I’m told that when a residential building changes hands, the new owner has to honor the existing leases. This leads me to wonder whether a seller who felt vindictive (say it’s a divorce situation) might give exceptionally generous leases to the tenants just before the sale closes, thereby screwing the purchaser.
Could this happen? Is there any way for purchasers to protect themselves against this (admittedly farfetched) occurrence?
Real estate person here. Yes, if the tenants have leases, they transfer with ownership. The new landlord has to honor them. If it’s a month-to-month tenancy, the new landlord has the headache of trying to get the tenants out.
However, any purchaser who didn’t check out the leases and the existing rent laws and the City records for the building before the closing is a big stupidhead. Our contracts have a clause that lists the current tenants, rental amount and lease term, and I image that is pretty standard.
Well, now, it depends. If its two guys just selling commercial rental properties back an forth, it can, and has happened. If they involve professionals, however, things change. A lawyer representing the purchaser will take a number of steps based on the assumption that the seller will do exectly that, if he’s not stopped.
One tool is called an estoppel certificate. http://www.abanet.org/rppt/publications/edirt/2000/summer2000/page1.html The buyer requires the seller to produce one from every tenant. This certificate rules out certain claims that the tenant might try to raise later based on the seller’s conduct including:
Another tool is the warranty. The purchase agreement will include warranties that the leases are as described in the estoppel certificate, that they haven’t been modified or prepaid before the closing, and a bunch of other goodies like that.
The agreement will probably have an indemnity provision that requires the seller to pick up the tab if any of that stuff is false.
I will add that anyone who thinks they can raise the rents and/or kick existing tenants out because they are the new owner is not dealing with reality. We sold a building to someone who had that idea in mind, and the whole thing became a legal nightmare for him. If tenants are paying a very low rent, they will fight heaven and earth to stay in a building (and who can blame them?).
When I was at Legal Aid we had a landlord who bought a building with a tenant who paid rent with vouchers from the local housing authority. The landlord refused to accept the vouchers, insisting instead on cash or check. When the tenant was unable to pay, the landlord tried to evict the tenant. He lost. IIRC, the landlord ate the loss (vouchers expire, he’d refused them anyway, the housing authority wasn’t amused).
The landlord cannot discriminate against any source of legal income. If a right wing religious fanatic buys a building and then finds out that a tenant works at Hooters, a gay bar, or Planned Parenthood, the new landlord still has to accept the rent. Refusing to accept it and then trying to get someone out for not paying the rent is illegal, immoral, and impossible.
It’s a lot more complicated than that, actually. Voucher programs are usually voluntary. *See, e.g., * Knapp v. Eagle Property Management Corp., 54 F.3d 1272 (7th Cir. 1995) (landlord’s refusal to accept Section 8 rental vouchers did not violate Wisconsin’s Open Housing Act, which prohibits landlords from discriminating in housing on the basis of a tenant’s lawful source of income.) *But see, * http://www.nhlp.org/html/hlb/499/499jersey.htm
The basis on which we prevailed was not that the landlord, in the first instance, had to accept the voucher. Accepting the voucher meant entering into a contract with the housing authority and assuming additional responsibilities. Local cases were unfavorable on the issue. Instead, we argued that the existing lease was subject to the terms of the previous landlord’s contract with the housing authority (bad lease and contract drafting all around didn’t help, but we managed). That’s the argument the court bought.
I didn’t know that. In New Jersey, a landlord cannot refuse to rent to a Section 8 voucher tenant based on their Section 8 status. That doesn’t mean they can’t refuse them for another reason, or in favor of a tenant who is paying their rent in cash because “this person has a better work record.” The only exception is for a two-family property where the landlord occupies the other unit. They can refuse a tenant for any or no reason.
Local laws do vary. Like I posted above, people have been known to buy buildings thinking they can bring the current tenants up to “market rent” and go insane when they find out it just ain’t so.
Thanks, all, for the clarifications. I do find myself wondering how common it is to ask for an estoppal certificate while negotiating a purchase. When I bought my house, yea these many years ago, I never even thought to ask about the leases. Thank God the departing owner didn’t offer the tenants 50-year leases at $10 a month!