TorontoRealtyBlog

A reader emailed me a rather unique listing the other day, and I figured I’d put it in the mental queue for blog material.

But when a second reader emailed me about it, and when I overheard a conversation at my office about it, I figured it’s probably worth discussing.

What the heck is a “tenant in perpetuity?”  And what does it mean when you’re looking to buy a property with a tenant in perpetuity attached?

Oh boy.  Where do we begin…

I suppose after Monday’s blog, maybe some folks are gun-shy about the subject of tenancy.

I received several emails about Monday’s blog, a few out of genuine concern that the “tenant” may be somebody in a vulnerable position, and of course one email that simply called me an asshole and said I was discriminating.  I wonder why that person didn’t just comment on the blog post?  Personal attacks always make for a good read!

I think the entire subject of “tenancy” has become a bit stickier since the Liberal government introduced a slew of measures to try to discourage any human being from ever being a landlord again, but alas, the might of those capitalists in society is far greater than misguided attempts by politicians to gain favour with voters.

I’ve sold more condos to investors in 2017 than in any previous year, but not once have I ever told a client that being a landlord is easy.

Monday’s blog showed us what kind of potential tenant comes knocking on your door, and in today’s ever-changing societal climate, you have to be very careful, how, and when, you say “no” to somebody.

The story in Monday’s blog was interesting, but not unique.

Every day in Toronto, offers and applications like the one I received in that story are submitted on residential properties.  Not all tenants are truly “Triple-A.”

The story I’m going to tell you today, however, represents a true “new one” for me!

For somebody who thinks he’s seen it all in this business, I’m always excited by new experiences, and the opportunity to wipe my proverbial brow and say, “Well, this is a new one!”

And indeed, this is…

The subject line of today’s blog pretty much tells you where this story is headed.

“A tenant in perpetuity.”

If you’re like me, you’ve never heard the term before.

“Perpetuity,” by definition, simply means an indefinite period of time.

The term has certain meanings in the world of finance, when it comes to a constant stream of identical cash flows with no end, but that’s not the context we’re using today.

For our purposes, “perpetuity” means, forever, or, at least until something changes that is beyond your own control.

“A tenant in perpetuity.”

Just think of what that means.

A tenant…….forever?

Let me cut to the chase here, folks.

A property was listed for sale this week in Toronto, and in the Broker’s Remarks, it made mention of the fact that this property is being sold with “a tenant in perpetuity” attached.

While no explanation of what that meant was provided, the brokerage’s Schedule B provided us with the following four clauses:

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The Seller represents and warrants that the subject property is occupied by (First Name, Last Name), on a month-to-month tenancy, IN PERPETUITY at the current rate of ONE THOUSAND FIVE HUNDRED and TWENTY FOUR Dollars and TWENTY TWO Cents ($1,524.22) per month, including utilities, payable on the FIRST DAY of each month.  The Parties agree that this representation and warranty shall survive and not merge on completion of this transaction, but only apply to those circumstances at completion of this transaction.

The Buyer hereby acknowledges that the subject property is currently tenanted IN PERPETUITY and the tenant can not be removed for the purpose of the buyer’s own use.  The Buyer further acknowledges that, should they choose to sell the property in the future, this “tenancy in perpetuity” runs with the property and no future buyer will be able to remove the CURRENT TENANT for their own use of the property.

The Buyer acknowledges that the current tenant has first right of refusal to purchase the subject property upon the same terms and conditions as any bona fide Offer to purchase the property that the Landlord has received and is wiling to accept.

THIS OFFER IS CONDITIONAL for a period of FOUR (4) business days (not including Saturdays, Sundays, and Statutory holidays) after acceptance of this offer upon the Seller not obtaining from the current tenant a bona fide Offer to purchase based on the same terms and conditions of this offer to purchase.  In the event that the Tenant submits to the Landlord, within the same time period described above, a written and signed Offer to purchase for the property upon the same terms and conditions as the Offer initially received by the Seller, this offer shall become null and void and the deposit returned in full to the Buyer without interest or deduction.  In the event that the Tenant fails to deliver to the Seller, within the same time limit described above, a written and signed Offer to purchase the property on the same terms and conditions as the initial Offer, the Seller shall be at liberty to sell the property to the Buyer who submitted the initial Offer and provide written notice to the buyer within the same time limit described above.  This condition is included for the benefit of the Seller and may be waived at their sole option.

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Please tell me you read that, and didn’t skim.

If you simply read “in perpetuity” a couple of times, and scrolled to the bottom, seriously – read it!

