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Weekly Q&As

Is an existing lease binding on a buyer?

Release Date: 4/14/2015

QUESTION: I represent an investor buyer who just put a property under contract using the Offer to Purchase and Contract (form 2-T).  He’s paying cash and the Settlement is supposed to be in two weeks, which is just before the end of the month.  I just got a call from the listing agent and you won’t believe what he told me.  His seller had supposedly forgotten to tell the listing agent that he’d just signed a one-year rental contract for the property that begins the first of next month!  All I know is that nobody told us anything about any lease before the property went under contract. 

The listing agent seems to think it’s not that big a deal.  He says the lease agreement hasn’t been recorded and that as long as we close before the term of the lease begins next month, my buyer will not take title to the property subject to the lease.  Is that right? 

ANSWER: No.  First of all, leases of 3 years or less do not need to be recorded.  A lease of more than 3 years does need to be recorded to protect the tenant against purchasers and lien creditors of the landlord.  The real question here is whether the fact the tenant has not gone into possession yet makes any difference.  We don’t think it does in this particular situation.  A bona fide purchaser for value who has no notice of a tenancy would generally take title free and clear of the tenancy.  In such a situation, the tenant’s leasehold interest in the property would be destroyed and the tenant would only have a claim for damages against the landlord/seller.  However, if the tenant has recorded the lease or is in possession of the property, that is considered notice to the buyer whether the buyer actually knows about the lease or not.  It’s true that in your situation the tenant has neither recorded the lease nor entered into possession.  However, your buyer now has actual knowledge about the existence of the lease, so our view is that the buyer would take title to the property subject to the lease.

If the buyer doesn't want the property subject to the lease and the seller can’t arrange to buy the tenant out or relocate him, we think the seller would be in breach of contract due to his inability to convey “good title” to the property.  See paragraph 8(f) of the Contract.

NCAR provides articles on legal topics as a member service.  They are general statements of applicable legal and ethical principles for member education only.  They do not constitute legal advice.  If you or a client requires legal advice, the services of a private attorney should be sought.  Always consult your broker-in-charge when faced with a question relating to the practice of real estate brokerage.

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