Buying A Tenanted Property In Ontario

Buying real estate with existing tenants presents a unique set of challenges and considerations for prospective buyers in Ontario. This article explores the intricacies of purchasing a tenanted property, outlining crucial legal aspects, potential risks, and strategic approaches to ensure a smooth transaction. Whether you're a first-time investor or an experienced property owner, understanding the nuances of this process is essential for making informed decisions and protecting your interests.

Understanding Tenanted Properties in Ontario

A tenanted property refers to a residential unit that is currently being rented out to individuals or families. These properties can range from single-family homes to multi-unit buildings, each presenting its own set of considerations. The existing lease agreement between the current owner and the tenant forms the foundation of the tenancy, and this agreement typically transfers to the new owner upon sale completion.

It's important to note that in Ontario, tenants have significant rights protected by law. These rights can impact a new owner's ability to make changes to the property or end the tenancy. Therefore, potential buyers must carefully consider their intentions for the property and how the existing tenancy might align with or complicate those plans.

The presence of tenants can also affect the property's market value and attractiveness to different types of buyers. Some investors may see a stable, long-term tenant as an asset, while others might prefer the flexibility of a vacant property. Understanding these dynamics is crucial for making an informed decision and setting realistic expectations for the purchase and management of a tenanted property in Ontario.

Legal Framework: The Residential Tenancies Act

The cornerstone of tenant-landlord relations in Ontario is the Residential Tenancies Act (RTA). The RTA covers a wide range of topics, including rent increases, maintenance responsibilities, eviction procedures, and dispute resolution mechanisms. One of the most critical aspects for potential buyers to understand is that the Act's provisions continue to apply even when ownership of the property changes hands. This means that as a new owner, you inherit not only the property but also the legal obligations to the existing tenants.

Key provisions of the RTA that directly impact the purchase and management of tenanted properties include:

1. Rent Control: The Act limits how much landlords can increase rent each year for existing tenants. This cap is set annually by the Ontario government and applies to most residential rental units.
2. Security of Tenure: Tenants have the right to continue occupying the rental unit indefinitely unless there are legal grounds for eviction.
3. Maintenance and Repairs: Landlords are required to keep the rental property in a good state of repair and comply with health, safety, and maintenance standards.
4. Entry Restrictions: The Act specifies when and how a landlord can enter a rental unit, which is particularly relevant during the property viewing and inspection phases of a purchase.
5. Eviction Procedures: The RTA outlines specific reasons for which a landlord can evict a tenant and the proper procedures that must be followed.

Understanding these provisions is crucial for potential buyers, as they directly influence your rights and obligations as a future landlord. For instance, if you're planning to purchase a property with the intention of personal use, you need to be aware of the specific conditions under which you can legally end a tenancy for this purpose (discussed later).

Evaluating Existing Lease Agreements

When contemplating the purchase of a tenanted property in Ontario, one of the most critical steps is thoroughly evaluating the existing lease agreements. These documents form the contractual basis of the relationship between the current landlord and tenants, and as the potential new owner, you'll be stepping into the shoes of the landlord upon purchase completion.

Lease agreements can vary significantly in their terms and conditions, and understanding these nuances is crucial for several reasons:

1. Financial Implications: The lease will specify the current rent amount, which directly affects the property's income potential. It's important to compare this to current market rates to assess the property's financial performance.
2. Duration of Tenancy: Leases can be fixed-term, month-to-month, weekly or daily. Despite the duration stated in the tenancy, tenants are allowed to rent the unit indefinitely unless there are legal grounds for eviction.
3. Tenant Responsibilities: The lease should outline what the tenants are responsible for, such as utility payments, minor repairs, or lawn maintenance. This affects your future obligations and expenses as the landlord.
4. Special Clauses: Some leases may contain unique provisions or agreements between the current landlord and tenants. These could include promises for future renovations, rent increase schedules, or specific use permissions.
5. Deposit Information: The lease should detail any security deposits or last month's rent held by the current landlord. You'll need to ensure these are properly transferred at closing.

