HELP!! Is this legal? Do I have to assume these leases?

13 Replies

I went under contract on a duplex on May 3rd.  There were tenants in the property that I was aware of but it was my understanding they were on Month to Month leases.  I am 1 week away from closing and I have been presented with leases on both sides of the duplex.  They are TWO year leases at way under market rent.  The leases were signed and executed on May 6th which is AFTER we went under contract.  Do I have to assume these leases?  What should I do?

Should always make leases and other documents that are important for due diligence to be required during the due diligence/inspection period.  This is one reason why.

If I were you I would simply walk if the numbers no longer work for you. You didn't close yet. You may be at risk of loosing your EMD or at the very fight for it, but that is a separate issue and fight for another day. First things first. Decide if you are okay/not okay with the leases in place. If okay move forward. If not, walk away. You will have to honor those leases assuming they are legal leases.

You should have a good case for getting your earnest money back and walking. The seller executed a material change to the condition of the property after the signing of the contract; in most cases this is sufficient grounds for voiding a contract.

If it were me, and the property didn't work under the terms of the new leases, I would walk. BTW, this is not that uncommon, especially if the tenants are family members or close friends of the owner. It's their way of "having their cake and eating it too" as the old saying goes - they hook up their relatives/buddies with locked-in short rent for a couple of years while they reap the windfall of the sale. 

Take the difference in rent and multiply it 24 months. Tell seller you want a price reduction to match that amount since he signed the leases which materially effected the value of the property. If not, tell him you will walk. 

Also, learn from this. Your purchase agreement should cover this by saying no new leases will be signed nor no new tenants put in without discussing it with you first. 

@Marc Mariani you have a few options, 1) you could walk but be at risk of losing your earnest money, or 2) I think @Andrew B. nailed it and is exactly what I would do, try to renegotiate the price for the difference in lost rent over the two years; if they say no then you're back to Option 1

@Marc Mariani

That’s a material change in the contract.

I would pay my closing attorney to explain why you're walking and why they are required to cough up the EMD. That's BS and completely changes the deal.

Those leases are valid because you did not own the property.  Also, the seller may have violated the terms of the contract.

When I buy rental properties, my attorney sends an addendum which requires leases to be delivered and no new leases or documents to be signed during the contract period.

Someone suggested getting an attorney.  That is good advice.  Perhaps you can exit this deal without defaulting. 

Did you have anything in writing about the terms of the lease? normally you assume them, but the fact that the seller had the tenants sign NEW leases and well below market value after they agreed to sell is a bad move.  I'd talk to your lawyer and do NOT close.  the fact that the seller did that shows they acted in bad faith and you should be able to get your money deposit back.

@Marc Mariani Check your contract and talk with an attorney. In the Texas standard 1-4 Contract, sellers are not allowed to execute a new lease for the property once it has gone under contract without the buyer’s permission. Each state may have different rules, so check yours to see what is standard.

Where is the duplex?   Is this addressed in the contract anywhere?

In Texas we have recently added information about leases, disclosure of leases, and changes, just to avoid such material changes.

Why would the seller do this?  Makes no sense unless the tenants are friends or relatives?

I like the idea someone posted about lowering the purchase price by the rent differences...but if that doesn't work, I would not only ask for your earnest money back, but all your expenses as well.