So, you finally found the perfect home to buy, but there’s a catch – it has tenants. Whether you’re looking to move in yourself or use it as an income property, buying a home with tenants is a transaction that goes beyond a typical buyer and seller agreement. On top of the practical implications, whether you want to become a landlord or not, there are critical legal considerations that need to be addressed. Here is everything you need to know about buying a home with tenants in Ontario.
What to Expect During Showings
When a home is tenanted, showings tend to look a little different than with a vacant home. You will need to give 24 hours’ notice for showings and the property may only have specific windows of time to view it. A vacant home is simply easier to see on your own schedule; with a tenanted home you’re more likely to have to view it on the tenant’s schedule. A tenanted property may also not be staged when you view it, that’s completely normal. It’s a hard ask to have a tenant move out to stage or show a home for sale.
What Happens When You Buy a Home with a Tenant?
The first step is to determine if there’s an existing fixed term lease. A fixed term agreement lasts for a specific amount of time, with a start and end date agreed upon between the landlord and tenant prior to occupancy, typically lasting 1 year. If the lease is still within its fixed term, it will legally remain in effect, even after closing. A change in ownership does not cancel a lease agreement and you cannot evict the tenant, even if you intend for it to be your primary residence. You must wait until the lease term expires, and until then you assume the tenant, the lease, the terms of the lease and the current rental rate, which should all be included in the Agreement to Purchase and Sale. The seller can ask if the tenants want to leave, but they are under no obligation to do so. To get a vacant home with a lease agreement in place your best option is to negotiate a closing date that coincides with the end of the lease.
When a lease expires, it turns into a month-to-month agreement. If the tenant is month-to-month, or if you’ve aligned your closing to the end of the fixed term, there are more options for taking possession of a vacant home. You can specify in your offer that you want vacant possession of a vacant home, which would put the onus on the seller to end the tenancy with the tenants prior to your closing. To do this legally you must provide an N12 (Notice to End your Tenancy Because the Landlord, a Purchaser or a Family Member Requires the Rental Unit) ,stating that you, a family member or a caregiver intends to take over the vacant unit. Along with the N12, the tenants must be given 60-day notice in writing that the lease is being terminated and you must provide one month’s rent as compensation for terminating the rental agreement. You can’t evict the current tenants in order to get new tenants and raise the rent; that would be considered a bad-faith eviction and the tenants could sue for wrongful eviction.
Becoming a Landlord
If you decide to keep the current tenants and become a landlord, you will have to abide by the current lease agreement. This includes maintaining the cost of rent. You can only legally increase it by approximately 2.2% every 12 months, so if the existing tenant is sticking around, you’ll need to know when they last experienced an increase. The allowable increase is dictated by the provincial government annually and is subject to change, and you can’t exceed that rental increase. If they’re renting month to month, you can ask the tenants to sign a new lease with you, but they have no obligation to do so and can continue renting under the terms they agreed to with the previous landlord. If you and the tenants ultimately decide that the relationship is not going to work out you can sign an N11, an Agreement to Terminate Tenancy. This is a mutual agreement to end the tenancy and once this is signed by both parties you can move forward towards finding new tenants.
Buying a tenanted property can be complicated, which is why it’s so important to layout what you need from the seller in the Agreement of Purchase and Sale. If you need the seller to provide the tenants with an N12, make sure you get it in writing. Tenants have a number of rights that protect them from rent increase and unlawful evictions. Whether you’re planning to move into the property you’re purchasing or take on a landlord’s role, you should review the Residential Tenancies Act. The bottom line? If the home you want to buy is currently occupied by renters, you do have options. Start by getting advice from a real estate agent you trust.
