Wisconsin REALTORS® Association: Prevent Pitfalls with Tenant-occupied Properties

The Best of the Legal Hotline: Prevent Pitfalls with Tenant-occupied Properties

 Tracy Rucka, WRA Director of Professional Standards and Practices  |    September 01, 2023
Hotline

The questions and answers this month illuminate the value of preparation in transactions involving tenant-occupied properties. Both listing and cooperating brokers should request copies of all leases or rental agreements to confirm tenant rights. The terms and conditions of each tenant’s written or oral lease should be set forth in the Leased Property provisions of the WB offers to purchase.

Possession of premises  

When a broker listed a single-unit rental property, the seller stated he delivered to the tenant a 28-day notice to vacate. The buyer’s offer was drafted assuming the tenant would be out of the unit before closing, however, as closing approached, the tenant claimed she could remain in the property until the end of the year because she has a lease. Does the tenant need to vacate based on the 28-day notice?

The answer will depend on whether the tenant has a lease, for a fixed period of time, or a periodic tenancy. If there is a lease, the landlord may not unilaterally terminate a lease by a 28-day notice.

When a tenant occupies a property subject to a lease, Wis. Stat. § 704.09 states a buyer takes title subject to tenant rights. The sale of a property does not terminate a lease or rental agreement. When a buyer writes an offer on a currently rented property, the buyer purchases the property subject to the lease or rental agreement terms. Wis. Stat. § 704.09 requires that a buyer or other transferee take ownership of the property subject to the tenant’s rights. The new owner will “step into the seller’s shoes” and must honor the current tenant’s rights.

Whether the tenant’s occupancy is based on a month-to-month tenancy, which would allow a timely written 28-day notice to terminate, or a lease in effect till the end of the year is a fact-based question. If the tenant has a lease extending to December 31, the tenant may remain in possession of the premises until that time — unless of course the tenant engages in conduct that would allow the landlord to otherwise terminate the tenancy.

At the time of listing, the listing agent may ask the seller about the tenants. Hopefully there are written leases or written rental agreements the seller can provide as evidence of the existing landlord-tenant relationship. If there is no written agreement, the critical and underlying question is what are the actual agreements between the landlord and tenants?  If there are questions or possible inconsistencies, getting the landlord and tenant to legal counsel early is beneficial. 

Paperwork

What if the landlord and tenants have a verbal agreement regarding the lease? Should paperwork still be provided by the seller?

There may be a verbal landlord-tenant lease or rental agreement in Wisconsin. There is nothing illegal, per se, about such a relationship. However, issues may arise if there is a disagreement regarding the lease terms or if the landlord fails to provide statutory documentation upon commencement of the tenancy. It is critical for the buyer to have access to any written documentation. Even in the absence of a written rental agreement or lease, the landlord should furnish copies of domestic abuse notices, lead-based paint disclosures for target housing constructed before 1978, check-in sheets, any optionally supplied notice of personal property disposition, and any other paperwork the landlord has on file.

Wis. Stat. § 704.08 states that it required information check-in sheets since 2011. Domestic abuse protections have been in effect since 2009. For any rental agreement entered into or renewed since March 1, 2014, written notice regarding these protections must be provided. If the property was built before 1978, proof of the proper lead-based paint disclosure materials is required to be provided to the tenant. How a landlord disposes of personal property was modified in 2014, requiring written notice if the landlord will not store a tenant’s personal property after tenancy. It is imperative for the buyer to obtain proof that the written notice was provided because if not, the new landlord will be required to store the tenant’s personal property left behind based on the pre-2014 law. 

Purchase agreement provisions 

What information and documentation are needed at the time of the offer?

It is incumbent on all parties to adequately address the interests of the buyer, seller, tenants and property managers as applicable. The WB offers provide for a minimal amount of information to be incorporated by reference. In addition, it is valuable to know if there are current, ongoing or past disputes or disagreements about the landlord and tenant’s relationship. 

When working with a buyer, an agent should gather all existing documentation available from the seller/landlord before drafting. The agent can then incorporate material information into the offer to purchase. Many issues can be avoided with attention to detail in the drafting of the offer to purchase. 

The listing broker knowing the tenant’s rights early and communicating with cooperating brokers will help facilitate completing lines 426-430 of the WB-11 Residential Offer to Purchase, which provide:

LEASED PROPERTY If Property is currently leased and lease(s) extend beyond closing, Seller shall assign Seller’s rights under said lease(s) and transfer all security deposits and prepaid rents thereunder to Buyer at closing. The terms of the (written) (oral) STRIKE ONE lease(s), if any, are ___________________.

