So I'm about to get involved in a lawsuit...

I reviewed the leases of a triplex and made my offer accordingly and got the property under contract. We closed the deal a month ago.

When I reviewed the leases initally they were set to expire in June '08 and my intentions were to renovate the units and raise rents significantly. I called one of the tenants a few days ago to let them know I would be showing his unit and he made me aware of the fact that he signed a lease extension through June '09 :shocked

I pulled up the original leases that they turned over at closing and sure enough the leases now had all been extended until June '09 :shocked

The property went under contract Aug. 29, 2007 and the lease extensions were signed Nov. '07, essentially the sellers and their reps extended the leases of the tenants w/o informing me while we were under contract/in escrow and now I have to keep the tenants in their current units until June '09. The currents rents are $390/unit and after I work my magic they will be $700/unit. That’s $310/unit I’m losing because I can’t rehab and raise rents.

My attorney says we should sue claiming misrepresentation and fraud. Anyone ever had this type of thing happen to them, where the leases changed while under contract/in escrow and were not informed of the changes? Don’t I have a ligitimate case here? :deal

I think you have a very strong case based on the facts provided.

I would think that it violates some sort of disclosure clause in the purchase agreement. In my personal contracts that I use it states that the buyer must review and approve all leases by a certain date, for this purchase I used the standard Board of Realtors and I’m not so sure it has that clause, so I’ll have to take the disclosure course I suppose. I’ll let everyone know how it goes in case you find yourself in the same position.

a lease is an encumburance on the property; the fact is that the seller changed the state of the encumburnace (i…e the status of the porperty). It really the same in principle as stealing all the light fixtures before closing.

the harder question is what are your damages. you might have a bit of an uphill battle to get $310x12month x3 units. Collection upon such a judgement will be even tougher yet. Does the seller have other property in the same county?

perhaps an easier way might be to offer each tenant a wad of cash to get out (help with moving etc) and then what you had to pay to get them out you sue the seller for, but in the meantime you can get your project on-track

I’ve considered essentially buying them out of their lease and then going after the sellers for my out of pocket expenses which as you stated may be easier than saying I’m out potential revenue due to their mistake.

The seller does have other property, actually just up the road for which I just made an offer on last week, he accepted a better offer, but it’s kind of funny in a way.

I’m just kind of feeling this out and seeing what the best route is. It’s clear to me and everyone in my ‘camp’ that what they did was wrong even if it was an honest mistake. I’m not going to lose money because they failed to make me aware of a change they made.

The language of the contract is such: “The seller must disclose all facts known to materially affect the value or desirability of the property.” - I will/would argue that the lease extensions most certainly affected the value and/or desirability of the property. Another piece of verbage reads: “Seller shall provide to Purchaser…current leases prior to closing.” I received the “new” leases after closing. The only leases I had been provided with up to this point were the ones stating that the current leases expired in '08.

My case looks much better when I type it out, I have to say!

Wow. Is the seller friends with or related to the tenants? What would a seller get out of this?

In addition to the right to approve all contracts, I normally ask the owner to provide estoppel certificates from the tenants verifying the terms of their lease? Sometimes they do and sometimes they don’t. I guess there’s nothing to physically stop a seller from signing new leases at the last minute anyway though.

How slimy.

My thoughts exactly. While it may be simply an exercise in futility what reason might the seller have had in extending these leases?

The seller actually had a property management firm handling the property and they are the ones who extended the leases. From what they’ve told me the seller wanted nothing to do with and had nothing to do with the property outside of receiving a check every month from the prop. mgmt. firm. I would surmise that the seller did not even know that they were renewing the leases.

Now, in my view that doesn’t absolve him from the issue and hand. Truthfully, I’ll probably have to seek damages from the seller, his agent’s firm, and the prop. mgmt. firm. In my eyes they all misrepresented the transaction and the property when they didn’t disclose the extensions to me while under contract.

The deal was supposed to close 11/29/07…I had my financing pulled from me on 11/25/07 and subsequently asked for an extension, which they granted and then we closed the deal 1/16/08. I could understand if they signed the extensions after I made them aware that there were issues with the lender but those extensions were signed 11/07 and 11/08 and they were not told about the issues with the lender until approx. 11/25/07 so they can’t use that excuse.

In the month that I’ve owned the property I’ve already put 15k in exterior upgrades to the property, I wonder if I can make the case that I would have never done that had I known the leases would be in tact until '09. Maybe I can also make the case that I would not have purchase the property w/ those extensions in place, theoretically I could ask for mortgage relief, maybe??? Thanks for the input.

I don’t see an intentional fraud or bad faith, just some negligence and poor communication.

But that doesn’t relieve them of responsibility though does it? Whether it was done with malice, which I don’t think it was, doesn’t change the fact that they made a mistake which is costing someone a nice chunk of change.

They are still responsible, but it’s not the slam dunk it appeared to be at first.

Maybe you can get the property management company (or the court if you proceed with a lawsuit) to void the new leases. Now you are back to the presettlement conditions that you were expecting.

What happens with the property management company? Did the seller give you an assignment of his management contract with the management company?

Even if you get nowhere, you do have a couple of vacant units, right? How about you finish rehabbing the vacancies, then offer them to your current tenants. If you tenants agree to “trade up” you can void their current leases and write new leases at your desired rent. If any tenants take you up on your offer, then you have new vacancies to rehab.


I spoke with the opposing parties today about this situation. Seems like they plan to argue that they have the right, as the owner of the building, to renew leases or re-lease the units whenever they want.

I tend to agree with them. But, if you are going to do that you should make the purchaser of your property 1) aware that you pursuing new leases and/or 2) aware of any changes to the property that is being purchased, new leases are without question changes to the property in my view.

Also, in my view this goes back to the language of the Purchase Agreement: “The Seller agrees to provide Purchaser with current leases prior to closing.” - They were current when in went under contract, but they were no longer current once they signed lease extensions with the tenants. I’m sure there’s more to come, I’ll keep posting in the hopes that someone may be able to draw from this if they find themselves in a similiar situation.