Residential property transactions involving a tenancy
Always take extra care with residential real estate transactions involving a tenancy. Failure to properly deal with tenancy issues or providing improper advice to your clients may result in a successful E&O claim being brought against you. Here are some important issues to keep in mind, plus practical tips to help you avoid claims when dealing with tenanted property.
Acting for a seller
Ask for a copy of the lease from the landlord/seller to confirm the tenancy details and to determine whether it is a fixed term or month-to-month tenancy. If it’s a fixed term lease, the tenancy does not end until the termination date on the lease (which generally converts to a month-to-month lease unless it’s renewed for another fixed term), and the tenancy will continue under the terms of the original lease when the property is sold. If it is a month-to-month tenancy, the tenancy may be terminated only if certain conditions in the Residential Tenancy Act (RTA) are met.
Investigate whether the rental unit is legal. If the rental unit is unauthorized accommodation, it is considered a material latent defect and you must disclose it to potential buyers. (Real Estate Services Rule 59 (1) (d).)
Review with your seller the tenant’s rights and obligations under the RTA while the property is being sold. Advise your seller to notify the tenant that they are intending to sell the property.
Acting for a buyer
Discuss whether your buyer is interested in purchasing property with an existing tenancy or wishes vacant possession of the property. If the buyer wishes vacant possession of a tenanted property, you should familiarize yourself with the RTA requirements including those for giving appropriate notice (two months) to the tenant. The seller’s agent should also be familiar with this legislation.
Showing the tenanted property
A tenant has exclusive possession of the rental property subject to the landlord’s right to enter. If the landlord/seller and tenant can’t agree on the date and time of showings and open houses, the landlord/seller or their agent must give proper written notice to the tenant under the RTA to enter the property. A buyer or buyer’s agent cannot enter the rental property unless the landlord/seller, or their agent, is present. The tenant can remain at the rental property during showings and open houses and cannot be forced to leave.
Failure to follow the RTA requirements could result in the tenant making an Application for Dispute Resolution to the RTA against the landlord/seller for unreasonable or unlawful entry. If the tenant refuses to allow reasonable or lawful entry to the property, recommend your seller get independent legal advice about their options.
You must also stay informed about and follow any public health COVID-19 restrictions regarding showing tenant-occupied properties.
Contract of Purchase and Sale
Both the seller’s and buyer’s real estate representatives must ensure the Contract of Purchase and Sale (CPS) accurately reflects the tenancy and the wishes of their clients.
In Aulakh v. Nahal 2017 BCSC 1000 (affirmed on appeal 2019 BCCA 57), the real estate representative acted as a disclosed dual agent for a property with two rental units. The CPS she drafted required vacant possession by the seller on completion and made no mention of the existing tenancies. The representative testified at trial that she believed the buyer would keep the existing tenants and that the buyer and seller would deal on their own with tenancy issues. The court found her negligent for failing to record in the CPS what would happen to the tenancies. She was also found negligent in not following up with the buyer and seller regarding the tenancies before closing.
Tenancy continuing after completion
Ensure the CPS states that the property will be subject to an existing tenancy. Include the tenancy details in the CPS and/or attach the tenancy agreement. Also discuss and document the transfer of any existing security deposits.
The tenant must consent to the disclosure of the tenancy details and/or the tenancy agreement before it’s provided to the buyer, because it contains the tenant’s personal information. If the tenant refuses to consent, the landlord/seller should obtain independent legal advice on this issue.
If there are any other outstanding matters between the tenant and landlord/seller (for example if there are rent arrears or an agreed rent reduction to cover an improvement made by the tenant), both the seller’s and buyer’s real estate representatives should recommend their clients seek independent legal advice to ensure these matters are properly documented and dealt with in the CPS.
If the property contains unauthorized accommodation, consider including an Unauthorized Accommodation clause in the CPS so that the buyer acknowledges the property contains unauthorized accommodation and understands the potential consequences.
Ending the tenancy before completion
Unless a landlord (seller or buyer) serves a proper notice to end tenancy, the tenancy continues under the terms of the original tenancy agreement. If the buyer is intending to end the tenancy, the CPS should reflect this and a Notice to End Tenancy clause should be included in the CPS.
When the buyer or a close family member of the buyer plans to occupy the property, the buyer or buyer’s agent may request the landlord/seller end the tenancy before completion and possession of the property, in accordance with RTA Landlord’s Use of Property requirements. A month-to-month tenancy can be ended on two months’ notice, if the buyer will be living in the property themselves or a close family member will live there. The RTA defines a close family member as limited to the parent, spouse or child of the landlord or the parent or child of the landlord’s spouse.
It is important the completion and possession dates in the CPS give enough time to properly serve the tenant with the notice required under the RTA, so the property is vacant for the buyer’s use by the possession date. Failure to give timely and proper notice to a tenant could cause costly delays before the buyer lawfully gains access to the property, which could result in a potential claim against a real estate representative if their actions or improper advice contributed to the delay.
A former tenant can apply to the RTA for additional compensation if they believe the notice to end the tenancy was improper. The onus on such applications will be on the landlord/buyer to prove they used the rental unit for the purpose stated in the notice to end the tenancy. If the landlord/buyer cannot prove this, the amount of the compensation is equal to twelve times the monthly rent before the tenancy ended, unless there are extenuating circumstances. If the notice was improperly given based on the agent’s advice, a buyer may seek to recover any additional compensation paid to a former tenant from their real estate representative.