Again, prior to drafting, it is prudent to obtain relevant paperwork from the seller/landlord or the property management company, if any. The list of documents includes but is not limited to written leases, written rental agreements, tenant applications, contact information, rent rolls, security deposit amounts, check-in reports any other correspondence or notices previously provided to the tenants. If these are not currently available, the buyer may draft contingencies for the seller to timely produce the documents. 

Use of the WRA Addendum R to the Offer to Purchase also may be helpful in this regard. Addendum R is designed for use in the sale of residential rental properties, regardless of the number of units involved. Addendum R tries to contemplate many of the problems that may arise when tenants do not pay their rent, abandon their units, damage the property, or terminate their tenancies between the date of the offer and closing. Addendum R also addresses other concerns regarding desired vacant units, termination of tenancies, leases, rent, security deposits, personal property, eviction and vacancies.

See the discussion of Addendum R on pages 1-5 of the October 2021 Legal Update, “WRA Addendum R and O 2021,” at www.wra.org/LU2110, pages 10-11 of Legal Update 03.11, “Overcoming Residential Transactional Obstacles,” at www.wra.org/LU0311 and “The Best of the Legal Hotline: Addendum R,” in the May 2004 Wisconsin Real Estate Magazine at www.wra.org/WREM/May04/Hotline.

Photographs  

A tenant was notified about an upcoming listing and potential showings. In response, the tenant said no one in the unit can take pictures, record video or broadcast the tenant’s personal property. Can the listing broker, cooperating broker or potential buyers take photographs or video in the rented units?  

Unfortunately, there is not a clear “yes” or “no” answer to this question unless the lease or rental agreement contains provisions with details about such a scenario. Although the seller authorizes photography in the listing agreement, the tenant is not a party to the listing, therefore the seller may want to review the lease with the tenant to see if photographing the property has been authorized. Regardless, given the likely need for the tenant’s cooperation for showings and potential arguments for liability under privacy laws, it may be best to work with the tenant to photograph limited areas, or assist in removing personal property for listing photos and then replace the personal property. If the seller or potential buyers are insistent on the photos, the owner should address the matter with their attorney. 

Security deposit  

Closing is scheduled for a rental property, and the seller now says the tenant is behind in rent payments, so the seller plans to withhold the security deposit from the buyer at closing. Can the seller just keep the security deposit? 

Not unless the offer has been amended. Per the offer, the seller agrees to transfer all security deposits and prepaid rents to the buyer at the time of closing. In addition, the ability for the landlord to withhold the security deposit can only occur at the end of a tenancy. According to lines 426-430 of the WB-11 Residential Offer to Purchase, the seller shall assign the seller’s rights under the existing leases and transfer all security deposits and prepaid rents to the buyer at the time of closing. Depending on the timing of the transaction and the terms of the offer, the seller may need to notify the buyer of the late rent, allowing the buyer and seller to negotiate accordingly.

What happens if tenants vacate between acceptance and closing of the transaction?  

When drafting an offer for rental property, it is appropriate for the buyer to articulate their expectations regarding tenant vacancy. For example, some common buyer expectations in such a scenario could be: 

  • The seller is required to give notice to terminate any month-to-month tenancy. 
  • Placing limits upon the seller to enter into new leases. 
  • Placing limits upon the seller not to extend current leases.
  • The seller may accept or counter as is appropriate for the transaction. 

Security deposit and assignment  

The seller said the tenant damaged the property and is late in rent, so the seller plans to withhold the security deposit. Is the seller required to provide the buyer with security deposits and assignments of the leases? 

The offer indicates that the seller shall transfer all security deposits and prepaid rents to the buyer at closing. A landlord may only withhold the security deposit at the end of a tenancy — not before. If there is unpaid rent, the landlord should consult with legal counsel about options to pursue the payment of late rent. This scenario illustrates the importance of asking good questions during both the listing process and when negotiating the offer: 

  • Will the seller give notice about the late rent?
  • Will the seller initiate or pursue eviction for the late rent?
  • Has the offer required the seller to provide complete information about late rent payments and previous notices in the event the buyer needs to later initiate eviction action?

The offer provides the seller shall assign the seller’s rights under the lease. The WRA Assignment of Lease and Deposits form has been crafted to document the assignment between the seller and buyer. The assignment does not require a tenant’s signature. 

Learn more in the article, “Landlords May Be Liable,” in the March 2006 issue of Wisconsin Real Estate Magazine at www.wra.org/WREM/Mar06/Landlords.  

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