Let’s start with the most frequently asked question about the sale of rental property: Does the sale of the property end the tenant’s rights?
No. The sale of a property does not terminate existing leases or rental agreements. The buyer purchases the property subject to the lease or rental terms. Wis. Stat. § 704.09 requires a buyer or other transferee to take ownership of the property subject to the tenant’s rights. The new owner will “step into the seller’s shoes” and must honor the current tenant’s lease. Therefore, when a buyer writes an offer on a currently rented property, it’s imperative the buyer knows the terms and conditions of the tenant’s occupancy. The buyer takes subject to the tenant rights regardless of whether the seller and tenant have a verbal or written agreement in place.
Given the tenants get to stay, what are the implications at the time of listing? How can a listing broker prepare when working with a seller owning rental properties?
It is important at the time of the listing to know who the tenants are and what the tenants’ rights are. To avoid confusion and issues when it comes to the offer and closing, work with the seller before taking the listing. Does anyone occupy the property, are there written leases or rental agreements? If so, the seller may provide tenant names and documents to the listing agent. This information will be communicated to cooperating brokers who can incorporate the lease or rental agreements into an offer. Alternately if there are not copies available, the seller may need to counter a buyer’s offer to incorporate the agreements by reference once the seller secures the copies.
It is about asking good questions: Are the units occupied? Who occupies the units? Are there written or verbal leases or rental agreements? Do you have security deposits? Are all tenants current with rent? Are there any notices given? Are there any evictions pending? Do you expect any evictions in the near future? Are you actively looking for tenants in vacant units? Taking a copy of the WRA Addendum R to the listing may assist in guiding the broker’s inquiries. Read on to learn more about the Addendum R later.
The tenant has lived in the property for years, but there is no documentation as to the lease terms. What do the seller, agent and tenant do at the time of the listing?
If it is unclear what the actual agreement is between the landlord and tenant, the seller may consult with legal counsel before entering into an offer to purchase. It is best for the seller to determine the tenant’s rights before entering into an offer. If the seller and tenant do not have a written lease or rental agreement, it may be beneficial to obtain documentation of what each party believes are the terms and conditions of the agreement. The term for such an agreement, usually used in a commercial setting, is an estoppel letter. Without documentation of the agreement, if the seller or buyer were to presume a month-to-month tenancy and the tenant believes he has a lease, a court may need to determine the type of tenancy if the parties do not agree. To avoid challenges at the time of closing or after obtaining this information at the time of listing is prudent practice.
The broker has an opportunity to list a multifamily apartment building and would like to use the correct listing form. Is the correct form the WB-5 Commercial Listing Contract or the WB-1 Residential Listing Contract?
Whether the licensee uses a residential listing offer or a commercial listing is determined on a case-by-case basis. A licensee should use whichever REEB-approved form best matches the transaction with the fewest number of changes or modifications. There is no right or wrong answer. It is a matter of the licensee's judgment as to what form best fits the individual circumstances. One way to choose the listing is to think about what offer the broker would use. If the broker expects a residential offer, then use the residential listing; if the expectation is a buyer will use a commercial offer, then use the commercial listing. Although it is perfectly fine for the listing and offer to not match, it is one way to guide the choice of listing contract.
Communication with tenants regarding access to the property for sale
Once a tenant moves into an apartment, landlords have limited rights to enter the apartment. State law, in Wis. Stats. § 704.05(2), establishes the tenant’s “right to exclusive possession of the premises.” This statute requires landlords to give advance notice of entry, which may then be conducted at reasonable times to inspect the premises, make repairs or show the property to prospective tenants or purchasers. Landlords must give notice of entry at least 12 hours in advance per Wis. Adm. Code § ATCP 134.09(2). The notice may be verbal or written, but it is arguably preferable to give written notice to tenants and keep a copy of all entry notices for the file.
What if the buyer wants to purchase the property and owner-occupy? Does it matter if it is month-to-month or if the tenant has a lease?
If it is a periodic tenancy or a month-to-month, the landlord/seller may give timely written notice to terminate the tenancy. Per Wis. Stat. § 704.19, the amount of time for the notice will be determined by the length of the rental period, whether that’s monthly, quarterly or yearly. The offer to purchase can be negotiated to require the seller to give the notice, indicating when the notice will be given in light of the statutory time frames. In the event there is a lease, the tenant may remain in possession until the end of the lease term. Although it may be possible for a landlord and tenant to voluntarily agree to amend a lease, the tenant may not be forced or compelled to renegotiate the lease.
What does the offer say about rented properties?
The standard language in the WB-11 Residential Offer is bare bones. See below. The seller is required to assign the seller’s rights under the existing leases and transfer all security deposits and prepaid rents to the buyer at the time of closing. The buyer takes title to the property subject to the rights of the tenants. Therefore, before drafting an offer, the agent working with the buyer should request copies of leases and reference them in the offer. If the leases are not available, the buyer may include a contingency for obtaining and reviewing them.
WB 11 Residential Offer to Purchase lines 140-143
LEASED PROPERTY If Property is currently leased and lease(s) extend beyond closing, Seller shall assign Seller's rights under said lease(s) and transfer all security deposits and prepaid rents thereunder to Buyer at closing. The terms of the (written) (oral) STRIKE ONE lease(s), if any, are __________________________________. Insert additional terms, if any, at lines 165-172 or 435-442 or attach as an addendum per line 434.
What additional resources are available for buyers and sellers when it comes to negotiating the offer?
The WRA Addendum R to the Offer to Purchase was designed for use in the sale of residential rental properties, regardless of the number of units involved. Addendum R tries to contemplate many of the problems that may arise when tenants do not pay their rent, abandon their units, damage the property or terminate their tenancies between the date of the offer and closing. Addendum R also addresses other concerns regarding leases, rent, security deposits, personal property, eviction and vacancies. The addendum may be used or modified to assist the parties to reach their desired outcome.
See the discussion of Addendum R on pages 10-11 of Legal Update 03.11, “Overcoming Residential Transactional Obstacles,” at www.wra.org/LU0311 and "Best of the Legal Hotline: Addendum R" in the May 2004 Wisconsin Real Estate Magazine at www.wra.org/WREM/may04/hotline.
Stay tuned next month
Tune in next month when “The Best of the Legal Hotline” column will explore what to do if your buyer wants to purchase a rented property. For more landlord/tenant resources, see the February 2016 Legal Update, “Landlord/Tenant Legislation for 2016,” at www.wra.org/LU1602.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.