Inherited tenants given new lease right before closing

[Wesley W.]

Hello All,

We're a week or so away from closing on another small-multifamily property that is, for the most part, (2 of the 3 units) occupied.

When we put in our offer, one of the units - a first floor apartment that takes up 50% of the square footage of the property - was vacant.  The PM (acting as agent for the seller) was in the process of screening tenants to place in the unit.

We asked them to "hold their horses" as we wanted an opportunity to find an screen our own tenant and would use our own MTM lease agreement to establish their tenancy.  The PM said he was willing to use our application and lease to place a new tenant.  We agreed, but were very specific that we wanted a MTM agreement only, NO LEASES.

Well, during due diligence under attorney approval we had the tenants fill out estoppel agreements, where they disclosed they were on a year lease that began when they took occupancy this month.  Prior to that, the "signed" lease agreement (ours that the PM used) was faxed to us, and the "term" field was left blank.  I assumed they were just being sloppy (which I see very often with sellers and their paperwork) and didn't fill it in because it wasn't a lease.  (I always fill it in for 30 days hence with my tenants upon signing.)

So, bottom line is that the PM either misunderstood our insructions (which I find hard to believe because we couldn't have been more emphatic about not having any year leases) or - more likely - he was worried he couldn't acquire this tenant without a year commitment.  Basically, obligating us to that term since the property was under contract.

As an aside - I opened with "2 of the 3 units are occupied."  Since we were under contract, a tenant vacated one of the upper apartments and we asked that it be left vacant.

Also - our local MLS contract does NOT have a stipulation that the seller may not enter into new agreements with tenants without the buyer's written permission (as I have seen in other markets).

My concerns are that this seller is marrying me to this new tenant from out of state, not vetted by me, and no payment history in this property.  And his unit comprises an inordinate amount of the rent for the entire building.

I'm not sure what I can ask the seller for to make up for this new increased risk.  Obviously, the tenant may now legally possess the apartment through June of 2016, and maybe he won't be a problem, but it's introducing another variable into my attempt to have a performing property.

I don't think this is a "deal killer", but I'd certainly be more comfortable with some type of overture from the seller to mitigate this situation.  Not sure what that would be.

What to do you think?  WWBPD?  ;)

[Matthew Saskin]

My .02c, you're SOL. Either accept the risk or kill the deal.  You're always free to ask for some concession, but if I were the seller and you didn't obligate me to anything, I'm going to keep running my business as-is in case the sale falls through.

Incidentally, I always add an addendum to my purchase contracts requiring the seller to seek my approval for any tenants for vacancies or renewals that come up during the sale period.  Likewise, I have agreed to such terms when I've sold properties.