Let’s say you are thinking about selling your building and you want to know what will happen to your tenants if you sell. Should you warn your tenants to start shopping for other space? In most situations, the answer is no. Your tenants will probably not even be effected by the transition. However, knowledge that you are thinking of selling is often enough to worry tenants and make them think about jumping ship which is why many landlords keep this information confidential until a sale is complete. Whether you decide to tell them about your plans or not, below are answers to a few common questions that will help you determine if your tenants have anything to worry about.
Can the new owner kick your tenants out?
Maybe. It all depends on the lease you signed with them.
- If you have tenants whose leases have expired, they are considered month-to-month tenants. They could be kicked out. If you have tenants who don’t have a formal lease agreement, they could be kicked out. Unless the tenants have a lease that gives them the right to the space they are renting, the new owner could evict them, raise their rent, downsize them, etc. The new owner may not be planning to evict any of the tenants. In fact, most landlords want as many tenants as they can have.
- If you want to help your tenants secure their rights to their suite, provide them with a new lease or a lease renewal. This will put them under a formal agreement prior to the sale that will be enforceable after the sale. As an added bonus, having tenants with longer term leases will most likely improve the value of your investment sale.
- If the leases your tenants have allow you to evict them, the new owner will have the same right. Reread the leases you signed with your tenants to understand what options you will be giving to the new owner. Look for sections entitled Right to Terminate or Early Termination.
- Encourage your tenants to continue to paying their rent on time. If they fall behind after the sale, their new landlord can evict them whether their lease has the Right to Terminate clause or not.
- When reading your tenant leases, pay close attention to all language regarding termination and make sure there is not an option for termination if the building sells. It’s rare, but some leases contain rights for a new owner to terminate tenant leases after a purchase. If the sale of the building is not mentioned in a lease, the lease remains the same after the sale.
Will your tenants have to sign a new lease with the new owner?
They don’t have to. New owners often ask tenants to sign new leases and the tenants can choose to do so but they are not obligated if they already had a lease with you that transferred over to the new owner. For example, the new landlord may offer a short term rent reduction to persuade tenants to extend their lease term or expand the size of their premises. Your former tenants should know that they have the right to negotiate because they do not have to modify their lease if their previous lease remains in effect.
Should I give my tenants their security deposits back?
Someone has to return the security deposits to the tenants. The most common scenario is transferring the security deposits along with the tenant leases from the Seller to Buyer on the HUD statement at closing. The new owner will be responsible for refunding the deposits at the end of each lease if the tenants comply with the lease terms. In rare cases, the buyer may want you to give the tenants their security deposits back instead of transferring them in the sale.
In summary, it is common for tenants to experience little change when their landlord sells their building. The current tenant leases transfer with the sale of the building. Leases remain in effect. Anything that was previously allowed in their leases will remain until the leases expire.
If you have found this blog post helpful, you may also be interested in reading another post of mine, called Mission Impossible: Simplifying the Gross Lease. To browse through all my blog posts, you can click here.