Is Buying Or Selling A Tenanted Property In Ontario Risky?

Real estate transactions always carry some level of risk. And there are several reasons why buying or selling a tenanted property here in Ontario is risky compared to one that’s vacant. That danger has massively increased over the last few years, especially if vacant possession is required by a buyer who intends to occupy the property.

Covid, low rental inventories, inflation, sky high rents and a huge backlog of cases at the Landlord and Tenant Board (LTB) can make buying or selling a real challenge if there’s a tenant involved.

Tenants are a 3rd party to any contracts that a buyer and seller may enter into. They have rights under the Residential Tenancies Act (RTA) that may prevent vacant possession despite the best efforts of the buyer and seller.

Refusal to vacate can occur even if proper legal notice to vacate the premises is served at the appropriate time prior to closing. The tenant can simply refuse to leave. You can’t touch their stuff, stop them from entering the property or change the locks on them. Calling the police won’t help either.

Instead, proper procedure according to the RTA must be followed. If a tenant won’t leave, the next step is to apply for an eviction with the LTB. Once the application is made a hearing date will be set where the landlord presents evidence demonstrating that the tenant should be evicted.

The tenant’s rights to a hearing prior to being evicted supersedes the rights of the buyer and seller even if the paperwork was filed correctly and on time.

The problem with the process is the enormous backlog of cases, roughly 38,000, that the tribunal is now saddled with. It can take 8 months or more to get a hearing let alone an eviction order. Needless to say the buyer and seller will both be incurring massive expenses and/or losses the whole time.

The risks of buying a tenanted property in Ontario

Buyers who plan on living in the property they’ve purchased face several risks if the property is tenanted. First and foremost is the chance that the tenant may refuse to leave even if proper paperwork is filed, leaving the property unavailable for your use.

In this situation you may very well find yourself homeless if you’ve sold the home you’ve been occupying or if you’ve already given notice to your landlord.

Obviously the seller is in breach of your purchase agreement but it’s unclear how your options will play out. It all depends on your lawyers and potentially the ruling of a judge. The seller is absolutely liable for damages but that doesn’t necessarily mean you can get out of your purchase. The courts may insist that you still close.

If you do close you’re now a landlord although the eviction should still be the seller’s responsibility. But what do you do if the tenant also refuses to pay rent? In this case would you have to apply to the LTB in an attempt to get paid? What if the tenant doesn’t have any money? Would you sue the seller as well?

And the damage to your wallet and credit rating will be considerable as you slowly wind your way through the LTB process. There are legal fees, rent and a mortgage payment each month (or having to carry two properties if you own) as well as a massive amount of stress you’ve been burdened with. What’s worse is you could end up losing the home you’ve purchased.

The risks of selling a tenanted property in Ontario

There are several pitfalls sellers face. One of the biggest issues is the sale price. Investors will discount a tenanted property for two reasons, risk and rent. It’s risky to assume a tenant as the normal vetting process is completely sidelined. In addition, the tenant may be paying substantially below market rent.

Savvy buyers and their agents are also aware of the issues at the LTB. Buyers who need vacant possession will discount what they are willing to pay because of the headaches of being a landlord and the risk of getting a bad tenant.

A seller who is providing vacant possession can find themselves in legal jeopardy if things go south. Clause 2 in the Agreement of Purchase and Sale makes the Seller liable if vacant possession is not provided unless there’s a clause stipulating otherwise.

COMPLETION DATE: This Agreement shall be completed by no later than 6:00 p.m. on the ……day of ………….., 20……. Upon completion, vacant possession of the property shall be given to the Buyer unless otherwise provided for in this Agreement.

Just to make it abundantly clear, when I work with buyers purchasing a tenanted property I also include in Schedule A, an additional clause mentioning the requirement for vacant possession. I also require the seller to send the N12 notice to the tenant no later than 2 calendar months before closing.

If the seller fails in their obligations they are in breach of contract and the buyer can then proceed with legal action against them.

I’d read another agent’s blog about the subject and they suggested striking clause 2 as some form of protection for the seller. While this might seem to be a solution all it would do is make potential buyers run for the hills. As a buyer’s agent my first though would be ‘gee, I bet this seller has a problem tenant’.

In any event, it’s clear that the tenant has the final say with regard to possession even if their actions are illegal and in breach of what they’d agreed to when they first rented the property. Now the seller will need to proceed with an eviction hearing and as I’d mentioned earlier that can take months.

If the buyer closes the seller is now saddled withe the time and expense of the eviction hearing and will also need to negotiate damages with the buyer. If they are lucky things don’t end up in court. The seller will also want to recover costs from the tenant and there’s no saying they have any money. Even if they do have means there’s no saying they’ll pay.

In the event the buyer gets out of the deal the seller is faced with damages and costs for relisting the property and still has to deal with the problem tenant. They are at the mercy of the LTB.

I’d recommend legal representation to make it crystal clear that the tenant has caused the failure of the sale and that the seller was acting in good faith when they submitted the N12 to the tenant notifying them that the tenancy was ending. Like the previous scenario the tenant will be liable for costs but will the seller be able to recoup anything?

Is cash for keys a solution?

If you are in anyway unsure about your current tenant then cash for keys is a viable alternative. While this might seem unpalatable it does get rid of that whole 3rd party problem I mentioned. If you’re selling and providing vacant possession you simply can’t wait for the provincial government to sort out the backlog at the LTB. The risk of a problem tenant refusing to vacate is simply too great these days.

The cost of paying a tenant to leave while expensive will be offset by the higher purchase price you’ll get when you sell. It’s also insurance that you won’t be sued and will provide you real peace of mind when your sale closes. If you’re going down this route I’d strongly recommend a lawyer or paralegal to draw up the agreement. A real estate broker, salesperson or agent has no standing at the LTB and cannot provide legal advice or services to landlords dealing with tenant issues.

The final word

Buying or selling a tenanted property here in Ontario is risky and you should always include a strategy for minimizing stress and financial pain if things turn out badly. A tenant is someone you (as a buyer or seller) simply have no control over and their rights take precedence over yours. Selling with a tenant you’re in anyway unsure about? Cash for keys and offer vacant possession. My advice for buyers? If you absolutely need to occupy your purchase at closing don’t offer on tenanted properties, it’s simply not worth it.

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