When reviewing lease agreements, pay close attention to:

• Rent payment terms and history
• Lease start and end dates
• Any provisions for lease renewal or termination
• Restrictions on property use or modifications
• Pet policies and any associated fees
• Parking arrangements

It's also crucial to verify that the existing lease complies with Ontario's Residential Tenancies Act. Any clauses contradicting the Act are considered void and unenforceable, even if the tenant has agreed to them.

As a prospective buyer, you can request copies of all current lease agreements from the seller. It's advisable to have these reviewed by a legal professional who can identify any potential issues or liabilities you might be inheriting with the property.

Remember, once you purchase the property, you'll be bound by the terms of these existing leases. If there are aspects of the agreements that don't align with your plans for the property, you may need to negotiate with the current owner or adjust your expectations accordingly.

In some cases, you might consider making your offer conditional on the review and approval of the existing lease agreements. This can provide you with an opportunity to back out of the deal if you discover terms that are unfavourable or incompatible with your investment goals.

Rights and Obligations of New Owners

Stepping into the role of a landlord by purchasing a tenanted property in Ontario comes with a specific set of rights and obligations. Understanding these is crucial for ensuring a smooth ownership transition and maintaining positive relationships with your new tenants.

As a new owner, your primary rights include:

1. Collecting Rent: You have the right to receive rent payments as specified in the existing lease agreement. However, you cannot arbitrarily increase the rent beyond what's allowed by Ontario's rent control guidelines.
2. Property Access: You have the right to enter the rental unit for specific reasons, such as conducting repairs or showing the property to prospective buyers or tenants, with proper notice as outlined in the Residential Tenancies Act.
3. Enforcing Lease Terms: You can enforce the terms of the existing lease, including rules about property use, noise levels, and maintenance responsibilities.
4. Ending Tenancies: Under certain circumstances, you have the right to end a tenancy, such as for personal use of the property or for extensive renovations, following proper legal procedures.

However, these rights come with corresponding obligations:

1. Maintaining the Property: You're responsible for keeping the rental unit in a good state of repair, ensuring all systems are functioning properly, and addressing any maintenance issues promptly.
2. Respecting Tenant Privacy: While you have the right to enter the property under certain conditions, you must respect the tenant's right to reasonable enjoyment of their home.
3. Following Legal Procedures: Any actions you take regarding the tenancy, from rent increases to eviction notices, must follow the procedures outlined in the Residential Tenancies Act.
4. Providing Essential Services: You must ensure the continued provision of vital services such as heat, electricity, and water.
5. Complying with Human Rights Legislation: As a landlord, you're obligated to adhere to Ontario's Human Rights Code, which prohibits discrimination in housing based on protected grounds such as race, age, family status, or disability.

It's important to note that these rights and obligations apply regardless of whether you were aware of them at the time of purchase. Ignorance of the law is not a valid defense for failing to meet your legal obligations as a landlord.

One of the most significant obligations you inherit is honoring the existing lease agreement. This means you cannot unilaterally change the terms of the lease or evict tenants simply because you're the new owner. If the property was sold with a clause specifying "vacant possession," it's the responsibility of the seller to ensure the property is vacated before the sale closes.

Evicting Tenant for Personal Use by Buyer

If you're planning to use the property for personal occupancy, the seller must follow specific procedures:

1. Provide 60 days' notice using the appropriate form (N12).
2. Compensate the tenant with one month's rent or offer them another acceptable unit.
3. Provide a signed statement by the buyer, a close family member, or a caregiver of their intention to occupy the unit for at least one year after closing.
4. If the tenant refuses to move out by the termination date in the N12, commence an L2 Application for eviction.

Its important to note that the tenant does not need to move out by the termination date and can wait for a Landlord Tenant Board hearing which can take several months. This is why it's important to ensure that a lawyer reviews the Agreement of Purchase and Sale so it contains the necessary clauses; alternatively, negotiate a cash-for-keys agreement.

Failure to comply with these obligations can result in significant penalties, including fines and compensation to the tenant. It's crucial to approach your new role as a landlord with a clear understanding of these responsibilities to avoid potential bad-faith eviction claims.

Conclusion

Owning a tenanted property is not just a financial transaction but also a responsibility that involves managing relationships and complying with legal obligations. Successful landlords often find a balance between maximizing their investment returns and maintaining positive tenant relations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.