Because I think there’s a reasonable amount of debate to be had about whether or not this is legal.

I asked our in-house legal counsel what he thought, and he said simply:

“It appears that the landlord has granted the tenant unlimited rights to renew the lease at the tenant’s option. This creates a “perpetual lease”, which means that the landlord can’t get rid of the tenant without the tenant’s consent. “

And as the second clause spells out, the clause “runs with the property,” much like a right-of-way, or an easement would.

But if you’re like me, your mind is spinning with questions.  Here’s what my brain rattled off when I first read these clauses:

1) What the hell is going on here?

2) Is this legal?

3) Why would any property owner agree to this lease?

4) What is the actual market rent of the property?

5) Could a buyer fight this in court?

6) Why would any buyer be interested in this property?

And on, and on.

So let’s try to answer these.

1) What the hell is going on?

I can only answer this with more questions!

Why is this property for sale?

What kind of seller thinks this sort of thing will fly in Toronto?

How common is this?

Why have I never seen this before?

Is there a lease in place?

2) Is this legal?

It appears as though it is.

If you think about an apartment building, those tenants are all essentially tenants “in perpetuity,” by virtue of the fact that the individual unit can’t be sold, like a condominium, and thus there’s no option for the new “buyer” to evict the tenant based on the owner-occupancy rule, like a condominium.

The difference here, is that this property is a house, not a unit in an apartment building.

While you cannot contract out of existing law, there’s nothing to stop two parties from entering into a legal agreement, where that agreement runs with the property.

3) Why would any property owner agree to this lease?

This is probably the most interesting part of the equation.

I don’t think any reasonable property owner would agree to this type of lease, so I have to think that the landlord and the tenant are involved in some capacity.

Be creative, think of a scenario.

The owner of the property is related to the tenant, and has found a way for the tenant to live in the property for a discounted rate, even after the owner sells.

There’s a holding company that owns the property, and the owner of the holding company is the tenant.

I’m sure we could think of a dozen other scenarios.

But bottom line, I just don’t see any owner ever agreeing to this, without some sort of personal interest in the equation.

4) What is the actual market rent of the property?

Without having seen it, I’d have to speculate around $2,000 per month.

But bottom line, the contractual rent is far lower than the market rent.

5) Could a buyer fight this in court?

Even though it appears to be legal, I just don’t think it passes the sniff test.

However, despite any argument in court about the Residential Tenancies Act, and how the idea of “perpetual tenancy” might not supersede a buyer’s right to evict a tenant for their own personal use, I think the clauses in the brokerage’s Schedule C would prove that any buyer of this property knew what he or she was doing.

That’s why, after all, the clauses were included in the first place.

Those clauses might be repetitive, but they clearly make the buyer aware of the situation.  There’s no way a buyer could plead ignorance in court down the road.

6) Why would any buyer be interested in this property?

The only conceivable reason why a buyer would be interested in this property would be if it were available at a significant discount.

The rent is below market.

The tenant can live there forever.

The legalese is uncertain.

There’s no reason for any rational buyer to look at this property, unless, the property were available for an amount below fair market value that was enough to make up for the associated risks.

How much under fair market value?

That’s up to each individual buyer.

The second clause clearly specifies that any future sale of this property would also incorporate the “tenancy in perpetuity,” so the discount that a buyer receives today, would also be present when that buyer goes to sell.  Unless, of course, the tenant is no longer living in the property.

And that’s the end-game here.

How long will the tenant live in the property?

If a buyer purchases this property, and the tenant leaves by his or her own free will in five years, then perhaps the discount on the purchase was worthwhile.  But if that tenant is still present in twenty years?  Then is this really a good investment?

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There’s more to this story, and more information we would could benefit from.

For starters, are there any rental increases outlined in the lease?  If not, that makes the purchase even less appealing than it already is.  And another legal question would arise: can the landlord legally increase the rent by the provincially-mandated amount each year?  Even if it doesn’t state as much in the lease?

We’d also like to know if there are qualifications for the tenancy in perpetuity, ie. if the tenant fails to pay the rent, or commits some other evictable offence, can the landlord kick him or her out?

I know a lot about the Residential Tenancies Act, and I’ve handled probably 150-200 leases over the years.

But I’ve never seen anything like this.

And the idea that one cannot “contract out of existing law” has me scratching my head here.

Like I said, this is a new one for me!

I will be very interested to see when, or if, this property actually sells…

The post What Is A “Tenant In Perpetuity?” appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.