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How Do You Sell A Tenanted Property In Toronto?

It may sound straightforward, but there's a lot more to it.

My favourite arcade game of all time is Street Fighter II. I can't tell you how many hours I spent in high school at the local convenient stores playing this. Remember when they had arcade games at almost every Beckers and Mac's Milk? Man, I'm old. That game was intense. Everyone knew that the hardcore players always picked Ryu or Ken to beat the game, but I was always in awe of people who crushed it with other characters, like Guile, or Blanka, or Chun-Li. I mean, who would say to themselves "I'm gonna finish this game with Dhalsim and his stretchy limbs"? Watching people master the moves of all these other characters made me realize that there's always more than one way to beat a game.

Selling a tenanted property in Ontario, and specifically Toronto, reminds me a lot of Street Fighter II - There's more than one way to get it done. I've dealt with selling numerous tenanted properties over the years, both from the listing side and the buyer's side and I will tell you it is not for the faint of heart. As we all know, the Landlord and Tenant Board is completely broken and dysfunctional, which means there is little to no support for landlords in this province when things go wrong with a tenant. So as a seller, if you are choosing to sell your property before your tenant vacates, you need to know the process and the risks.

Here's a few ways it can be done:

1 - Talk to your tenant: My first recommendation to any landlord client who is thinking of selling is to have a real conversation with your tenant. Not via text, not email, but a live conversation or face-to-face and just tell them the situation. You are planning to sell and in all likelihood, the buyer will be an end-user and the tenant will have to vacate for closing. You'd be surprised but just having that conversation might be a relief to your tenant. For all you know, they were planning to move anyway, or were looking to move in with their significant other, or they were about to be transferred for work. If your tenant wants to leave in 30 days, let them. If they want to leave in a week, so be it. The best case scenario when you are planning to sell a unit that is tenanted is if the tenant wants to leave anyway. So get an N11 form signed (which is the formal agreement between landlord and tenant to terminate a tenancy on a specific date), let them leave, then paint, clean, stage the property, and sell it. Done and done. This is the dream scenario but unfortunately it's not always that simple...

2 - Sell the property and serve an N12: This is how the majority of tenanted properties are sold in Toronto. It goes a little something like this:

a) The tenant is near the end of their 1 year term, or they are already month-to-month, so you list the property for sale. (If your tenant is in the middle of their lease, good luck finding a buyer. It's pretty rare to see something sell while the tenant is in the middle of their lease. Impossible? No. But likely? No. Most landlords would prefer to vet their own tenants).

b) Since the property is tenanted, you need to provide 24 hours notice for showings. Tenants officially can't refuse showings between 8am and 8pm but trust me, you'll have to make concessions on this even if it's the law. Plus, it's probably best to keep your tenant happy so they are cooperative during the process.

c) If the buyer is an investor, they will have to take on the tenant at the current rent being paid. If you sell to an investor, you as the seller can't ask the tenant to vacate so that the buyer can re-rent the unit at a higher amount or to someone else. So if the tenant is paying below-market rent, you'll effectively be missing out on just about all investor buyers out there. And I said, most investors want to vet their own tenants anyway.

d) If the buyer is an end-user and will be living in the property, you'll need to agree on a closing date that is at least 60 days from the next time the rent is due. More on that below.

e) You and the buyer agree on a price and closing date, and firm up the deal. You, as the seller, now need to serve your tenant with a Form N12 Notice to End Your Tenancy, since the buyer needs the place for their own personal use (and you will verify that with the buyer's agent before you accept their offer). The N12 form must be served at least 60 days from the next time the rent is due, and the tenancy termination date must fall on the last day of a rental period. So if you firm up the sale on March 17th, and your tenant pays rent on the 1st of every month, the earliest termination date on the N12 can be May 31st. If not May 31st, then June 30th, etc. This is super important when negotiating the sale as the closing date on the offer needs to be set while keeping in mind time for any conditions (financing, status certificate review, home inspection, etc). As a matter of practice, the N12 should not be served until the deal is actually firm (i.e., all conditions have been removed), because it's only at that point that the sale is official. In this example, if you negotiated a closing date of June 1st but your conditions didn't get removed until April 3rd, you could run into a timing issue for vacant possession as the earliest tenancy termination date would now be June 30th. Timing is hugely important.

