ever come across a situation like this or have any suggestions on how to handle it?

I was thinking about having the seller and her business partner (i.e. the person listed as the tenant on the rental agreement) sign some sort of stipulation that there is no valid rental agreement in place and they have no right to the property after close of escrow. Sort of like an estoppel certificate (though an estoppel certificate doesn't appear to be exactly the right form to use and I'm not quite sure what the right document would be).

Any suggestions???

Kyle J. · Answer

Just a quick update on how this situation turned out. I got a copy of the rental agreement, as well as a signed letter terminating the agreement as J Scott suggested. I also had the seller and the "tenant" sign the estoppel certificate I wrote up. All in all, I think I'm more than covered with the documentation I have. I authorized the title company to proceed with closing and they just emailed me and said we are on record and the house is mine. Thanks again for the suggestions. Now it's time to get to work and get the house ready to rent. :)

Kyle J. · Answer

Thank you to everyone who responded. All very helpful suggestions. I believe I have figured out how I will resolve this issue. I just drafted my own custom estoppel certificate which I am requiring the seller and her business partner (i.e. the "tenant") sign and have notarized which will stipulate: ------------------------------------------------------------------- 1. There is currently no valid rental agreement and/or lease agreement in place for the Premises. 2. No verbal and/or written promises and/or agreements have been made to rent the property to any person or entity past the close of escrow date, which is currently scheduled for: January 24, 2013. 3. Any and all previously agreed to rental and/or lease agreements are considered null and void and shall not be enforceable on the “Buyer”; nor shall the “Buyer” be obligated by any prior agreement(s) agreed to by the “Seller”. 4. Any and all rights to the property conveyed by any and all prior written and/or verbal rental agreements and/or lease agreements shall be immediately terminated upon close of escrow. The foregoing certification is made with the knowledge that the “Buyer” is about to purchase the Premises from the “Seller” and that the “Buyer” is relying upon the representations herein made by the “Seller” and the “Tenant”. ------------------------------------------------------------------- I think I should be good with this on file. (Let's hope anyway.) Thanks again!!

Bill Gulley · Answer

I would not close until the property was vacated, having an agreement saying there is no valid lease doesn't mean the property is vacant and that you don't have a squatter to evict. Ensure any utility transfer fee or turn-on fees as well as any bills have been paid as well. You can file a notice of Lis Pendens to cloud title and release it at closing and if they seller(s) don't comply in providing good title (without any leasehold interest) then ask for damages and follow through. It's not on you to do any eviction. If the leasing was accomplished after the sale contract, well, the owner has a problem and my thoughts are along that line.

Carlos Flores · Answer

The lease agreement allows subleasing and is for 25% of market rent. They'll sublet it to someone else for market and pocket the difference or just enjoy the place on the cheap. What, all bills paid too? NOooo, Just Kidding. Well, stranger things have happened. In addition to what J said. Get the assistance of the closing attorney at the title company so they know and understand your wishes.

J Scott · Answer

Here's what I would do: 1. Have the seller call the utility company and have them release a copy of the supposed lease to you. 2. You verify that the name of the "tenant" on the lease is the partner. 3. You have the seller create a termination of lease contract that is signed by both the seller and the partner/tenant. This would ensure that, if the lease was in force, it no longer it. I'd also have the seller sign an amendment stating there are no lease agreements on the property; while I'm sure your contract probably covers this issue, can't hurt to be safe.

Jennifer Lee · Answer

i am no expert, but if you bought the unit the rent is part of the interest you own on the property. i recently bought a retail commercial with the tenant included. i was able to get a rental history to make sure they pay each month. they had a few more months to go the lease. my realtor gave me a copy of the lease. lucky for me the lease was landlord friendly, so i told them i will keep the original lease, only they have to sign a new lease with me. they signed on for another 2 yrs with me. i don't know if that helped. also i have power attorney for my last project. and i had all the rights u stated above. i signed at closing by poa, turned on the utilities under my name, only water had to be my investors bc of municipality rules. i turned on the utilities to do some renov. but all the electricity need is a signed lease to let tenant turn it on, b/c they asked if i was a tenant. If we decide to rent my poa would allow me to find a tenant and manage the property. again i am not sure if this helped

Wayne Brooks · Answer

Kyle, Like you say it is probably innocent/odd, and I'd go with your last paragraph. Something like 1) There is no lease in place, and 2) If there is any lease in place, it is hereby voided, signed by both the seller and their "partner".