Selling Tenant-Occupied Property: Does the Lease Survive the Transaction?

Selling Property with Tenants: An Overview

When selling a tenant-occupied property, a common question arises: does the lease survive the sale? In most cases, the answer is yes. The lease agreement remains in place, and the tenant continues as before, albeit with some adjustments. This article explores the nuances of leasing and selling tenant-occupied properties, including legal frameworks and best practices.

The Lease and Property Sale Dynamics

A lease is a legal agreement between the landlord and tenant that provides temporary rights to occupy and use property. These rights do not encompass all the rights of ownership, meaning only the rights the landlord owns can be sold. This is often why the building's owner, rather than the tenant, is the one being sold.

For commercial properties often pre-leased, the lease usually transfers to the new owner since they are purchasing the property for rental income. This is a crucial point to consider if you are investing in a commercial property. It’s advisable to check with the owner if they plan to sell the property in the near future and include a clause in your rental agreement stating that if the owner plans to sell, they should introduce you to the new owner and notify them in advance. For heavy investors, a long-term lease agreement is recommended.

What Happens on Sale?

Upon the sale of a property subject to a lease, the lease transfers to the new owner on the closing date. To ensure a smooth transition, it is recommended that you obtain an estoppel certificate. An estoppel certificate is a legal document signed by the tenant, landlord, and the seller. It confirms the terms of the lease, the deposit amount, and the start and end dates of the lease, among other details. This helps to verify the rent amount and deposit amount, ensuring both parties are being truthful. Additionally, the tenant's deposit should transfer to the new owner.

The new owner should send a certified letter to each tenant informing them that payments should start being made to the new buyer from a specified date. This is known as attornment, a formal process to acknowledge the change in ownership and ensure that the tenant continues to fulfill their obligations under the lease agreement.

Legal Considerations and Tenant Rights

When a property with a lease is sold to a third party, the lease remains in effect as it stands. The lease is a legal status with its own rights and obligations, governed by the Transfer of Property Act. The new owner must notify the tenant of the change in ownership, directing them to pay rent to the new buyer.

A tenant can only be lawfully evicted in accordance with applicable laws and procedures. It is important to understand that the tenant's rights under the lease are protected, and the landlord (now the new owner) must follow these legal procedures if eviction becomes necessary.

Conclusion

Selling a tenant-occupied property requires careful management to ensure the lease and the rights of both the tenant and landlord are upheld. By understanding the leasing and selling dynamics, including obtaining an estoppel certificate, negotiating appropriate clauses in lease agreements, and following legal procedures, you can facilitate a smooth transition and protect your investment.