Will a buyer be bound by an oral lease on the property?

QUESTION: I represent a buyer who is interested in a property that a tenant is currently living in. The listing agent says that according to the seller, there is not a written lease, but the tenant pays her rent on time every month and hasn’t caused any problems. My buyer wants to know if he would be bound by the lease if he buys the property. What’s the answer?

ANSWER: The answer is yes. Unlike a contract to sell property, which must be in writing and signed by the parties, an oral agreement to lease property is legally enforceable unless the term of the lease exceeds 3 years, which would be very unusual for a residential tenancy. In addition, a buyer who purchases property with knowledge of the lease takes title subject to its terms. In other words, a sale (or other transfer) of the property would not affect the validity of the lease.

If the buyer is interested in making an offer on the property, he should take into consideration the potential for disagreement or confusion about the terms of an oral lease. For example, he should not assume that it is a month-to-month tenancy simply because the rent is payable on a monthly basis. Also, no assumptions should be made about how much notice would be required to terminate the lease. If the parties haven’t agreed otherwise, NCGS Section 42-14 provides that a tenancy from year-to-year can be terminated by notice given one month or more prior to the end of the current term, and a month-to-month tenancy can be terminated by a like notice of seven days. The owner and tenant may or may not have a clear understanding about the terms of their lease. If there is a disagreement about its terms, it would ultimately be up to a magistrate, judge, or jury to determine the disputed terms of the lease.

The buyer should be advised to get more information about the lease, either before making an offer or during the due diligence period of any contract to purchase the property. Consideration should be given to making the “Rental/Income/Investment Property” provision in the Additional Provisions Addendum (From 2A11-T) a part of any contract to purchase the property. It requires the seller to deliver, by an agreed-upon date, “copies of all existing leases, rental agreements, outstanding tenant notices, written statements of all oral tenant agreements, statement of all tenant’s deposits, uncured defaults by Seller or tenants, and claims made by or to tenants, if any.” The buyer should also consider requiring that any contract include a provision that the seller will enter into a written lease agreement with the tenant as a condition of the sale. Such a provision should be drafted by an attorney.

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