The inherited tenant is something of a rite of passage for the new investor. It occurs when an investor purchases an occupied rental property and the tenant or tenants has a valid, binding lease that extends past the change of ownership. For some, the situation will be a positive one, with both tenant and investor able to forge a good working relationship. In a few cases, however, new investors may find themselves dealing with a difficult tenant who signed their lease agreement under a previous landlord and is firm in their resolve to remain in the unit. This quick guide offers helpful information that new investor owners can use to minimize problems when working with any tenants they may have inherited from the previous owner.
The first order of business for a new rental housing investor should be to review existing leases for any inherited tenants and determine how their remaining lease periods align with their plans for the unit. Because existing lease agreements survive a change in ownership, new owners will need to be prepared to honor the original lease terms.
If an inherited tenant is agreeable, the investor-owner may be able to buy out the lease for a mutually acceptable amount. While many tenants are happy to accept this type of offer from a new owner, some may choose not to move. In this case, the new investor will likely be forced to bide their time until the lease runs its course. During this time, the new owner cannot raise the tenant’s rental rate or make any changes in the lease terms without the agreement of the tenant.
Many new investors have plans to rehab the rental property after the purchase, but this may also not be possible if one or more inherited tenants are currently residing in the property and have valid leases. It may, however, be possible for the new landlord to move forward with improving vacant units while waiting for the inherited tenant to complete their lease. In some cases, the inherited tenant may also be willing to allow improvements to be made to their unit, as well. In any case, investors should always attempt to have a good relationship with their tenants — inherited or not. If this type of agreement is reached, investor-owners should always make sure to properly document this agreement and to give proper notice before commencing the rehab.
Raising rental amounts
When inherited tenants have a valid lease, new owners cannot change the rental amount or terms unless the tenant agrees. If however, the tenant’s lease term has expired and they have become a month-to-month tenant, it should be possible to raise the rent or make other changes, as long as proper notice is given to the tenant or tenants involved. In most cases, the notice period must be at least thirty calendar days.
One of the most troublesome issues many new investors find when dealing with inherited tenants is having a clear understanding of the agreement the inherited tenant had with the previous owner. For this reason, it is recommended all new landlords have inherited tenants complete and sign a document called an estoppel agreement.
This legal, binding document includes detailed information about the tenant and other occupants in the unit, as well as specific information about the previous lease arrangement, such as rental due date, who is responsible for utilities, whether pets were allowed in the unit, and information about security deposits.
Ideally the estoppel agreement should always be completed and signed before the new investor closes on the property. If this was not possible for any reason, it is important that it be done as soon as possible after taking possession.
A properly completed and signed estoppel agreement can help prevent the new owner from losses and potentially fraudulent activity. Common examples include situations in which an unscrupulous tenant claims that they paid a larger security deposit than records show or that they own appliances or other property that conveyed to the new owner as part of the sales transaction.
Inherited tenant situations can be difficult to navigate successfully, especially in situations where the tenant is unwilling to work with the new owner or when the new owner suspects unscrupulous behavior. Seeking the guidance of a reputable real estate attorney might help new investor-owners avoid making costly mistakes or incurring unnecessary liability when dealing with inherited tenants.