Seller leased to new tenants 14 days before closing?

Question

Good Evening, Sorry for the long post, but I have interesting situation.

We are under contract for a duplex property in Bradenton, FL as of 12/23/2020 with a closing date of 01/29/2021. During the inspection, multiple serious issues (roof, flooring, electrical, hot water heater, replacing knob and tube wiring) came to light. These were brought up to the seller during negotiations and he agreed in a contract addendum to fix them all prior to closing with proof. This appears to be happening per our agent.

There is a tenant in the upstairs unit (2/1) renting for $850/month on a month-to-month lease. (Market rent for this is about $1,200/month). The downstairs unit (3/1.5) was unrented and seller said it could go for about $1,150/month (fixed up market rent is about $1,500/month). Given that it was unrented, we were going to see what additional issues may need to be fixed outside of the things the seller is repairing and then rent for market rent.

However, I received notice yesterday that the Seller just wanted to let us know that he was looking to rent out the downstairs unit and we received an executed lease agreement today (starting 01/15/2021) that states that he rented it out for $1,125/month on a month-to-month contract. I spoke with my agent and he said that this is common and the seller is hedging his bets and if our sale does not go through, then he is not losing rental income and if it does go through, then we have some rental income during this time and can decide to raise rents or not renew their month-to-month lease.

Is this a common situation that you have heard about, for a seller to place a tenant in a unit he is selling 14 days prior to closing? With the current under market rents, the property is at a 3.9% COC return and with market rents, it is a 16.5% COC return. How would it be to go to the new tenant 1-2 months after they signed their lease and tell them that the rent is going up by about 30% or $375/month or their lease will not be renewed? I know that if I was the renter, I would be upset after having just moved in. (I am not sure he told them that the property is being sold.) The upstairs tenants were present during the inspection, so they know property is on the market, but their rent would also go up a little over 30% or $350/month. They were living downstairs and moved upstairs because they could not afford the cost, so they would likely leave.

Is there a good way to go about this or just give notice that the building is under new ownership and this is the rent if you want to stay and renew your lease?Thanks!

Frank Procopio · Answer

Your agent should have written in the contract that the seller cannot enter any new lease agreements or could not enter without your approval. I put this in all my contracts to protect myself. Your agent is correct though it is common for a seller to do this so they are not losing income but 14 days prior to a closing makes no sense as its more work than its worth. I would also have the fear they just tossed a heart beat into the unit. Unfortunately learning the hard way is a part of this business. Make sure moving forward that is in your purchase agreements. The tenant most likely will not be happy to hear that so I would just get ahead of it and have a conversation with the tenant right away, maybe even prior to closing.

Nathan Gesner · Answer

I agree with @Frank Procopio; if you wanted the unit empty at closing, you should have said that in your purchase contract. Until then, he owns the property and can lease it out. You now have a one-year lease with a renter you haven't screened and for $400 below market.

Jay Roney · Answer

@Nathan G. He did state the new lease is month to month. Still a crappy situation to be put in that could have been avoided with a better agent and/or better advice.

Ryan Fisher · Answer

Thanks to everyone for your comments. I guess this is a learning experience!

Michael Noto · Answer

Simply put, you do not own the property until you own you own the property. In the future make sure to put a contingency in the contract that either A. Unit is to remain vacant upon close or B. You have a say in acceptance/denial of tenant.

Ola Dantis · Answer

This is a tough one as it is usually customary to want to honor a lease of an inherited tenant.

You might have to bite the bullet on this one OR you can try to get the Seller to rescind the lease agreement by somehow assuring you will close by putting some non-refundable money down again.

Something to guarantee surety of close is going to go a long way.

Steve Morris · Answer

What does your sales agreement say?  In mine, we have a clause stating any new leases by seller at a min require buyer notice and maybe approval.

Theresa Harris · Answer

Your agent should have had the contract state the the unrented unit would be delivered vacant.  If the tenant hasn't moved in, you can ask the seller to cancel the lease.  Otherwise you are stuck with that tenant and that rent for the length of the lease.  You say it is month to month, but check local laws to see if there are limits on how soon your can increase the rent. I would also contact the seller and get the tenant's info to let them know what is happening.  They may not want to move in if the rent is going to go up in a few months (assuming that is allowed).

Make sure you get the deposits from the seller.

Matt Devincenzo · Answer

Yes you're correct... I read the month to month as the existing tenant, not the new. But in rereading I see they are both M2M. In FL my only concern then would be that he now owes sales tax on a lease that is less than 6 months. Unlikely that it is a real issue in that no one actually checks, but technically that is a new problem the seller has created.

Stephen David Smith Jr. · Answer

@Matt Devincenzo,

The leases are month to month per his post, so there should be flexibility. It seems the seller is just hedging against potential losses if all contract contingencies are not met before this closes.

Seller leased to new tenants 14 days before closing?

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