When is a landlord required to notify tenants of property being sold?
Question
When is a landlord required to notify tenants of property being sold?
Answer
Although I know for certain that most states do not require by law that the landlord notify tenants in advance of a sale, I don’t know for certain that none does. However, I’m not sure it matters because logic and my experience over more than 3 decades of real estate investment and management experience has been that it is usually best to provide such disclosure anyway.
Obviously, if a “For Sale” sign is installed on the property, the tenant will know of a possible sale. Even if the marketing of the property does not include on-site signage, the tenant will know that the property is being sold because it is almost always necessary that potential buyers (perhaps more than one) and/or their agents (e.g., lenders, appraisers, inspectors, contractors) visit the property once marketing begins, particularly after the first purchase offer is made, with this often being well in advance of escrow closing. While many of these tasks do not require access to interiors of units, it is almost certain that one or more tenants will notice strangers who are involved in surveying common areas.
For example, often prior to marketing of the property the owner hires contractors to do deferred maintenance and/or improvement and those vendors often know that they are doing the work because of a future sale. Curious tenants will likely obtain this info from those vendors. Thus, at least some tenants will know well in advance of other indications – perhaps before it is even listed for sale – that a sale will likely occur in the future. And, one tenant knowing something usually means all tenants know that thing.
Of course all access of leased premises would require advance notice of entry in accordance with state law and it would be nearly impossible and inadvisable to not disclose why access is being requested. More units often complicates matters.
Another practical issue is that an owner should do his/her best to avoid alienating tenants because this can result in tenants “bad-mouthing” the property to all who visit the property, including potential buyers. One must also keep in mind that tenants may refuse to allow access, perhaps because they’re alienated by the way they’re being treated during the marketing. This can occur in spite of the lease agreement explicitly allowing access for such reasons (as all agreements should) and if it does there is nothing that can be done about it except through the court, meaning delays. Their refusal cannot be overcome by force or deception.
Also, for multi-unit properties some of those tenants whose leases expire within the next month or so may if upset give notice of termination at the end of their lease term (30 days for month-to-month) resulting in greater than normal vacancy for the property, possibly reducing the price it can eventually be sold for and/or a lender’s willingness to make a loan, particularly in a bad rental market when tenants have more alternatives than usual. In a slow sales market that might require
many months to close escrow, the seller usually prefers to avoid vacancies. Alienation of tenants can only increase the risk of increasing vacancies.
For reasons mentioned above and for other reasons, I feel it is usually in the interest of the owner to provide advance notice to tenants upon listing the property with an agent, even before, if there will be significant potential for disclosure by contractors as mentioned earlier. Most tenants will likely consider this to be a positive thing as it indicates that the owner has consideration for them. The owner must also keep in mind that sales can fall through, meaning that tenants’ lives must again be disturbed by the process related to some of the needs for entry.
Providing tenants with written notice of the potential sale also gives the owner a chance to reassure the tenants that their lives will go on pretty much as usual because (1) their lease agreement is fully binding on a future buyer, (2) their security deposit will be transferred to a new owner through escrow, (3) rent paid past the close of escrow will be credited to the new owner, (4) they will be notified immediately upon close of escrow and then be provided contact information regarding the new owner, (5) the need for access will be keep as minimal as possible, and (6) housekeeping will be of no interest to those permitted access. You may be able to think of other issues that might be of benefit to mention.
Although it is of value to reassure both residential tenants and commercial tenants, it can be of most importance to tenants of commercial property because commercial lease agreements are usually for multiple years (often 5 or more), include specifically scheduled rent increases, and include lease terms related to options for renewals and/or extensions. Often the survival of a tenant’s business is greatly dependent on the exact terms of the lease being in effect as originally agreed.
Because sales can and sometimes do fall through after all contractor visits related to the first potential buyer, there is potentially a multiple number of times that access will have to be provided. Since access of leased premises is an invasion of privacy, a disturbance to peaceful enjoyment, and an inconvenience to tenants, it can be beneficial to provide tenants some financial benefit for inconveniencing the tenants. There are numerous ways to do so, but the simplest might be to reduce their rents a bit for a month or two from the time when the first sale-related access is required.
I recommend that you also do some Internet research of your own regarding the issue for your state.