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Potential Pitfalls When Buying and Selling Tenant-Occupied Real Estate

Buying or selling tenant-occupied real estate comes with special considerations with regard to tenants’ rights in New Jersey.

There are a number of pitfalls that can occur for both buyers and sellers. Buyers typically purchase tenant-occupied property either to make it their primary home or with the expectation that they will be able to gain a positive return on investment as a rental property, often by making improvements and raising rents. Both of these scenarios suggest that the existing tenants may need to move out before or shortly after the new owner takes possession. Buyers need to understand that they simply cannot evict a tenant just because the buyer/landlord wants to get a “better” tenant or charge more for rent as soon as they buy the property.

New Jersey has strong tenant protection laws that both sellers and buyers should be aware of to ensure a smoother transition of ownership.

Seller Notification to Tenants:

The first thing an owner of a tenant occupied building should do when they are ready to list is try to determine whether it is better to keep the lease terms as they stand or make revisions. This is critical, as converting to a month-to-month lease may be attractive to some potential buyers, but not so much so for others. Taking a close, hard look at what the fair market rent is for the property is a good starting point.

Even if there is no written lease, New Jersey law dictates what types of notices, as well as when and how they must be served upon the tenant. Failure to adhere to the law may subject the seller and even the buyer to legal consequences. Parties involved in the transaction may open themselves to legal liability, as well.

We have also seen deals go more smoothly when the landlord acknowledges the stress of living in a listed property. At a minimum, acknowledging that the process will be an imposition for them. If it makes sense, giving a tenant a gift certificate to a local supermarket or a local restaurant might also be appreciated.

Owner-Occupied Status:

Many buyers believe that they will be able to break a lease and evict tenants by invoking the Owner-Occupied status on the property and then only “living” there for a short period of time while they maintain another full-time residence. There are a number of issues with this approach. Tenants have protections in New Jersey and if a tenant finds out they were evicted under false pretenses, they can sue for damages and the owner will face other penalties as well.

Second, if the buyer has purchased a mortgage, Fannie Mae rules require residence for a full year to maintain the usually lower mortgage interest rate.

Security Deposits:

Security Deposits are another source of issues for rental properties. Security deposits must be held in trust according to New Jersey law and transferred to the new owner (in trust, of course) upon sale of the property. The transfer and amounts must be properly documented and the new owner should set up proper accounts and accounting for them.

Listing and selling properties with tenants adds a layer of complexity to the real estate transaction. Posternock Apell, PC is here to help you and your clients understand the legal requirements and ramifications of these transactions. Please call us with any questions. Email us to set up an appointment. Click here for Landlord-Tenant Information from the State of New Jersey Department of Community Affairs.