Real Estate Law News
By: Gregory Mallia
Purchasing Tenanted Properties with the Intention of Personal Occupation
Throughout 2021, the combination of high demand and low supply of residential real estate in Hamilton has created an ultra-competitive marketplace with record-breaking prices. Prospective purchasers are doing all they can to obtain an advantage when submitting offers to buy real property and sellers are looking to off-load their asset with minimal responsibility while receiving the maximum amount of profit in return.
At the forefront of this pricing boom is an increased level of aggressiveness employed by eager purchasers, from the submission of offers without conditions to offers that are grossly over the asking price. One approach has been the submission of offers for the purchase of tenanted properties, and the assumption of those tenants by the purchasers on closing, despite the intention of the purchaser to owner-occupy the property.
The perceived strategy of offering on tenanted property is that it reduces competition; many prospective purchasers wish to avoid the challenges of assuming tenants and dealing with the eviction process. This strategy involves risk, as rising prices of real estate, low supply of housing and the COVID-19 pandemic has created volatility in the rental market, such that tenants are reluctant to vacate their residence. An ill-prepared purchaser may receive more than what he or she bargains for in this situation, especially if the tenants are steadfast in their refusal to vacate and prolong the eviction process.
This article offers suggestions to those counseling purchasers who are considering an offer on a tenanted property, by outlining the key steps as set out in the Residential Tenancies Act, 2006 S.O. 2006, c. 17 (“RTA”), that allow landlords and new purchasers to avoid delays in the removal of tenants from property where the purchaser’s intention is to occupy the property for personal use.
The N12 Notice
Section 49 of the RTA permits a landlord (as defined in the RTA) to give the tenant of a unit notice terminating the tenancy, if the purchaser of the property, in good faith, requires possession of the residential property for personal occupation. To initiate the eviction process, the seller/landlord must serve on the Tenant a “Notice to End Your Tenancy Because the Landlord, a Purchaser or a Family Member Requires the Rental Unit”, known as an N12.
The N12 must be served in accordance with the Landlord and Tenant Board Rules. It must be completed in the prescribed form provided by the Landlord and Tenant Board (“LTB”), must contain a termination date not less than 60 days from the date the N12 is served and must be the last day of the rental term. For example, if the lease is a month-to-month tenancy ending on the last day of each month, and if an N12 is served prior to the end of the month, the termination date specified on the N12 would necessarily be 60 days from the end of the month, not 60 days from the date of service.
Once the N12 has been properly served, the seller/landlord is able to commence an L2 Application to End a Tenant and Evict a Tenant, until 30 days from the end of the termination date specified in the N12 to submit an L2 Application.
The L2 Application
Upon service of proper notice on the tenant, the seller/landlord and purchaser will want to ensure the L2 Application is successful. The L2 Application will require sworn evidence, satisfying the LTB that the requirements of the RTA are met, specifically, the requirements of good faith and tenant compensation.
Of critical importance to the L2 Application for the purchaser’s personal use is the element of good faith. The LTB must be satisfied that the purchaser has a genuine intention of the purchaser to reside at the property; a sworn affidavit from the purchaser outlining this intent is best practice. In some circumstances, the L2 Application may be strengthened by further evidence that the purchaser intends to occupy the property on a permanent basis, such as reasons tied to employment, education or other sworn evidence of a convincing nature that leaves no doubt as to the intention of the purchaser.
Compensation paid to the tenant is the second critical element for success on an L2 Application. The RTA provides that the landlord must provide either (i) alternative living accommodations to which the tenant is agreeable; or (ii) compensation in the amount of one (1) month’s rent to the tenant prior to the termination date.
The seller/landlord will want to avoid the common mistake of withholding compensation until the hearing date or until an Order for eviction is rendered. Exhaustive attempts should be made to ensure compensation is paid prior to the termination date. Recent amendments to the RTA and its regulations have strengthened this requirement, so that if compensation is not paid within the prescribed time, the L2 Application may be dismissed.
There are circumstances outside the seller/landlord’s control where compensation is not paid before the termination date. If the Tenant refuses to accept compensation or refuses to cooperate with the seller/landlord in providing same, a strong argument exists that the L2 Application should not fail on this basis, alone.
Conditions in Agreement of Purchase and Sale
Upon learning your client wishes to submit an offer to purchase a tenanted property, counseling the client on the above items and having the process begin before closing may shorten the time between completion of the transaction and eviction of the tenant, as the LTB is significantly delayed in offering hearing dates on L2 Applications.
The purchaser can begin the process by including conditions to the Agreement of Purchase and Sale, such as (i) the seller/landlord provide evidence that the tenant was properly served with an N12; (ii) the seller/landlord provide evidence of good faith efforts to pay compensation to the tenant prior to the termination date; and (iii) the seller/landlord provide evidence that an L2 Application is submitted upon service of the N12 and prior to 30 days after the termination date. The purchaser is also encouraged to provide a sworn affidavit to the seller/landlord for inclusion in the L2 Application, outlining the purchaser’s intention to occupy the property for personal use.
If the above conditions are accepted as part of an Agreement of Purchase and Sale, a purchaser client can be expected to be appreciative of the eviction process getting underway without the purchaser having to invest significant time or funds, ultimately leading to a great value-add proposition in a market where any advantage is welcome.
Greg is a Partner at Regency Law Group and can be reached by phone at 905-383-0500, by email at [email protected], or by visiting regencylawgroup.ca.