There are many things home buyers and sellers need to know if they are considering buying or selling a tenanted property in Ontario.
Today, I will touch on some common misconceptions and the different scenarios that buyers and sellers might encounter when dealing with tenanted properties.
Let's start by clarifying a misconception many landlords have.
Many landlords I speak with believe they can give their tenants notice to vacate if they want to sell their property. Selling a property does not grant a landlord the right to evict a tenant, and sellers who try this are starting off their sale process on the wrong foot.
For sellers who would like their tenant to move out as part of their sale process, there are two approaches they can take.
The first approach is to list their property for sale while it's tenanted and then provide the tenant notice to vacate if the Buyer wants to move into the home for their use. In this situation, the seller would serve their tenant with a form called an N12 Form- Notice to End your Tenancy Because the Landlord, a Purchaser or a Family Member Requires the Rental Unit.
In Ontario, a tenant can be evicted if the owner of the home or the buyer of a home wants to move into the property for their or their use. But it's worth noting that this only applies to month-to-month tenancies. If the tenant is currently within the term of a lease, the seller would have to wait for the lease to end and for the tenancy to roll over to a month-to-month tenancy.
The other approach is for sellers to negotiate with their tenants to mutually agree to end the tenancy by signing an N11 Form - Agreement to End the Tenancy. For a landlord to persuade the tenant to sign an N11, they typically need to compensate the tenant - something often referred to as Cash for Keys.
Now that we have the basic rules figured out, I will walk you through both scenarios in more detail and discuss the pros and cons of each scenario from buyers' and sellers' perspectives.
The N12 Process - Ending the Tenancy for the Buyer's Own Use
Before COVID, most landlords who had a tenanted property would typically list their property for sale with the tenant still occupying it.
When buyers make an offer, they include a clause in the agreement of purchase and sale that requires the seller to give the tenant the N12 notice so the buyer can move into the home for their use. The buyer would also typically sign a declaration that confirms they intend to move into the property for their use.
The seller must give the tenant at least two full months' notice and needs to compensate the tenant one month's rent.
One important thing about N12 notices is that the tenant has the right to dispute the notice with the Landlord Tenant Board if they disagree with the notice.
For this reason, when an N12 notice clause is included in an agreement of purchase and sale for the sale of a home, it is common to include a clause that says that if the tenant does not move out by the time that the Buyer is scheduled to take possession - the Buyer agrees to assume the tenant.
Before COVID, Buyers rarely had any concerns with these clauses because it was rare for a tenant not to move out when given the proper notice. But a lot has changed over the past four years.
During COVID, some tenants felt more empowered and refused to move out in these situations. They effectively decided to squat and dispute the notices with the Landlord and Tenant board, knowing it could take many months for their case to be heard because of the backlog at the LTB. Which means it would take months before they are forced to move out.
The other factor that led more tenants to refuse to vacate is the rapid increase in rents in the Toronto area. Tenants paying below-market rents would have difficulty finding another apartment in the same price range.
So, in this situation, if the tenant does not move out by the closing date, the Buyer would be responsible for having the tenant evicted through the Landlord and Tenant Board.
Now, let's go through some of the pros and cons of the N12 process from both sellers' and buyers' perspectives.
From the Seller's perspective
The seller's property can remain fully tenanted throughout the sale process, and the seller does not need to worry about negotiating a cash-for-keys deal with the tenant to sign an N11.
On the flip side, tenanted properties usually sell for less than untenanted properties for several reasons. Tenanted homes typically don't present as well as homes that have been staged and styled to be as attractive as possible to the average Buyer. Tenanted properties are often more challenging for buyers to view if the tenant is not cooperating with showings. Finally, for some buyers, a tenanted home isn't even an option because of the risk that the tenant may not move out on closing.
It's worth noting that in some cases, the Buyer may ask to be compensated on closing if the tenant refuses to move out.
From the Buyer's Perspective
One advantage for buyers is that they can often get more value when buying a tenanted property. This might be a good option for someone currently renting who can wait to see if the tenant has moved out before giving notice to vacate their rental.
The downside is that if the tenant does not move out, you must go through the eviction process at the Landlord Tenant Board. Buyers can ask for a reduction in the sale price if the tenant refuses to move out. Hiring a good paralegal can help speed up the eviction process.
N11 Process - Agreement to End the Tenancy
Unlike the N12 process just discussed, which is a notice that the tenant can dispute. The N11 is an agreement between the tenant and the landlord to end the tenant's tenancy.
When I'm representing sellers, I always advise them to try to negotiate the terms to an N11 with their tenant upfront before they list their property for sale because this issue will likely come up, so it's better to be proactive about it.
There are one of two approaches to negotiating an N11 agreement with your tenant.
The first approach is to sign an N11 so the tenant can move out of the unit before a seller lists their property for sale. Under such a scenario, we would typically make some improvements to the property, including painting it, and the property would be fully staged to maximize the sale price.
The other option is to negotiate the basic terms of the N11, including the compensation to the tenant and how much notice the tenant will receive should the purchaser request a signed N11. I should mention that many of today's buyers who intend to move into the home for their use request a signed N11 rather than relying on an N12 notice because the Buyer is more confident that the tenant will move out with a signed N11.
Under this scenario, the tenant remains in the unit during the sale process and would only sign an N11 with the previously agreed-upon terms if the Buyer requires it. If the Buyer wants to assume the tenant, then the N11 will not be signed, and the tenant will continue to occupy their unit.
But negotiating an N11 agreement is sometimes easier said than done. Sellers often feel like they shouldn't have to compensate the tenant anything. In contrast, the tenants are faced with the prospect of paying a lot more for a smaller unit, so it is understandable to ask for more money than the landlord is often willing to pay.
The right amount of compensation often depends on several factors, including the length of the tenant's tenancy and their current rent relative to market rents.
But if the tenant refuses to sign an N11 agreement, the Seller would have to list the property with the tenant and would market the home to a buyer who is willing to accept the tenant, or is comfortable with an N12 notice. In this scenario, may even compensate the Buyer should the tenant refuse to move out on closing.
Now, let's go through some of the pros and cons of the N11 process from both sellers' and buyers' perspectives.
From the Seller's perspective
Suppose you can achieve a higher sale price by painting and staging your property. In that case, it's in your interest to negotiate an N11 agreement with your tenant and have them vacate before you begin marketing the property for sale. In most cases, a vacant property will sell for more than a tenanted property.
Even if you don't want the tenant to move out immediately, agreeing to the basic terms of an N11 will ensure your sale process is much smoother because most buyers today are asking for a signed N11 rather than an N12 notice.
The downside is that you'll have to spend some money to compensate your tenant.
From the Buyer's Perspective
You can be far more confident that the tenant will move out by the closing date if they have signed an N11.
There is still a slim chance that the tenant will not move out, but this is less common when tenants sign an N11. You can try to include a clause requiring the Seller to compensate you if the tenant fails to move out on closing.
I hope you found today's post helpful. If you have any questions, please email me at askjohn@movesmartly.com.
If you are considering buying or selling a tenanted property and would like to speak with me and my agents in more detail, you can schedule an appointment via the link below.
John Pasalis is President of Realosophy Realty. A specialist in real estate data analysis, John’s research focuses on unlocking micro trends in the Greater Toronto Area real estate market. His research has been utilized by the Bank of Canada, the Canadian Mortgage and Housing Corporation (CMHC) and the International Monetary Fund (IMF).
February 13, 2024
Advice |