Many people consider investing in a property to earn regular rental income by leasing their properties. A lease refers to a legal agreement between the landlord (owner) and the tenant, wherein the tenant is allowed to use the property in return for a specified rent for a specified period. Whether it is a commercial property or a residential property, the property owner can lease out the property and both parties must adhere to the terms and conditions of the contract. A common question that is asked is whether a leased property can be sold or not. The answer is that the property owner can sell a leased property at any time, while the lessee (tenant) does not have the right to sell the property. However, the landlord must notify the tenant about the deal since they both are bound by the lease agreement. The landlord must inform the new owner about the existing lease.
Typically, when property owners plan to sell a property with tenants, they may wait for the lease to end. However, there may be scenarios where a property owner finds a prospective buyer with an attractive deal. Legally, a landlord can sell a property with tenants in it. However, it is important to understand whether or not a change in ownership impacts the lease.
Tenant’s rights when a landlord sells a property
While a landlord has the right to sell the property at any point during the lease period, the tenants also have certain rights as the deal may impact them. Hence, even for a landlord, it is not easy to sell a property when there are tenants.
#1. Clear communication
Landlords should maintain open communication with their tenants and inform them about their plans to sell the property. Tenants have the right to get regular updates on the progress of the property sale and any changes that may impact the tenancy.
#2. Inform tenants before property visits
Since tenants reside within the property, it can be not easy to schedule property visits for prospective buyers or take photos or videos of the property. Hence, the landlord must ask the tenants before showing the property to prospective buyers. The landlord must notify the tenants when bringing the new property owner for a property visit. A notice of at least 24 to 48 hours will help the tenant plan for the visit.
#3. Right to receive security deposit
If the tenant plans to vacate the property, they must notify the landlord as per the terms of the lease agreement. They have the right to receive the security deposit they paid to the landlord during lease signing. It is a refundable amount, typically, equal to two month’s rent. The landlords must refund the security deposit amount to the tenant after the lease ends.
What happens to a rent agreement if the property is sold?
According to legal experts, unless the rent agreement has an express provision for the termination upon the transfer of tenancy by the landlord, an 11-month rent agreement guarantees payment of the same rent irrespective of the change in ownership.
However, in case certain clauses are not specified in the rent agreement, a new rent agreement may have to be executed with the new property buyer. Thus, adequate clauses should be included in such rent agreements, which state that if the landlord wishes to sell the flat, it would be subject to the rights of the tenant under the rent agreement and that the new buyer will have to execute a new rent agreement with the tenant on the same terms and conditions as the existing rental agreement.
That is, the existing rent agreement will remain valid, but the new buyer and tenant must decide whether or not they wish to re-execute a new tenancy agreement on the same terms and conditions.
Does the tenant need to sign a new lease when the property on lease is sold?
The tenant is not required to sign a new lease agreement with the new property owner. However, the property owner may offer some concession or reduction in rent by extending the lease period or increasing the property’s overall square footage. Moreover, certain clauses may not be specified in the existing rental agreement. In such cases, a new rent agreement must be executed with the new property buyer in which you are staying on rent.
According to experts, rent agreements must include suitable clauses to highlight that if the landlord wishes to sell the property, it would be subject to the rights of the tenant under the lease agreement and that the new buyer would have to execute a new lease agreement with the tenant on the same terms and conditions as the existing rental agreement.
That is, the current rent agreement remains valid and depends on whether or not the new purchaser and tenant wish to re-execute a fresh rent tenancy agreement on the same terms and conditions.
Things to note when there is a change of ownership
Costs of acquiring the property
When there is a change in property ownership, the new owner will acquire both the structure and its tenants. They must comply with the terms and conditions specified in the existing lease agreement. If the owner decides to go for renovation and upgrades in the property, it can lead to higher costs that must be considered. However, the tenant is not responsible for bearing the costs of major renovations or upgrades.
There may be additional capital expenditure owing to the conversion of a part of the structure for industrial usage or similar reasons. The landlord can pass these on to the tenants.
Increase in rent
The new landlord may decide to raise the rent during the renewal of the lease agreement. Hence, it is essential to discuss with the new landlord and check the terms and conditions.
