The Best of the Legal Hotline: So Your Buyer Wants to be a Landlord?


 Tracy Rucka  |    November 09, 2017
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Last month in the magazine, The Best of the Legal Hotline column looked at sellers wanting to list rental properties, and this month, we will look at buyers purchasing rental property.

Showings

A seller wants to list a duplex in which both units are rented, but the tenant is refusing access for the buyer. Can the property be shown? 

Only if the seller gives the tenant advance notice or reaches an agreement with the tenant for entry. Once a tenant moves into an apartment, the tenant has the right to exclusive possession, and the landlord has limited rights to enter the apartment. Wis. Stat. § 704.05(2) requires a landlord to give at least 12 hours advance notice of the landlord’s entry to make repairs or show the property to prospective tenants or purchasers. Advance notice is not required if the tenant consents to a proposed entry at a specified time. 

Existing leases

When this buyer considers purchasing a duplex, do the existing leases run with the property? Can the buyer raise the rent or make the property a nonsmoking building?

The sale of a property does not terminate a lease or allow the new owner to make unilateral modifications to an existing lease. When a buyer writes an offer on a currently rented property, the buyer purchases the property subject to the lease or rental agreement terms. Wis. Stat. § 704.09 requires that a buyer or other transferee take ownership of the property subject to the tenant’s rights. The new owner will “step into the seller’s shoes” and must honor the current tenants’ leases. When there is a lease for a specified period of time, the rent may not be increased during the term of the lease nor can the new landlord make modifications to rules, like making the unit nonsmoking. When using the WB-11 Residential Offer to Purchase, the offer states the seller shall assign the seller’s rights under the existing leases. The parties may review the WRA Assignment of Leases and Security Deposits form (WRA-ALS) or consult an attorney or title company to draft the assignment.

Lease or rental agreement? 

The buyer looked at the paperwork provided by the seller and asked for clarification about the difference between a lease and a rental agreement. What is the difference? 

Rental agreements can generally be divided into two main categories: (1) leases — those agreements where property is rented for a definite period of time, and (2) informal tenancies — those agreements with no definite termination date, including periodic tenancies and tenancies at will. Use of written leases or rental agreements minimizes disagreement and disputes. The WRA Residential Lease is a written lease form that includes some rules and regulations and was modeled after the old WB-20 Apartment Lease; the approval by the Wisconsin Department of Regulation and Licensing of this lease was rescinded in 1991. The WRA Residential Rental Contract may be used for a month-to-month tenancy or for a lease. The choice between the two is one of familiarity, style and preference. 

Although WRA forms are updated and modified to keep current with changes in Wisconsin law, they are not required for use. Therefore the seller may have an attorney-drafted rental agreement a homemade agreement or a contract downloaded from the internet. The buyer may find it prudent to have the agreements reviewed by legal counsel to assure there are no illegal provisions. The buyer does not want to inherit the seller’s bad habits. 

Case law in Wisconsin provides in the event a landlord has a lease with certain provisions that violate the law, the landlord would not be entitled to enforce the lease against the tenants. The Wisconsin Supreme Court held that a landlord cannot enforce a lease that contains a provision illegal under § ATCP 134.08(3) against the tenant in Baierl d/b/a Supreme Builders v. McTaggart, 2001 WI 107. See www.wicourts.gov/sc/opinion/DisplayDocument.pdf?content=pdf&seqNo=17457.

Security deposits

So the leases get assigned to the buyer, but what happens to the security deposits? 

The buyer takes title to the property subject to the rights of the tenants. Therefore, the terms of the leases should be stated when the offer is negotiated. Likewise, it is prudent to know the amounts of security deposit held by the seller. The buyer and seller are referred once again to the terms of the offer. Per the offer, the seller agrees to transfer all security deposits and prepaid rents to the buyer at the time of closing. 

The buyer and seller are getting ready for closing. The seller said the tenant still owes some rent, so the seller is going to withhold the security deposit from the buyer at the closing. Must the owner go to court later for a judgment or can the owner take it out of the security deposit?

A landlord generally can withhold the security deposit only at the end of a tenancy. According to lines 140-143 of the 2011 WB-11 Residential Offer to Purchase, the seller shall assign the seller’s rights under the existing leases and transfer all security deposits and prepaid rents to the buyer at the time of closing. Depending on the timing of the transaction and the terms of the offer, the seller may need to notify the buyer of the late rent, allowing the buyer and seller to negotiate accordingly. 

Use of the WRA Addendum R to the Offer to Purchase also may have been helpful in that regard. Addendum R 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 desired vacant units, termination of tenancies, leases, rent, security deposits, personal property, eviction and vacancies.

See the discussion of Addendum R on pages 10-11 of Legal Update 03.11, “Overcoming Residential Transactional Obstacles,” at www.wra.org/LU0311 and “The Best of the Legal Hotline: Addendum R” in the May 2004 Wisconsin Real Estate Magazine at www.wra.org/WREM/May04/Hotline.

Notice to terminate month-to-month tenancy

Can the buyer ask the seller to provide the month-to-month tenant with a 28-day notice to vacate? 

Yes. A provision in the offer indicating the tenancy is to be terminated can be negotiated if that is the desired outcome. According to Wis. Stat. § 704.19, when a notice to terminate is provided for a month-to-month tenancy, the notice is effective at the end of the next rental period. Notwithstanding the statute, the landlord and tenant may negotiate for a different result. If, for example, the tenancy goes from the first of the month to the end of month, a notice to terminate delivered in the middle of December would be effective at the end of January. See Wis. Stat. § 704.19 at docs.legis.wisconsin.gov/statutes/statutes/704.pdf.

Which offer? 

When the buyer is looking to purchase rental property, does the licensee use a residential offer or a commercial offer? 

Whether the licensee uses a residential offer or a commercial offer is determined on a case-by-case basis. A licensee should use whichever REEB-approved form best matches the transaction with the fewest number of changes or modifications. There is no right or wrong answer. It is a matter of the licensee’s judgment as to what form best fits the individual circumstances.

The same analysis applies when choosing addenda to use in the transaction. The licensee will use addenda that represent the character of the transaction and the needs of the parties. For rental properties, the WRA Addendum R may be appropriate.

Tracy Rucka is Director of Professional Standards and Practices for the WRA.

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