The Best of the Legal Hotline: Addendum R

 Debbi Conrad and Tracy Rucka  |    January 22, 2007

The WRA Addendum R to the Offer to Purchase was designed for use in the sale of residential rental properties, regardless of the number of units involved. Addendum R tries to contemplate many of the problems that may arise when tenants do not pay their rent, abandon their units, damage the property or terminate their tenancies between the date of the offer and closing. Addendum R also addresses other concerns regarding leases, rent, security deposits, personal property, eviction and vacancies.

The following questions concerning the sale of rental properties and the use of the WRA Addendum R were recently asked of the WRA Legal Hotline.

Forms: When listing a 14-unit rental property, does the broker use residential forms? What other forms should be used? 

Residential or commercial forms may be used in multi-unit transactions. Use of the WRA Addendum R is also recommended. Addendum R is designed for residential rental property transactions, and includes provisions addressing vacancies, evictions, indemnification of the parties, rent schedules, lease terms and much more. Use of a LBP addendum and brochure will be needed if the property was built before 1978, and the buyer should receive a RECR if the property has 1-4 units.

Rent proration:  If the tenants do not pay rent to the current owner - in the sale of residential rental property, is the seller obligated to transfer the prorated amount of rent to the buyer? 

Both the WB-11 Residential Offer To Purchase and Addendum R obligate the seller to prorate all rent for the month of closing. Addendum R provides, at line 27, "All rent for the month of closing shall be prorated through the day prior to closing." If the tenant fails to pay rent in a timely manner, the seller must react to the tenant’s breach in a timely manner to avoid a breach of contract. The seller should promptly give the buyer notice of the tenant’s rent delinquency and then seek to obtain the delinquent rents from the tenant or negotiate a mutually agreeable solution with the buyer.

Buyer wants unit vacant: There is a tenant in each unit of the duplex the buyer is purchasing. The buyer, per the Addendum R, plans to occupy the side that had a six-month lease and now has a tenant on a month-to-month basis. A 28-day notice to vacate has been given to this tenant. This tenant refuses to leave, insisting that he had a verbal agreement to stay until next spring. 

The dispute seems to be over what happened at the end of the tenant’s six-month written lease. Either there was a verbal lease, as claimed by the tenant and as described in Wis. Stat. § 704.01(1), or this was a holdover under Wis. Stat. § 704.25 that created a month-to-month tenancy. Per the Addendum R provisions, it is the seller’s (and the seller’s attorney’s) responsibility to resolve this issue and get the tenant out as promised in the offer and in the Requested Vacancies section (lines 45-48) of Addendum R. The buyer may wish to confer with his attorney because the buyer should not close until the issue is satisfactorily resolved. The buyer may have a claim for monetary damages if the closing and occupancy do not occur on time.

Tenant Terminates Tenancy: Prior to closing, the owner did not disclose to the buyer that a tenant was vacating one of the units. The buyer assumed that the unit was going to be rented. The WRA Addendum R was used with the offer but the new vacancies (lines 49-50) provision was not checked. Does the seller owe the buyer the rent for the month of closing? The seller claims that the tenant used their security deposit as the last month’s rent. Does the seller owe the buyer the security deposit also? 

Provided the tenant is still in the unit, the security deposit must be assigned to the buyer per the offer (lines 37-39) and per Addendum R (lines 29-31). If the buyer receives the security deposit, he then becomes responsible for returning the security deposit and/or a notice of withholding within 21 days of the tenant’s surrender of the premises. Unless the seller is responsible to collect rent for the month of closing (Addendum R, line 27), the seller and buyer may agree to assign the claim for the last month’s rent over to the buyer.

If, however, the tenant will be out of the unit at the time of closing, the seller appears to be in breach for failing to give buyer immediate notice of the termination and for failing to attempt to re-rent the unit (Addendum R, lines 36-39). The buyer should consult with an attorney and discuss whether he can request the security deposit and rent and pursue any other appropriate remedies.

Collecting Delinquent Rents: The broker has a listing of a 10-unit and is negotiating an offer. Three tenants in the building have balances due the seller for past rent due to illness and medical problems. These amounts have been approved and allowed by the seller. Is it necessary to disclose those amounts as delinquent on Addendum R? The seller’s intent is to obtain promissory notes from these tenants and make payment arrangements separate from this transaction. 

Wisconsin courts have indicated that problematic tenant payment history may be a material adverse fact in the sale of an income property. See the summary of the Kailin vs. Armstrong case, 2002 WI App 70, in Legal Update 03.01. Addendum R states it is the seller’s obligation to collect delinquent rents (see lines 36-39). Accordingly, the seller should disclose the rent situation to the buyer. The situation may be excluded from the standard Addendum R provisions if the buyer agrees to accept the promissory notes in lieu of current rent payments and the offer is modified to explain these circumstances.

Re-renting Vacant Units: The parties have a rental property sale pending, and Addendum R was included in the offer. It is one month before closing and the seller is going to enter into a one-year lease for a vacant unit where a month-to-month tenancy was terminated. The seller believes that this is appropriate because Addendum R obligates the seller to re-rent vacant units. The buyer, however, had hoped to raise the rent and modify other rental conditions for this and other units after she closed on the property. 

It appears that the seller is acting in accordance with lines 36-39 of Addendum R. A preprinted form like Addendum R, however, cannot contemplate and resolve every possible situation. When buying a rental property, it is important for the agent working with the buyer to sit down with the buyer and discuss what the buyer plans to do with the units after closing and what the buyer wants the seller to do prior to closing. If the buyer wants to implement certain rents or lease terms, either these terms should be specified in an addendum to the offer or the seller should be directed to not rent any vacant units prior to closing.

Personal Property Schedule: The parties do not wish to give a value to the personal property for the bill of sale is referenced on Addendum R. 

The parties may modify Addendum R to eliminate the reference to the value of the personal property on line ten. The offer may be modified to provide that the personal property will be transferred by bill of sale for one dollar and other good and valuable consideration. The offer may also specify that the parties will amend the offer to allocate the value of personal property prior to closing. It will be beneficial to assign a value to the personal property because that amount may then be deducted from the value of the real property on the real estate transfer return. The parties may wish to confer with their attorneys or accountants in this regard.

See pages 10-11 of Legal Update 03.11, "Overcoming Residential Transaction Obstacles,", for further discussion of Addendum R.

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