Seller signed two year leases right before closing on the sale

15 Replies

I'm currently buying a property upstate NY. I entered into a contract in May 2018 and the close is next week. It's a 5 unit building where at the time of signing, 2 of the units were rented to long-term tenants (I think they had 1 year contracts), and 1 had the property manager that was living there for free, in exchange for services. As I'm getting the paperwork for closing I noticed 3 leases signed in June. Two leases for the long-term tenants were signed for 2 year terms and another lease with new tenants for 1 year terms. The problem is that the rentals are way below market and the landlord did this in order to protect their tenants (friends) I'm guessing. In addition, the contracts that they signed are one pagers and don't give any protections to the landlord. Now, I wouldn't have raised the rents for the first year for the current tenants, as a gesture of good faith, regardless. But this whole thing definitely put me in a bad mood. Both the previous landlord and the tenants have not acted ethically, I believe. My attorney is saying that the landlord hasn't done anything illegal. Does anyone have any experience with this type of issues and what do you think is a proper course of action here? 

Ideally you would have had a clause in your contract that allowed or did not allow tenant placement or lease extensions during the term of the contract. Without this, you are out of luck.

Check to see if your state requires RE agreememts longer than 12 months to be notarized.  Mine does.  If NY requires that, the new agreements are invalid. 

@Colin Ghira I agree that you have to specify in your contract that no new leases will be signed without written approval by buyer. Are you still in escrow? I would get a credit for the difference bw market and current rents. If not still in escrow I would ask for the money from seller. Still, it’s on you for not getting that into the contract so it might just end up being a lesson for the next one.

What were the details of the original leases were they month to month or did they still have time left? Like said above I'd get adjustment (money) from seller or their agent... they likely have far more to "lose" in this then you.

Thanks everyone for their reply. Well, it's definitely a lesson for the future on modifying contracts. I will try to negotiate with the seller, to see if I can get anything for it. New York doesn't require a notarized lease. Previous leases were one year. 

Although you have been backed into a corner it would not appear to be that serious if you were not intending to raise all tenants to full market asap. Waiting one year or two years is not much of a difference if you were not prepared to realise your rent increases immediately. Does not sound like increasing your bottom line was a priority. Fix the problem in two years by raising all tenants to full market at that time. I would also be looking to probably be getting all new tenants as well if you have not had to evict them.

Originally posted by @Colin Ghira :

Thanks everyone for their reply. Well, it's definitely a lesson for the future on modifying contracts. I will try to negotiate with the seller, to see if I can get anything for it. New York doesn't require a notarized lease. Previous leases were one year. 

 If they weren't expired how'd they get renewed? I guess if both parties mutually agree to extend it'd work(?), but that seems to make your side of negotiations stronger...

IF you go through with the deal (I would not); then when their leases get close to the end, terminate every single one of them. And then, just for fun, contact the seller and tell him you did it because he screwed you. 

@Anthony Wick  - I don't think I would take a vengeful action two years in the future just to spite the previous owners. If they are good tenants, I would just raise the rent and sign an appropriate lease contract. But, this does bring up a good point. You want to protect your old tenants, by creating a strain between them and the new landlord? Very interesting thought process from the seller. 

@Thomas S. I wanted to wait one year for the current tenants as a gesture of good faith upon change of ownership. Then I was going to raise the rents. Increasing the bottom line is a priority, of course, but I wanted to balance that with the security of having tenants (only 2 of 5 units were occupied when I signed the purchase contracts). 

I don't understand "good faith". It has nothing to do with business and not something that tenants would recognise or appreciate.

It is not a rational business decision. It's personal and therefor not rational.

@Thomas S.  I do agree that in business you should not let personal feelings interfere with good business practices. Now, allowing 2 tenants that have been there for many years, continue to stay for another year at the same rates, is I think an effective business decision and I'm not going to go through all the reasons why on here, because I do believe we are steering off topic. A couple of points though for your future reasoning. Good faith (or goodwill) is something that is paramount in business and I believe is also a legal term. The fact that you don't understand it, doesn't mean that it's not useful. Companies even record goodwill and various intangible assets based on actual accounting rules. Also I wouldn't call a decision someone makes as not rational, because you see, inherently that person has some kind of reason. You might call it not-optimal, or inefficient, ineffective, etc. 

I hope you negotiated in their deposits, I have heard of landlords taking over tenants and when they move the new landlord has to pay back the deposit but they didn't get that credited to them in the purchase.  I hope that doesn't bite you in the butt down the road.  I will remember this scenario for future reference.  Good luck!