When Two Worlds Collide: Selling Tenant Occupied Properties
May 1, 2022
Our real estate market is as hot as the Arizona desert in July. Demand for property rises as inventory declines. Home sales and the rental market are the driving forces behind this growth and demand. Rents are increasing at an unprecedented rate. It’s a great time to take advantage of the increase in property values. It’s also a great time to take advantage of the increase in monthly rental cash flow. But, what happens when these two worlds collide?
What if a Seller has a property with a tenant in place and the Buyer doesn’t want to be a landlord? What happens to the tenant? Can the tenant terminate the lease because of the change in ownership? Does Buyer have to honor the lease? Can the Seller put a lockbox on the property or hold an open house? Is the tenant required to allow showings?
The Arizona Residential Landlord/Tenant Act (“ARLTA”) defines a landlord as the Owner of the rental property. When the property is sold, Seller ceases to be the Owner but the Buyer may now stand in the shoes of that Seller even though the Buyer was not a party to the lease. The best practice for the Seller is to disclose the existence of the tenancy in the listing and ensure that the lease, pro-rated rents, and deposits are transferred in the Purchase documents. Failure to do so may result in an unlawful ouster and the tenant could sue Seller for breaching the contract and recover an amount equal to twice the monthly rent or twice the amount of the tenant’s actual damages, whichever is greater pursuant to ARS 33-1367.
Showing the property with a tenant in place is a challenge. A.R.S. 33-1343 states the Landlord has a right to “exhibit the dwelling unit to prospective or actual purchasers” and that a tenant “shall not unreasonably withhold consent to the Landlord to enter into the dwelling unit.” The Landlord “shall not abuse the right to access or use it to harass the tenant.” The statute requires a Landlord to give the tenant “at least two days’ notice of the Landlord’s intent to enter and enter only at reasonable times.” If the Landlord (or the Landlord’s agent) “makes a lawful entry in an unreasonable manner or makes repeated demands for entry otherwise lawful but which have the effect of unreasonably harassing the tenant,” the tenant may recover an amount “not less than an amount equal to one month’s rent” for each infraction. However, the Landlord may also to evict the tenant for refusing lawful access. A.R.S. 33-1376.
The delivery of the Access Notice itself can be tricky. A Notice delivered via email, text, first class mail or posting on the door requires proof that the tenant actually received it. Without such an acknowledgement by the tenant, proper notice has not been given. Notice will be “deemed received” after five (5) days of it being mailed certified or registered mail even if the tenant does not pick it up. As a reminder, certified/registered mail of an Access now requires the Landlord to wait up to seven (7) days to legally access the property. A.R.S. 33-1313(B). Delivery “in hand” to the tenant (not to the tenant’s door because doors don’t have ‘hands’) is the only method that does not require more to achieve proper service.
In addition, a court may determine that a notice stating the Landlord intends to enter at 10:00 am every day for a week, a lockbox that would allow access to the property by people other than the Landlord, and an open house may all be unreasonable. The purpose of the law is to balance the Landlord’s right to sell with the tenant’s right to peaceful enjoyment. The simple solution? Use a Realtor that understands the law or contact your attorney before taking action, not after these worlds collide.
Co-authored by Denise and Kevin Holliday, partners at Hull, Holliday & Holliday, PLC. www.h3landlordlaw.com