Lease Subordinate To Sale

The lease terms dictate what is and what is not allowed during a rental period. It is essentially a contract between renter and landlord. It is typically rare for either party to deviate from the letter of the lease, but what if a buyer comes along with an attractive purchase offer for the property? If you have a current agreement with the tenant for a one or two year lease this can potentially stall any sales effort.

The best way to deal with any impact a sale of the property will have on a rental period is to add a subordinate clause. This section should clearly state that the lease is subject to change by any future financial agreements effecting the property, including any future sale of the property. This is a reasonable clause but may not sit well with some rental applicants. In most cases a modification of the clause  to reflect a time period from first notification of a sale to the lease termination will need to be added, a thirty or sixty day notice is common.

On the flip side purchasing a property and ‘inheriting’ a tenant and lease from the previous owner has never worked out well for me. If I can’t get a signature on my lease agreement from the rental party or don’t want a tenant, I will walk away from the deal in most cases. In one of my purchases, a short sale, the property was empty when I signed the purchase and sales. During the sales process the owner signed a lease contract with a rental party and they moved in a week before the purchase closing. They would not sign a new lease and during the next two years pretty much did whatever they wanted. Purchasing a yiper dog, painting rooms dark purple and not paying rent are but a few results from this ‘dangling’ lease I had with the rental party.

Having a sales clause in the lease will ensure a smooth transition from seller to buyer in regards to any current rental party. If you have no plans to sell in the next few years and the applicant is better than average, you can always take out the clause. When purchasing a rental property you should add an addendum in the purchase and sales that covers the occupancy situation you will accept before the purchase can happen. Don’t leave it up to chance!

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