By: Jayson Schwarz LLM
Usually a home or property inspector can give you a good idea of the condition of the real estate you are buying. Unfortunately, the one thing an inspector cannot tell you is whether tenants will come with the property, and if they are any good. Purchasing a commercial property with existing tenants can be a great way to hedge investment losses in the property. In addition, having them there will save you the time and expense of advertising to fill vacancies and can help you secure financing for the purchase of the property. However, beware, having tenants brings with it exposure to several types of liability, in many cases dictated by the commercial lease in place and real estate law. As a landlord it is important to understand there may be certain obligations for which you are responsible and understanding these obligations is critical to ensure you get what you bargained for.
Prior to purchasing a commercial property where you will be inheriting tenants:
Meet the tenants. It is important to meet the tenants and discuss with them any complaints that they have with the property. This will help you gauge whether you will have a good working relationship with your future tenants, and will also provide valuable insight into potential issues with the property. If you have many tenants, or you do not want to deal with your tenants directly, discuss the options for engaging a property management company with your lawyer.
Know your rights. When you purchase a commercial property any leases relating to the property will usually be assigned to you at the time of Closing. If you consent to this assignment you will be bound to the terms of those leases. For example, these obligations could require that you remove snow from driveways, install or maintain security systems, pay for utilities, etc. Generally speaking, existing leases and then the Ontario Commercial Tenancies Act will govern your relationship with the tenant going forward.
Know your tenant’s rights. The lease will describe your tenant’s rights and the remedies he or she has against you if a dispute arises. These remedies may include abatement of rent payments, court or arbitration, or even cancellation of the lease. Be sure to have a lawyer review the lease and explain how you may be exposed to liability.
Review the leases prior to purchase. The leases will list your responsibilities to the tenant and vice-versa. These rights are impacted by the law relating to commercial tenancies as well. Be sure to make review the leases by your lawyer and that they meet his satisfaction, a condition of any agreement of purchase and sale. If you don’t like what you hear, it is not necessarily the end of the deal; you may be able to renegotiate the terms of the lease or the agreement of purchase and sale.
Commercial leases are very complex and intimidating documents; however, understanding your obligations and your tenants’ rights will allow you to feel comfortable knowing that your exposure is limited. These documents function to maintain stability, predictability, and in short, the “status quo”. Landlord-Tenant disputes often arise when a lease obligation is not being fulfilled or is unable to be filled, resulting in issues with the property. Ideally the landlord and tenant should keep a good relationship in order to be able to resolve these disputes amicably without resort to the court system or other formal dispute resolution mechanisms.
Commercial leases require a lawyer familiar with the concepts and the law. Find a lawyer that has experience in the area because you will need him just as much after your closing as you did before.