As a side note, once the N12 is served to your tenant, the tenant has the option of vacating with as little as 10 days' notice. If they decide to leave earlier than the termination date on the form, by all means let them! Not only is it their right but it also ensures vacant possession for the buyer without any stress leading up to the closing.

f) Then you wait, and hope that your tenant actually leaves. Why do you need hope, you might ask? Because the N12 is just a "notice" to vacate". It's not an eviction letter, it's more of a "hey tenant, I sold the property so can you please leave now?" kind of notice. What happens if the tenant doesn't leave? Exactly. What happens? Does the deal still close? Does the buyer walk away? Is the buyer or seller on the hook? There are so many questions and each situation is different but the short answer is, it can be a nightmare to deal with. Trust me. I've seen it. I like to think that most tenants (and landlords for that matter) are respectful of the tenancy rules in Ontario and understand the implied contract that comes with renting a property in this province (i.e. we'll all play by the same rules and not unnecessarily make life miserable for the other party just because you can), but there are too many horror stories out there to not take precautions.

g) If the buyer is an investor and is happy to keep your tenant, then great! Nothing changes from the perspective of the tenant except who they pay their rent to, you can close the sale at any time, and you as a seller should be ecstatic. No muss, no fuss. But if your tenant is paying below-market rent in a rent-controlled building, this scenario is about as likely as beating Street Fighter II with E.Honda as your character.

3 - Cash for keys: This is probably the closest thing to legal extortion that I can think of but the premise behind "cash for keys" is that you, as a seller/landlord, literally pay your tenant to leave so you can then sell the property and guarantee vacant possession to a buyer. This can get expensive. With the way the rental market is and how ridiculously dysfunctional the LTB is, the mere threat from a tenant that they won't leave even if served with a legitimate N12 is enough to strike fear in a landlord's heart. And it unfortunately puts dollar signs into the eyes of some tenants. I hate that this a remedy that is required just so people can legally sell their tenanted properties but since the Ontario government has basically said that landlords have no rights in this province, and the LTB eviction process can take literally several months even for cut and dry situations (regardless of the timing constraints of a looming closing), a lot of landlords are having their properties held hostage by nefarious tenants who refuse to play by the rules. I'm going to stop here before I go on a rant about how messed up the system is...

Here's a pro tip - when I'm working with buyers and we see a unit that is tenanted, I always have a conversation with my clients about the risks involved. I.e., if the tenant is month-to-month and you need the property for your own personal use, there is always a risk that the tenant does not actually leave. Then what? Are you willing to take that risk? I'd be doing my clients a disservice if I didn't have this conversation, and I know other (good) agents do the same. So as a seller, you are turning away potential buyers by not waiting until your tenants leave so that this risk is a non-issue. I understand that waiting isn't always feasible, but I think it's extremely important to understand the risks (and potential costs) involved.

So there you have it. Selling a tenanted property isn't as smooth sailing as you might think. This is why I tell all my seller clients who are debating between selling and renting out their properties the same thing - "If you decide to rent it out, consider yourself a landlord indefinitely, until your tenant tells you otherwise. If your goal is to rent it out for a year, hoping to sell when the market gets better, you're probably better off just selling now. The risks involved with selling a tenanted property are real - it may not show well, the tenant may make it difficult for showings, you can't clean, paint, and stage... all these things could cost you money on the sale. You are a landlord until your tenant decides to leave. Then we'll assess the market and decide if selling or re-renting is the right play. Until then, cash your rent cheques and think of yourself as a landlord forever."

Have you checked out my previous blog posts?

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Your Toronto condo lover,

Adil Dharssi

Sales Representative

iPro Realty Ltd, Brokerage

Direct: 647-223-1679 (call/text)

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