SELLING TENANT-OCCUPIED COMMERCIAL PROPERTY

August 27th, 2018

Selling a tenant-occupied commercial property sounds scary, but in practice, the building’s tenants won’t be affected all that much. Below are answers to the most common questions asked when conducting this type of transaction. However, despite the answers to these questions, landlords should always review the language of the governing lease agreement as this will be the primary law governing the process.

First, should you notify your tenants of a potential sell? In most situations, the answer is no. Your tenant’s will likely not be effected by the transition, and knowledge that you are thinking of selling is often enough to worry tenants and make them consider other options. This sudden panic can create hesitation by the prospective buyer and ultimately cause a deal to sour. Therefore, unless the lease agreement requires notice for a potential sale or transfer, it is not recommended to notify the commercial tenant’s just yet.

Next, what happens to the Tenant’s leases? Typically, these leases are assigned to the new owner of the property. Unless one of the tenants has an expired lease or fails to have a formal lease at all, the new owner will not be able to immediately remove the tenants after the purchase without going through a formal eviction process. To be evicted, a material breach of lease agreement must exist, typically in Minnesota this means the failure to pay rent. Alternatively, the new owner may not even be planning to evict any of the tenants. In fact, most commercial property owners want as many tenants as they can have and for as long as they can, as this is good for business.

Next, will the tenant need to sign a new lease with the new owner? Once again, the current lease between you and your prior tenants will govern the new relationship between the tenants and the new landlord. Therefore, the new owner may ask the tenants to sign a new lease, however, the tenants do not have to do so until their current lease expires. However, to persuade the tenants to sign a new lease agreement, the new landlord may offer incentives, such as a short-term price reduction, or an expansion of the premises. However, it is important to note, the tenants will have the power to negotiate, as once again, so long as the prior lease remains in effect, they do not have to sign anything.

Lastly, should the tenant security deposits be credited back to the tenants? Minnesota law requires that tenants receive their security deposits timely and in full unless damages are present. Minn. Stat. § 504B.178. Therefore, at the end of each lease, someone will need to return the tenant’s security deposit. The most common solution to this problem is to transfer the security deposits along with the tenant leases from the seller to the buyer on the HUD-1 Statement. Thereafter, the new owner will be responsible for funding the deposits at the end of each lease so long as the tenant fully complies with the terms of the lease.

These types of transactions are common and should be handled with care to avoid litigation. Prior to doing anything it is important to review each lease agreement and consult your attorney.

This article was sponsored by Vlodaver Law Offices, LLC, an experienced business solutions and transactions law firm in the Twin Cities. If you would like a free legal consultation, contact us.