Tenant lease problem

Tenant lease problem

Rental Property Investor · Oklahoma, OK · Member since 2020 · 11 posts · 0 votes

Hello everyone. I'm about to close on a property in Oklahoma City, OK. The property has 3 units, one main house, and 2 detached garage apartments. One of the tenants first rented out the main house and then added the upstairs garage apartment a few months later which required a new lease to be made with the seller of the property. Since I'm buying the house with a VA loan, The tenant had to move out of the main house so that I can live there.

When the seller first asked me if I wanted the tenants to stay after the property was sold, I told him that I would like for them to stay and I will create my own lease for them.

The seller made an agreement with the tenant that was very vague and not specific. The agreement stated that her lease in the upstairs apartment would not be affected by the sale of the property. The seller also paid the tenant $5000 to break her lease.  

The lease the tenant had was for both units, the main house, and the garage apartment. In that lease, there were no specifics on rates per unit. The first lease she had with the seller was for the main house at a rate of $975 a month. The second lease they created was for the apartment and the main house at a rate of $1400 dollars a month.

The tenant now thinks that she does not need to sign any new lease. She believes that the lease transfers over to the new owner without needing any documentation. She also believes that her rate will be $425 a month by deducting the original lease from the second lease.

My question is, do leases automatically transfer to the new owner? Does the agreement she had with the previous owner stay intact or even matter once the property is sold? 

Thank you for any input or advice you may have!

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Bjorn AhlbladPro Member
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
6y

@Justin Mayne when you buy a property with tenants you are buying the property and the leases-good or bad. The existing leases stay in effect until they have run their term. Before the leases end you will deliver your new lease or a notice of non-renewal. All the best!

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  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    6y

    @Justin Mayne when you buy a property with tenants you are buying the property and the leases-good or bad. The existing leases stay in effect until they have run their term. Before the leases end you will deliver your new lease or a notice of non-renewal. All the best!

  • Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    6y

    @Justin Mayne when does that lease expire? And does it show both the main house and the back house on it? 

  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y

    When you buy a property, you should know exactly what you are purchasing, to include any existing contracts. If there is a written agreement between the Seller and the Tenant, you are supposed to honor it.

    In this case, you can play ignorance to the fact and simply give the tenant 30 days notice to vacate the main house so you can move in. Tell them what you want the rent to be for the apartment and see if they'll accept it, give notice to move out, or push back and demand something different.

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  • Rental Property Investor · Oklahoma, OK · Member since 2020 · 11 posts · 0 votes
    6y

    @Nathan Gesner I did not know about the agreement they previously had until after we were under contract. It would also be hard to honor the lease when it included both units at a rate of $1400 per month. The seller also gave the tenant $5000 to break her existing lease. Once she was bought out of the lease, shouldn't she have to sign a new lease if she wants to stay? 

  • Rental Property Investor · Oklahoma, OK · Member since 2020 · 11 posts · 0 votes
    6y

    @Alyssa Dyer The lease term was from December of 2019 to December of 2021. 2 years is a long lease but the tenant was a family friend of the seller. It does have both the main house and the apartment. However, it only has 1 rate of $1400 a month. The seller never disclosed that they had such an agreement when I first looked at the property or before we went under contract. 

  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    6y
    Originally posted by @Justin Mayne:

    @Nathan Gesner I did not know about the agreement they previously had until after we were under contract. It would also be hard to honor the lease when it included both units at a rate of $1400 per month. The seller also gave the tenant $5000 to break her existing lease. Once she was bought out of the lease, shouldn't she have to sign a new lease if she wants to stay? 

    Yes, the seller should have put it in writing. Otherwise, the tenant could take the $5,000 and then claim they were never paid. Ridiculous.

    In the future, you'll want to use an estoppel to prevent things like this from happening. The estoppel certificate is a form filled out by the tenant and then confirmed by the Landlord. It's supposed to ensure there are no surprises after closing. For example, you buy the place and the tenant could claim the Seller allowed them to paint the walls black or that their security deposit was twice what the Seller claimed. How will you know? An estoppel certificate fixes this problem.

    Some things it may include:
    1. Tenant name, contact information, and address
    2. Occupancy date
    3. Is there a written lease? If so, review it to ensure it matches the estoppel certificate
    4. Are there any modifications to the written lease?
    5. Are there any verbal agreements or arrangements between the current Landlord and Tenant?
    6. Current lease term (expiration date, month-to-month)
    7. Current rent rate
    8. Rent due date
    9. Security deposit amount
    You can find plenty of examples by searching for "tenant estoppel certificate doc" or exchange "doc" with "pdf" for more options.

    Here is an example and explanation: https://eforms.com/rental/esto...

    Some have a lot of legal jargon but this document does not need to be so detailed. This is an important tool for anyone buying a tenant-occupied property.

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  • Rental Property Investor · Oklahoma, OK · Member since 2020 · 11 posts · 0 votes
    6y

    @Nathan Gesner Thank you so much! I will use that document for future deals. 

  • Rhett TullisBusiness Member
    Property Manager · Oklahoma City, OK · Member since 2013 · 1k+ posts · 617 votes
    6y

    @Justin Mayne i deal with this sort of thing often with folks buying houses for us to manage.  if you want to email me a copy of the lease i can look over it.  i also have a good attorney that could help you out as well and she is very inexpensive.  i think you may have a few options on this but would need to read over the lease first.

  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    6y

    @Justin Mayne you say that you are "about to close". My suggestion is prior to closing, you resolve this issue. 

    This all depends on the exact wording of the "lease break" agreement. Does it void the lease or does it modify the lease? If the only modification on the agreement is removing the main house, then all the other terms would still apply. In other words, the time period and rent amount would sill be the same. 

    I will just caution you that the tenant is correct. Any leases do transfer to the new owner. That is why you need to review the paperwork and resolve this before taking possession.

    If you already closed, then you need to negotiate with the tenant in good faith. You can't force them to sign paperwork, so you need to show them it is in their best interest. Give them three options:

    1. Move out.

    2. Stay in the apartment and pay $1400 per the modified lease agreement (assuming that is what the $5000 lease modification agreement says).

    3. Negotiate a new lease for the apartment. Make that lease a month-to-month agreement. Tell the tenant it is to their advantage because they are not locked in. That gives you a chance to make sure the tenant will work out, before locking into a long term.

  • Rental Property Investor · Oklahoma City, OK · Member since 2017 · 1k+ posts · 694 votes
    6y

    @Justin Mayne

    This is a “fun” one. There’s a couple things at play here.
    The lease will transfer, but that doesn’t mean you can’t/shouldn’t get new paperwork! In my experience most of the time when things go to court the judge rules in favor of common sense if it can be backed by paperwork.
    What paperwork do you have? The lease termination for $5,000 and the two leases would be super helpful to be able to answer on this!
    The paper trail really seems to be the swing vote here.

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