Buying a Tenanted Property in Ontario: Pros, Cons & What to Know

Introduction

Hey everybody, thanks for joining us today. Today’s topic is purchasing a tenanted property — a question that comes up a lot with clients, many of whom are working with landlords buying their first or second property and weighing whether it’s better to buy something vacant or something with a tenant already in place. There are pros and cons to everything, so we’re going to break it all down. Joining again is Rob Di Lisi from Stonegate Legal Services, a paralegal who only deals with landlord and tenant issues.

Can You Raise the Rent?

This is a popular subject, especially right now as it’s a buyer’s market and investors are looking to acquire properties that may already have a tenant in place. Common questions: can we raise the rent right away? Is there a way to evict the tenant? Can we pick our own tenant? Is there a way to pretend to move in?

Starting with the first one — is it possible, when you buy a property with a tenant in it, to raise the rent or make changes to their lease? Any lease in existence continues automatically with the new buyer. The question is whether it’s on a year lease or month-to-month. You can only raise the rent once per year. If it’s on a lease, you have to wait until the end of the term and give proper notice. If it’s month-to-month, the new buyer still can’t raise the rent arbitrarily — the process is an N1 or N2 with a minimum 90 days’ notice, and the increase can only follow the guideline (2.5% this year) unless the unit isn’t rent controlled.

There’s also a concept called “security of tenure” — the tenant is entitled to occupy the rental unit after the initial term specified in the rental agreement, so everything continues automatically. In real estate this ties to the term “covenants with the land”: any agreements the previous owner had continue with the new owner. So a buyer of a tenanted property can’t change the rent beyond the guideline and can’t do that right away — can they at least evict the tenant or choose a new one to move in?

Options for Ending Tenancy

No — if a buyer takes over, they’re entitled to follow through with the existing lease. There are only three ways to terminate a tenancy: the tenant decides to leave, giving an N9; the landlord and tenant agree to a termination, an N11; or a court order through the Landlord and Tenant Board. So a buyer can’t simply end the tenancy — the only way is a mutual agreement, which circles back to cash for keys.

As a realtor, clients have bought tenanted properties both as investors and for personal use. For personal use, the buyer can have the tenant vacate by moving in themselves with a minimum 60 days’ notice. Investors sometimes ask whether they can just claim they’re moving in to get the tenant out.

Personal Use (N12) Requirements

If someone wants to claim personal use, there are stipulations to understand — this is called an N12. It applies only if an individual wants to move in; it can’t be for a corporation. The requirements: minimum 60 days’ notice, one month’s rent compensation, and the person moving in — who must be at arm’s length, meaning immediate family — has to occupy the unit for one year.

An important point on the N12: the second page, fourth paragraph, tells the tenant they don’t have to move out and are entitled to wait for a hearing. That wait is a minimum six to eight months, and if successful, another 30 to 60 days to get the order — and then the person must move in for a year. So the total timeline can run close to two years before the property can be re-rented or sold, even though the notice itself is only a minimum 60 days. Tenants have the right to wait for that hearing.

Closing Date Considerations

When buying a tenanted property for personal use, clients are advised to be prepared for the tenant not moving out by the closing date. In one case the clients were living at home with their parents buying their first house, so it wasn’t a major issue if the move-in was delayed. The same situation can arise for an investor — if they can’t take possession on the closing date, there can be room to renegotiate a better price for the inconvenience. It becomes more complicated for a personal-use buyer who also has a property to sell and needs to move in, creating a domino effect.

Purchase Agreement Clauses

A paralegal can’t recommend specific clauses, but a buyer needs to determine upfront whether they’re assuming the tenant or want vacant possession, since clause two of the agreement of purchase and sale already states the seller shall guarantee vacant possession. If the buyer is willing to assume the tenant, that can be a further point of price negotiation. If an N12 will be used for personal use, the process should ideally start with the seller before closing — since the minimum 60 days’ notice and one month’s compensation should come from the seller — and then continue with the buyer after closing. That N12 must be flawless: any mistakes in the paperwork can get it dismissed once it reaches the board.

With multifamily properties, it’s harder to find something fully vacant — buyers are often taking on somebody else’s tenants. A single-family home is easier to find vacant or turn into an investment property without an existing tenant. With multifamily, due diligence on the existing tenants, leases, and agreements already in place is critical, since the new landlord has to agree to everything already in effect.

Essential Due Diligence Documents

There are three things a buyer should check before closing on a tenanted property. First, whether there’s an existing lease agreement — if so, confirm whether it’s month-to-month, the terms, and whether there are any existing deficiencies or orders against the landlord. Second, a tenant acknowledgement if there’s no lease in place, so the buyer knows exactly who the tenants are, since a notice can only be served to known tenants. Third, the seller should sign a direction to the tenant stating that the buyer will be the new landlord after closing.

Thanks everybody for joining us — this has all been about buying a property with tenants in place. Thanks so much, Rob, and thanks everyone for tuning in. If you’re finding it informative and useful, make sure to like, subscribe, and share with a friend so we can keep getting information out to Ontario landlords. We’ll see you next time.