When we think about buying and selling real estate, it’s easy to overlook that, in many cases, the property being sold is a rental property that likely has tenants. In fact, with a majority of households in Canada owning their homes (67.8% according to a 2016 Census) nearly one-third of all homes in Canada are rental properties.
While most real estate transactions are pretty straightforward, different rules apply when a rental property is concerned. Let’s look at the different scenarios you might encounter when buying a rental property that has tenants.
Scenario 1: You wish to keep the tenant(s)
This is the simplest scenario and has the least impact on timing and conditions of the sale. No matter if the tenant has a fixed-term or periodic tenancy (month-to-month), once the sale closes they will fall under your responsibility as the new lessor (a.k.a. landlord). In most provinces, any fixed-term lease will revert to a periodic tenancy automatically when it expires.
You may be asking, “do I need to sign a new lease agreement?” While it’s not mandatory to sign a new lease the rules in the Residential Tenancies Act (RTA) will always apply, regardless if there is a contract or not. If the parties sign a new lease, the landlord can change the terms ONLY if the tenant agrees and if the changes comply with the rules stipulated in the RTA.
Scenario 2: You wish to occupy the home or rent to a family member
There are two ways this works, but in both scenarios it’s important to clearly state your intent to occupy the home or assign it to an immediate family member (parent, spouse or child)—this does not apply to extended family or close friends—as part of your purchase agreement.
The tenant has a lease that has not come to term: The tenant’s lease remains protected until the end of the fixed term. Therefore, landlords need to ensure the buyer is aware they must comply with the existing tenancy agreement. This means you must assume responsibility for the tenant and serve notice to end the tenancy no less than the minimum period required by law before the end date of their fixed-term lease.
If you need the home vacant at the time of purchase, then the sale can only close on the last day of the tenancy, and the current owner is responsible for providing notice. Notice must be given according to the laws of the province or territory in which the home exists.
When it comes to this situation, the lease must be respected regardless. When I have this situation we will typically open discussion with the tenants and try to find a monetary compensation that they are comfortable breaking the lease agreement for so that all sides are happy.
The tenant’s lease is month-to-month: The same minimum notice requirements apply in this case, though notice can be given immediately once the terms of sale have been satisfied. If you require the unit empty, the sale can only close after the day on which the tenancy ends.
Scenario 3: You wish to demolish, renovate or repurpose the property to a non-residential use
This is often where things can get difficult, especially if due diligence has not been taken to prepare ahead of time before ending a tenancy, or if the work is not completed within a reasonable timeframe after the tenancy has ended.
Generally, if a plan is in place to demolish the home, if the home requires substantial renovations that require it to be empty, or if it’s being converted to a non-residential use, longer notice times can be expected. The notice period is anywhere from two months to a full year, depending on the province.
In the case where a multi-unit building is replacing the original rental unit, or where renovations are concerned. The tenants have the right to move back into the unit once the work is completed, or the landlord and tenant may agree to end the lease early.
In some cases the landlord may be required to pay moving expenses, or to compensate the tenant, depending on the province and number of units in the property.
Scenario 4: The tenant is paying below market rent
When a tenant has been residing in a home for many years, rent often falls below market, causing what is the only downside for a buyer when they wish to keep a tenant. As years pass, property values, taxes, and mortgage rates rise, increasing the overheads for landlords and narrowing profit margins.
Most provinces set annual limits for rental increases to limit abuse, though the premise is that a landlord risks losing a good tenant if they unreasonably raise the rent. A landlord must follow a minimum notice period, and if they have good reason to increase the rent beyond the guidelines, they can apply for permission from their provincial landlord tenant board.
Rent may also be increased beyond the guideline amount if it’s justified by investing in improvements or renovations to the property.
Residential Tenancies Acts Resources
While there are many similarities from province-to-province, notice periods and restrictions on ending tenancies can differ greatly. In Ontario, a fine of up to $25,000 can be levied against a landlord on top of damages for bad-faith evictions. Here is the link for resource where you can become familiar with the laws in Ontario.
While buying a rental unit is becoming a popular long-term investment, there’s a lot to keep in mind to ensure you stay on the right side of the law while respecting the renters. Let’s not forget they’re individuals and families who love their home and have made memories they will carry forever. Doing your due diligence and approaching tenants with empathy will go a long way to ensure a positive outcome for all.