If you decide on buying a tenanted property, there are many different scenarios and you’ll want to consider each of them carefully. The GTA has strict regulations on what’s allowed and what isn’t, and it is governed by the Landlord and Tenant Board.
Buying a tenanted property has its challenges. Today I will speak to the most common scenarios from the buyers’ perspective.
If you want vacant possession
Scenario #1 – You are buying a property as a primary residence and the tenant is on a month-to-month lease.
If you are buying a tenanted property as your primary residence the process to have a month-to-month tenant evicted isn’t bad. The best course of action is to ask for vacant possession on closing (it is pre-printed on the standard OREA purchase agreement) and instruct the seller to give the tenant an N12 notice (Eviction for Personal Use, Demolition, Repairs, and Conversion). To obtain vacant possession the closing date would have to be 60 days from the next monthly rental period. The Residential Tenancies Act permits the landlord to give notice of termination to a tenant if the landlord, in good faith, requires the unit for residential occupation for a period of at least one year by the landlord, a specified family member or a caregiver.
Scenario #2 – You are buying a property as an investment and the tenant is on a month-to-month lease.
If you are buying a tenanted property as an investor, it becomes more difficult. Even with the tenant on a month-to-month tenancy, you cannot request an N12 notice as it doesn’t comply with the Residential Tenancies Act. This isn’t so much of a problem if the tenant is paying market rent. However, if it’s a long-term tenant, chances are high that they are paying below-market rent. If the market isn’t in the seller’s favour then you can try to negotiate for the sellers to have the tenants sign an N11 notice prior to closing. An N11 notice is a mutual agreement between the tenant and the landlord to end the tenancy. Typically it involves a large payout from the landlord to the seller, but if the market isn’t strong it is possible. Please note that the tenant is under no obligation to agree to this.
Scenario #3 – You are buying a property as a primary residence or investment and the tenant is on a long-term lease.
Ending the tenancy legally while the tenant has a signed lease in place is not possible. Unless the tenant either does something that they shouldn’t do or fails to do something that they agreed to. Examples: failed to pay rent, causing damage, etc.
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If you want to assume the tenant
Assumption of tenancy
When buying a tenanted property, you have to include a clause stating that you as the buyer will be assuming the existing tenant. The purchase agreement has a standard clause that states that you are to receive vacant possession on closing unless otherwise indicated. Without the inclusion of an assumption of tenancy clause, the seller will have to provide vacant possession and evict the tenant. provide vacant possession even though you still have the tenant residing in the property.
Existing lease
Before making an offer, you should always ask the seller for a copy of the existing lease agreement, or if the tenant is month-to-month, confirmation of the existing lease terms. You do not want to be in a position where you are assuming a lease agreement with difficult and/or illegal terms. As a result, I always insist that the seller provide a tenant acknowledgment, which has the tenant confirm the amount of monthly rent, the term of the lease, any deposits provided by the tenant to the landlord, and who pays for utilities. This ensures that the terms of the lease agreement are clear to all parties involved.
Closing adjustments
Finally, there are general adjustments relating to the tenancy that should be considered. For instance, depending on the closing date, the buyer is usually credited for any deposits provided by the tenant to the seller. There is also an adjustment for the buyer and seller’s pro-rated share of the current month’s rent. In order for this to happen, a clause must be written in the purchase agreement to such effect.
What happens if the tenant refuses to leave by the closing date?
Edited September 2023 – Concern is growing for buyers who are buying a tenanted property in the GTA with the intention of using it for their personal use. The reason is simple – a lot of tenanted properties have tenants who are paying below-market rent due to recent rental price increases. When their landlord gives them notice to leave, they often find rental rates have increased substantially. Consequently, I’m running into more and more situations where the tenant refuses to leave by the closing date. To make matters worse, the LTB is still experiencing delays with eviction hearings of up to 12 months. Depending on your circumstances you generally want to add a clause in your offer to mitigate risk.
In a recent offer that I wrote for a first-time buyer, I added the clause below. It gave my buyer some flexibility in case the tenant didn’t want to leave to either proceed with the closing and assume the tenant or walk away from the transaction. These types of clauses are usually adjusted by your personal circumstances. With the market currently more balanced than it has been in a while you have some leverage to negotiate and mitigate risk.
“In the event that vacant possession cannot be obtained prior to closing, for any reason, then the Buyer shall have the right, but not the obligation, to complete the transaction and accept the Tenant, or cancel the agreement and have any deposit returned, without interest or deduction.”
Want to read more about the home-buying process? Check out these posts for buyers:
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