Transfer of security deposit
The security deposit the tenant initially paid to the existing landlord will be transferred to the new landlord after the property deal is completed. The new buyer will be liable to refund the security deposit after the expiry of the agreement.
Condition for lease to end
If the main objective of the new landlord is self-occupation, renovation, demolition, or redevelopment, they may refuse the renewal request of the existing tenant. This will bring the lease to an end after the expiry of the present term.
Things to check when renewing rent agreement
- Rent amount: Check the terms for increase in monthly rent. The new owner may consider increasing the rent during the renewal.
- Security deposit: Make sure to check the clauses for the security deposit and its return. Tenants can negotiate this amount with the new landlord while renewing the rent agreement. Check the terms and conditions for the refund of the security deposit.
- Options for expansion: This entails the right of the first offer to expand the space or the right of first refusal.
- Termination clauses: This will allow an exit for the lessee in case they plan to move out. Typically, terms and conditions on how the landlord can terminate the lease agreement will be mentioned.
- Negotiating costs: Operational and other cost limits are negotiable.
- Renovations: The agreement may include provisions for tenants to offer opinion on building renovations and improvement. The landlord may provide total/partial compensation for renovations.
What happens to a rent agreement if a commercial property is sold?
Whether it is a commercial property or a residential property, selling the property before the end of the tenancy has the same implications as discussed above. However, there is one key difference between residential leases and commercial leases. In the case of commercial properties, leases are generally longer than those for residential properties. Residential leases tend to be around one year, while commercial leases last for three to ten years or more. Extended agreements enable investors to get a constant flow of income. We discuss the impact of the tenancy when a commercial property is sold.
When a property on a short-term lease is sold?
In the case of a commercial property leased for a shorter period, the tenant must check their property requirements for the future. Based on the present state of business, they must figure out if they will need the same property or if they should move into a bigger property or whether they should pay the expected higher rentals at the time of renewal. It is also necessary to assess whether they it is better to move to an affordable property upon the expiry of the lease agreement or stay put with a slightly higher rate.
When a property on a long-term lease is sold?
If the property has been leased for a longer period, it is an advantage for the tenants. Typically, the owner would not be interested in changing existing tenants. However, they can decide to alter the lease agreement terms for an extension or other benefits. It is advisable to consult a legal professional to understand these aspects.
Questions tenants should ask the landlord
Here are some important questions that tenants should ask their landlord, especially in the case of commercial properties:
- When will the property sale take place?
- Which is the month when the base rental value will change?
- Have you received an official notice about the sale from your property manager or management agency?
- Does the notice outline the terms and impact of the sale?
- Who will be the property’s new manager? What are the contact details? Will the owner be a resident or from abroad?
- Will there be a management and operational change?
- What are the plans for the building and the timeline for renovations? Will it impact existing tenants in the interim period?
If the landlord decides to increase the rent
In commercial properties with leases expiring within at least 25 months or more, the tenants will be saved from sudden rental escalation. There could be certain clauses allowing the new landlords to increase the base rental value, resulting in an increase in property taxes, higher property management fees, etc.
Things to check when renewing lease agreement
Like in the case of residential leases, tenants must check the terms and conditions related the monthly rent amount, security deposit and its refund, options for expansion of the space, renovations, operational and other costs and termination clauses. In addition, tenants of a commercial property should check the following points in the commercial lease agreement:
- Non-compete clauses: This is one of the common clauses mentioned in case of commercial leases to avoid competition from fellow tenants.
- Tenure: In case of commercial properties, tenure of one to two years will provide more flexibility for smaller businesses.
Housing.com News Viewpoint
When a leasing out a property and selling it to a new buyer, the property owner, also known as the landlord, has certain obligations towards the tenants. This includes notifying the tenants about the change in ownership. However, this process can take place without impacting the existing tenancy. Both the parties must comply with the terms and conditions of the rent agreement. At the same time, the tenant must check with the new landlord about re-executing the tenancy agreement.
FAQs
What happens if a leased property is sold to another owner during the lease term?
If a leased property is sold to a new owner during the lease term, the terms and conditions of the lease will remain the same unless the new owner decides to make any changes.
What happens to a tenant if the owner sells the house?
The tenant can continue to occupy the property if the owner decides to sell it unless there is an express provision for the termination upon the transfer of tenancy by the landlord.
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