Previous Landlord Contracts

[Jessica Davies]

I am currently under contract to purchase a 4 plex.  The previous owner bought the 4 plex for his child to live in while the child was at college.  All 4 units are currently rented out.  Two of the units are month to month, and two of them recently signed new contracts.  We were sent the contracts today to look them over, and are frustrated with one of the contracts.  This contract was signed one month ago (well after the current owner new he was trying to sell the 4 plex) by the owners child.  The contract isn't similar to any of the other contracts, is under market, and has allowances that the other contracts do not.  The other contracts require deposits, pet deposits, and additional pet fees for each month in addition to rent.  This contract with the child has no deposits, no pet deposits, allows the tenant to have 2 large dogs in the unit, the rent is under market value, and there are no additional monthly charges for the pets (while other units with pets do).  They are in the largest, nicest unit and it is priced under market.  They also have no restrictions on the amount of vehicles they can have, and the contract specifically says that the tenant can cancel the contract at any time.  I know that if we purchase the property, we are supposed to honor the contracts that the previous landlord has with the tenants, but we are frustrated with this contract because of all the allowances and felt like they specifically made this contract the way it was so the child could have an easy, cheap place to live for the next year.  Does anyone have any ideas or advice on how to deal with this?  The contract would be up in September of 2019.  We are under contract but are still in due diligence.  Maybe this isn't a big deal and we just need to deal with it, but I'm concerned we are going to inherit a nightmare.  

[Wesley W.]

I think this is very big deal, especially since this person is related to the seller.  "Normal" inherited tenants can be difficult.  I can only imagine this entitled spoiled brat.

I would put a monetary value from your business standpoint on all of the risk you take on in that new lease, and deduct that from your offer.  Tell the seller you'd be happy to honor your original offer if that particular unit is delivered vacant.  I wouldn't want a relative of the former owner in my building.  That's asking for all kinds of friction.

Here's a short list on the lost value for honoring the "sweetheart" lease:

Security deposit

Pet rent and/or pet fee

Loss of rents due to under market

Holding costs/vacancy/marketing when the tenant leaves "whenever he wants"

Other operational headaches / PITA "tax"

Your attorney should have suggested estoppel agreements as well as language in the contract that states no changes to or new leases can be signed by seller henceforth.