tenant eviction as part of a deal?

Question

Howdy BP folks! Under contract for what will hopefully be our first multi-family property in Manchester, NH. It's 3 level 6 unit. We'd ideally like to take the first floor (3b, 1b) and convert it into two 2bd units. The first floor is currently occupied by a section 8 tenant (2nd and 3rd floor are not). This tenant has both 1st floor units (with family) and has also taken over the basement and garage (2 stalls). He's clearly made himself very comfortable in this space. We want him out for a number of reasons, but primarily to rehab the 1st floor, garage and basement.

In talks with my 2 partners, we'd like to make having the 1st floor vacant as part of the deal. We're completing the inspection process today after an extension on due diligence so the seller is expecting to hear back from us shortly. Has anyone had experience with this request? What are some of the challenges we might encounter?

Thanks for any advice!

Rick

Marcia Maynard · Answer

Your plan involves displacing a family. Whether they are Section 8 or not, it can be tricky trying to displace a family, especially if they've lived there for a long time. Whether they are on a long-term lease or on a MTM rental agreement will also factor in. This kind of displacement usually requires quite a bit of time and finesse to do successfully. If you really want this property, don't expect the seller will warm up to the idea of evicting their tenants.  If I were the seller, your request would delay the sale and be a deal breaker for me. Consider you could lose the deal.

Tucker McCarthy · Answer

Oh I see, sorry about that I misunderstood! No definitely not, you'll need a building permit but not any zoning approval as long as you aren't changing the total number of units. My apologies for the mix up!

Richard Lovering · Answer

Thanks Tucker. We have not. The units we plan to rehab currently exist, but as a 3 and a 1. We'd like to make them into 2 and 2. Do you think that still needs zoning approval?

Tucker McCarthy · Answer

Hi @Richard Lovering I know this is a bit unrelated to your question/post, but have you checked zoning to see if you are allowed to add an additional unit? Just want to make sure you aren't factoring that into your proforma for the property if you haven't researched it yet. Manchester is very forgiving with Variance applications if the zone you are in doesn't allow an additional unit, but it is never a guarantee. Just food for thought!

Richard Lovering · Answer

Troy,

Thank you for the extremely thoughtful and informative response. I will admit that while this is not my first real estate deal, it is my first (and my partners) multi-family investment deal. The idea of having the first floor unit empty for rehab is not a deal killer by any stretch. It was simply a condition we thought we would request to see if the seller was amenable to. If not, no big deal, we will continue to work through the deal. Perhaps my use of the word "eviction" was incorrect. I believe with a month to month lease in effect we will have a reasonable time frame to rehab the unit during the final winter months and have it ready for spring rental. I think our apprehension lies in the fact that this first floor tenant has made himself "at home" with use of the basement (setup a whole "man town"/"smoking lounge") and the garage. The current owner does not live in the area and is not involved with the operation of the building other than working with a local pseudo property manager. It's poorly managed and this tenant has sort of been left to his own devices.

We are still working through the final negotiation and requests so we will see where it goes. Again, thank you for the advice!

Rick

Richard Lovering · Answer

Thanks Ann! We do have copies of the leases and they are month to month. I think this makes our dilemma a bit easier to deal with. Looks like we will not renew the lease once we close on the deal. Ideally we'd like the unit empty upon closing for rehab purposes, but we will have to work within the parameters given to us. Lots of great advice folks. Thank you very much!

Rick

Ann Bellamy · Answer

Troy has given you some good advice.  I'm going to add that you shouldn't be guessing.  Review of the leases should have been part of the contract.  Is this on MLS?  did you use the listing agent?  Do you have your own agent?  Is he/she inexperienced in multifamily investing and didn't tell you this, along with the other stuff that Troy mentioned?  If so, time to get a new agent.  If you used the listing agent, they are not going to tell you stuff like this.  If this was off-market, then you need someone with experience helping you.

Troy Zsofka · Answer

@Richard Lovering -

There are a few things to consider in this situation.

First, while well-intentioned, opinions from investors outside NH can be inaccurate and misleading; as different states have different L/T laws and leanings. NH is a relatively landlord-friendly state compared to many others. While @Marcia Maynard gives solid advice, WA has a reputation for being super tenant-friendly; whereas my experience in NH is that our courts are less inclined to tell landlords what they can and can't do with their own property, so long as the proper procedures are followed precisely and the landlord adheres fully to all applicable statutes.

If the tenants are in a lease term, they can not be evicted for cause not stemming from violation of lease provisions, nor should they be; as they entered into that lease in good faith that they would have a place to live at least until the expiration of the term. If they have violated any of the provisions of the lease, that is a different story. However, your desire to renovate, or the current owner's desire to sell the property, does not supersede the tenants' rights under the lease agreement, and you inherit the terms of that lease when you buy the property.

