Lawyers Journal

The risks of purchasing occupied property - Advising the eager client

New buyers of occupied multi-family properties - for themselves or an investment - face serious risks lurking under the welcome mat that are rarely considered before closing: inability to move into the home as intended, non-paying tenants, tenants paying less than market value, illegal apartments, numerous sanitary code violations and other issues that can require serious hours and dollars to rectify or considerably decrease the home's value. But with proper advice and negotiation, these risks can and should be alleviated.

In my practice, I handle many cases in which a family is either unable to move into their property for several months (or longer), incurs serious financial harm due to a non-paying tenant and/or ends up with dissatisfied or even hostile tenants. It can be a nightmare, especially for first-time homebuyers, and to many these situations seem inconceivable after making it all the way through the buying process. In many cases, these families were not informed of these possibilities prior to or during the closing process.

Attorneys representing buyers purchasing occupied property should approach the transaction from the outset with a higher level of care and diligence than may be necessary in traditional purchase transactions. This includes, of course, the same basic steps of negotiating the purchase and sale agreement, and ordering a title exam, municipal lien certificate and plot plan. But a diligent conveyancing attorney should familiarize themselves with the rights and responsibilities of being a landlord, or engage a landlord-tenant attorney at an early stage. Buyers cannot be expected to know the law and should be able to rely on their attorney to provide guidance throughout the entire transaction.

When a client is purchasing occupied property, the best time to get involved is at the "offer" stage. This avoids a potential McCarthy v. Tobin issue, and buyers should at this moment be advised to express any and all contingencies. As conveyancing attorneys, we should also be educating the real estate brokers with whom we work about the value of retaining an attorney to review the offer to purchase (aka, contract to purchase). If a buyer intends to move into one of the units in a multi-family property, that fact should be reflected in the offer (i.e., "buyer's performance shall be contingent upon seller's ability to deliver unit #_ vacant").

After the offer is complete, even more specific terms must be included in the purchase and sale agreement, which should be negotiated by the parties' respective attorneys. Whether or not the attorney negotiating on behalf of the buyer is also representing the buyer's lender should never affect the thoroughness with which the attorney approaches the project - as we are all required to zealously advocate on behalf of our clients. In order to adequately represent the buyer, additional language regarding tenancies must be included in any purchase and sale agreement relating to occupied property.

Owning and managing occupied property includes specific responsibilities and the more information a buyer is able to obtain during negotiations, the more prepared they will be. Provisions should be made regarding the need for lease documentation, including whether or not any of the tenancies are subsidized (e.g., Section 8) or whether or not the seller has written leases with tenants. In order to determine basic financial obligations, the buyer must be informed of what bills they are responsible for and what bills are paid by the tenant(s).

In addition, if a security deposit exists, the seller should be required to provide all documentation reflecting compliance with the security deposit statute - Massachusetts General Laws, Chapter 186, Section 15b. This includes, without limitation: a signed apartment condition statement; initial receipt for exchange of funds; evidence of the seller placing the funds in a separate, interest-bearing account unreachable by seller's creditors; evidence that the name of the bank, location of the bank, the account number and the interest rate have been provided to the tenant; and evidence that the seller provided yearly interest and/or yearly interest statements to each tenant. Failure to confirm all of this could result in a new homeowner being responsible for returning a security deposit they never received. In some circumstances, they may even be subjected to multiple damages and attorney fees. Proper representation of prospective buyers will avoid these scenarios.

It is vital to advise buyers of occupied property about the potential need to evict tenants immediately or in the future. This includes information on "no-fault" evictions, defenses and counterclaims to evictions, increasing rents in a proper and legal manner, how to recover possession for the purpose of renovations (and the possibility of this process taking up to several years), and the special regulations for the elderly and disabled. The history of the property's code issues or complaints is also an important factor, and can result in the court granting possession to the tenant if the landlord knew or "should have known" of any adverse conditions. Accordingly, the purchase and sale agreement should require the seller to provide a complete list of housing and/or code complaints made by any and all tenants. And in the case of Section 8 tenancies, a copy of all Section 8 housing authority inspections should also be reviewed. In light of the warranty of habitability, a buyer takes possession of any issues that exist in the property after purchasing and may be held responsible for any such issues whether or not they are apprised of said issues by the seller. Estoppel certificates can be useful to alleviate this concern.

In Massachusetts, there are several types of tenancies and they each come with a unique set of rules. Regulations for Section 8 and other government-assisted tenancies, for instance, have special guidelines that prevent displacing tenants during the first year of tenancy solely because a buyer wants to move in. Similarly, market tenants with an active lease cannot be evicted before selling. Statutory law even requires giving set time periods to occupants without a lease before terminating their tenancy, and ultimately a formal eviction may be necessary in order to sell a property vacant.

Relying on the ability to overcome all of the aforementioned legal hurdles after the closing is far from the best practice. In fact, it can lead to devastating financial and emotional consequences for families. These very real risks must instead be explained to clients at the outset of the buying process. After all, purchasing property should be a joyous occasion, a smart investment, or both - not an endless string of legal problems.

FOOTNOTE

McCarthy v. Tobin, 44 Mass.App.Ct 274 (1998) is a Massachusetts case relating to a real estate transaction. In this case, the Massachusetts Court of Appeals decided that an Offer to Purchase Real Estate, signed by both parties to the proposed transaction, containing all of the material terms and conditions to the contemplated transaction, and which stated on its face that the offer created "binding obligations," contractually bound the parties despite the language in the offer contemplating the later execution of a more formal purchase and sale agreement.

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