How should the transfer of rental property be addressed in an Offer to Purchase?
QUESTION: I have a buyer client who wants to purchase a residential rental property for investment purposes. I have located a suitable property that is currently rented under a lease that will expire in approximately six months. I know that the lease will transfer along with the property but I have questions about the buyer’s rights to review any leases on the property, how the security deposit will be handled, etc. I’ve read through the Offer to Purchase and Contract (form 2-T) and the only thing I can find that addresses rental property is where it states that rents for the property are prorated through the date of Settlement. Is there another form we’re supposed to use?
ANSWER: Provision #3 in the Additional Provisions Addendum (form 2A11-T), captioned “Rental/Income/Investment Property,” addresses the transfer of property subject to a lease. It confirms that the property will be conveyed subject to existing leases, establishes a date by which the seller must deliver copies of existing rental agreements and other specified information relating to the rental agreements, provides that any security deposit will be transferred at Settlement and in accordance with the Tenant Security Deposit Act, and contains an option relating to transfer or non-transfer of any pet fee.
It’s important for agents to understand what the Tenant Security Deposit Act says about how a security deposit is to be handled when property subject to a residential lease is transferred. The general rule is that the Act prohibits taking any deductions from a security deposit until the lease is over. However, Section 42-54 of the Act contains an exception. It permits a landlord whose interest in the property has been terminated to make any lawful deductions from the security deposit before sending the balance of the deposit to either the landlord’s successor-in-interest (i.e., the buyer) or the tenant within 30 days of the transfer. So, for example, if there is any rent outstanding for the period of time prior to Settlement, the seller/landlord can deduct that amount from the security deposit and transfer the balance. Provision #3 modifies Section 42-54 to the extent that the seller agrees to transfer the security deposit to the buyer rather than the tenant, and that the transfer will take place at Settlement rather than up to 30 days thereafter.
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