If the lease does not include the use of the basement and the garage, the owner (or you after you close) can petition the tenants to remove all of their belongings from those areas, but the tenant would presumably have the right to comply and thereby not compromise their continued rights to the first floor (basically, a lease violation that is curable, if cured, is no longer grounds for eviction). Furthermore, it can get a bit wonky if the lease does not specify as to the garage and basement one way or the other, and their use of these areas has been tolerated for some period of time. Seems to me from your representation that these tenants may be the type of people who will take whatever they can, then deem themselves entitled to it, and then be rather unwilling to let it go once they become accustomed to having it. Good luck with that if such is the case. Deal with it objectively, professionally, and firmly to the point.

Also, if they are in a lease term that does not include a non-smoking provision, you can not demand that they stop smoking until the term of the current lease agreement expires. While doing so might seem at first glance as a reasonable compromise, it isn't. Once in place, contracts are not negotiable, nor should they be (as I will revisit in a bit).

On the other hand, if the tenants are month-to-month (or once their current lease term expires), a 30-day notice can be issued to terminate the lease, and the sale of the property requiring the unit to be vacant (if done by the current owner), or the desire to renovate (if done by you), should suffice as reasonable cause to terminate (this is one area where some other states may differ substantially from NH). However, this does not mean that they will be out in 30 days. What it does mean is that, if the notice is properly issued, and they do not comply by the expiry date of the notice, you can then commence the eviction process; which will take about 6-8 weeks assuming you execute it perfectly and the judge doesn't decide to grant something called a "discretionary stay" (their way of being the nice guy at your expense). Make sure that you issue your notice with an expiry date corresponding to their rent due date. Many landlords don't know this, but (at least in NH), if you terminate in the middle of a payment period (say on the 20th if rent is due on the first), the tenant is not responsible to pay for that partial month. Same goes the other way - if a tenant issues a notice to vacate that takes effect on the 10th, and their rent is due on the 1st, they are responsible for the entire month.

Another thing to consider here is your desire to change the terms of your purchase agreement by requiring the unit to be vacant (this is similar to the idea that you should be able to renegotiate the terms of the current lease agreement and require the tenants to stop smoking). While I have no doubt that your intentions are sound, you have to look at this from the perspective of the seller. He or she entered into an exclusive sales contract with you (and removed the property from the market) based on a set of terms that presumably did not, at the time, include the first floor unit being vacant prior to transfer of title. To use the inspection to add new contingencies to the contract that are unrelated to the inspection, is not really on the up and up. Again, I have no doubt that your intentions are above board, but you should recognize that this decision should have been made before the seller tied up the property under contract with you in good faith that the agreement would be honored, and I would suggest that the risks of your understandable oversight should be borne by you, and not by the seller through a renegotiation of terms this far into the process. In other words, your opportunity to require that the 1st floor apartment be vacant prior to closing has passed, pure and simple. Sure, you can always try to renegotiate the terms of any contract, but you have to ask yourself if that is the reputation that you want to create for yourself moving forward. If I were the seller, and you brought this up this far into the process (after I had granted an inspection extension on good faith that you would honor our agreement), I would give you the option to close according to the agreed upon terms, or forfeit your earnest money. I always honor my contractual obligations (even if I've made an oversight that I regret), and I expect the same from the other party to the transaction.

I'm not trying to be a jerk; just offering my perspective of how this looks to an outside party. I also don't believe that you are attempting to get one by on the seller, just maybe a bit new to how contractual agreements are supposed to work between parties acting in good faith. Now, if your agreement was contingent upon your satisfactory review of all current leases, and that contingency has not yet expired, that becomes a different story (still pushing it if all of the leases are the same but you only want one tenant removed, but at least better than using the inspection contingency to add this stipulation). Also, if something significant is revealed during the inspection, and you want to trade remedying that issue for a vacant first floor, that could be an option, but the issue should be material and not exaggerated, and the seller should have the option to remedy the inspection issue instead of making the trade.

Lastly, and somewhat unrelated, you should always require that any security deposits, and interest accrued on such deposits, be passed on to you at closing. Even better, have the interest accrued be paid to the tenants prior to closing (with documented acceptance by the tenants, of course) so you can then start from a clean slate with depositing the security and tracking interest. If a tenant is displeased with your actions after the property is sold, this is one avenue they can use against you if it was not handled property, and the damages awarded for improperly adhering to the security deposit statutes can be costly. I only bring this up because it seems inferable from your post that the first floor unit is, in fact, under a lease term, and you will therefore likely have to deal with removing these tenants yourself once that lease expires. You don't want to give them anything to get you on if they decide to try.

Happy investing,

Troy

The above is not legal advice and you should seek the advice of a local attorney. The information provided is merely the opinion of a non-attorney and should not be relied upon to make any decisions.

Axel Ragnarsson · Answer

@Richard Lovering Is the tenant on a M2M lease? If they are, you can just serve a 30 day notice after you close and take possession of the unit that way. You can certainly ask the seller to deliver the property at closing with a vacant unit but if it wasn't part of the original contract, I doubt the seller agree considering it adds another variable to the deal. Even if the seller was open to the idea, he/she can only serve an eviction notice if there is cause.. and while NH is a pretty landlord friendly state, evicting for reasons aside from nonpayment of rent can be difficult (especially if there a family in there on section 8).

Richard Lovering · Answer

I'm going to guess no as a few of the tenants smoke.

tenant eviction as part of a deal?

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