How to Handle Lease Renewals While Under Contract
We recently had a real estate transaction that was in the escrow phase of the sales process. The seller of the property, who owned a multi-family asset for a long time, renewed a few of the leases in the building during this period. This created a problem for us because our original plan was to vacate the property and renovate it as soon as possible, but we had to change our strategy to make the deal work. We learned some lessons from this deal, including the importance of not assuming that the other party in a transaction understands your goals.
If you’re a seller who’s cashing out of your real estate asset(s), here are some reasons why a real estate investor may not want you to renew leases before the closing:
The buyer may want to negotiate new lease terms: If the leases are renewed before closing, the buyer will be obligated to honor those terms, limiting their flexibility. The buyer may have different plans for the property or want to change the terms of the existing leases.
The buyer may want to vet the existing tenants: If the leases are renewed before closing, the buyer may not have the opportunity to review the tenant’s history, creditworthiness, or other relevant information. This can create problems for the buyer down the road, especially if they need to evict a tenant or renegotiate lease terms.
The buyer may want to take advantage of vacancies: If the property has vacant units, the buyer may want to renovate or reposition the property. If leases are renewed before closing, the buyer may miss out on this opportunity.
The buyer may want to have control over the property sooner: If the leases are not renewed before closing, the buyer will have more control over the property immediately after the sale. They can decide whether to renew or terminate leases, make changes to the property, or find new tenants without being bound by the terms of the existing leases.
In general, the buyer may prefer to have more control over the property and its tenants, rather than being bound by the seller’s decisions or agreements. Buyers and sellers should have an open dialogue, either through their respective attorneys, agents, or directly, about the plans for the building after the purchase. If major decisions are made by the seller without including the future owner, the value of the property could become less than the buyer was originally willing to pay, which could bring you back to the negotiating table.
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