We are in the final days of escrow on a 4-Plex property. This property is located in Phoenix Arizona, and we are very happy with the property. However the seller is an inexperienced landlord, and has only owned the property for 12 months. They have 4 tenants in the property - all have existing leases.
We just have received the existing leases and they are completely crazy. The basics of the leases are ok (rent, start/end dates, etc.) but that’s about where it stops. Having been a landlord in Arizona for many, many years, I know how the system works with judges in eviction court, since I’m normally in there about once a month evicting non-paying rental tenants. However these leases, from what I can tell, are almost impossible to police.
Anyway we will be approaching the tenants to have them convert over to our more ‘standard’ leases. But in the process, I realize that the laws here state that if I purchase this property with existing leases on them, I inherit the obligations of the lease. That’s fine. However here’s the question…
The leases were written not between the seller and the tenant but between the seller’s sister and the tenant. I guess they contracted with her to act as their ‘property manager’ and clearly she had no idea about what she was doing. The fact is that from what I can see, if I purchase these properties, I inherit the leases. But since the leases are not between the seller and the tenant, but between a 3rd party and tenant, would that not imply that I am buying a property where the rents have to be paid to the person on the lease? I mean the title might change over, but if a 3rd party is the part to the lease on this property, what should I do to get them off that agreement knowing that the lease agreement has to be inherited with this sale?
All advice and information is greatly appreciated.
Thanks
V
I bought properties with leases in place in NY State. At the closing, the seller executes an “assignment” for each one of the leases, assigning the seller’s interest over to the buyer. The fact that a 3rd party signed the lease is irrelevant after the assignment is made.
Priror to the closing, there is an estoppel letter signed by each tenant attesting to several things, such as deposits made, rent due each month, past due rents if any etc.
I spoke to the title company about this yesterday, and they concurred with your first point about the assignment, so I think we are ok there. But the estopel letter has not been mentioned. The seller has contacted their tenants to make them aware of the sale, etc. but is there more that they have to do?
V
The “estoppel letter is sent to the tenants”, confirming deposits made, rents paid, etc., and is signed by the tenant attesting to the accuracy of the information.
When I sold a rental, I wrote such a letter to each one of my tenants, titled “estoppel” because my attorney was bogged down, and had them each sign and confirm the information, return it to me, and was then forwarded on to the buyer’s attorney.
The purpose is to make sure the tenant and buyer is on the same page, and you don’t get into an arguments with the tenant or seller afterwards that you’re keeping the deposit because the tenant is behind on the rent and so forth.
That’s very interesting. We are going through this process right now. According to the lease documents that the seller disclosed to us, they are holding about $1,000 in security deposits on behalf of 4 tenants, and based on the close date of escrow, another $1,500 in rents received in advance.
When I requested that the title company deduct this money from the proceeds to seller at the sale, the seller freaked out. They thought that because we didn’t put this in the contract, that the money was theirs to keep. The title company eventually had to cite a paragraph in the purchase contract that shows that they are responsible to forward all funds from liens, rents, etc. to the buyer at the time of closing. That took care of the rents part of it. But as far as the security deposit goes, I’m going down to the title company today with my copies of the leases that they have written and I’m going to force the title company to deduct the other $1,000 from the sellers proceeds since its clear that they are not going to release these funds willingly.
V
You might check with an attorney or title company on the technicality of this.
In the leases I use, the deposit is recognised, and written into the lease document, i.e. “Landord received $xxxxx as deposit and is kept at the xyz bank …”.
Thus, when the “lease assignment” is made, this action should encompass assignment of the “deposit funds” as well.
Remember, the deposit is the property of the “tenant”, not the seller, and in some states such as MA, requires it to be kept in a special “trust” account with the tenant as owner, and the landlord as beneficiary.
There was a case in the “People Court” (or maybe another one) recently where a SFH was sold with a teant in place, the seller kept the deposit, and the buyer didn’t ask for it. When the tenant decided to move, asked the new owner for his deposit. The new owner said he doesn’t have it, and said “you’ll have to sue the seller”. So the tenant bought the seller to court and got his money.
I concur with Frank and it would really be an issue between the older owner and the tenant. However, I would push to get the deposits released to you as no need to get tenants in an uproar. (I would escalate to sr. escrow officer/general manager of the place to get a formal opinion, if necessary). State laws might mandate that transfer be made and actually title co. may have a duty to make sure that is done.(not sure, just thinking…)
Sounds like the seller is a real amateur/joker. Keep tenant deposits because you sell the place, huh??? Not sure I understand that thought process.
If at the closing, an assignment is executed, it transfers all the obligations, and responsibilities from the old owner to the new. Unless the assignment transfers everything EXCEPT for the sellers holding of the deposit, I can’t legally see where he has a leg to stand on.
Some state laws are very strict on deposits, and it is only used for the purpose of repairing damages, and it must be returned within a certain period of time after tenant moveout, or a letter explaining why not, else the landlord can be slammed with triple damages.
Since the seller’s reponsibility to fix damages ends on the sale, there is no legal reason for holding the deposit. Besides the new owner now assumes all the responsibilities with the assignment under state law with the assignment of the lease, and it is he who will answer to the law.
Unfortunately, this seller is not the only one with a BAD attitude regarding deposits.
Sounds like you may want to get some new door locks installed for all entry points to the building just in case!..
Or, the best thing that I like to do, is have a locksmith rekey them so you have one master key and tenants each get 2 individually keyed keys (they pay for any more than that)…Costs a little bit of money but well worth the convenience (you can have all of your buildings on one master, while each tenant has an individual key…costs about $8 a lock for that)…
Shouldn’t be any legal problem with this as far as the tenants are concerned since you’re a new owner of the building, and you also need to protect yourself so that nobody from the past who may have a key gets themselves inside…