By Tia Politi, ROA President
With the passage of SB 608, buyers, sellers and realtors are finding that the law’s mandates are dramatically changing the world of property sales when there are tenancies of more than one year in place. The new law restricts a landlord’s ability to terminate a tenancy of more than one year to a for-cause termination, or for one of four Qualifying Landlord Reasons: 1) the property is being demolished or converted to a different use within a reasonable time; 2) the landlord intends to undertake repairs or renovations to the property within a reasonable time and the property will be unsafe or unfit for occupancy during repairs or renovations; 3) the landlord intends for the landlord or a member of the landlord’s immediate family to occupy the dwelling unit as a primary residence and the landlord does not own a comparable unit in the same building available that is available for occupancy; or 4) the landlord is selling the property separately from any other unit to a buyer who intends in good faith to occupy the dwelling unit as their primary residence.
It’s becoming clear that especially for sellers of single-family homes, planning will need to start well in advance of offering their property for sale.
Buying or Selling a Single-Family Home
For an owner selling a single-family home occupied by a tenant for longer than one year to a buyer who wants to occupy the home as their primary residence, the new law requires that the tenant be provided with a 90-day notice of termination, and that at the time the notice is delivered the landlord also provide written evidence of the offer to purchase the unit not more than 120 days after acceptance (names and private information can be blacked out), and state that the buyer intends in good faith to occupy the dwelling unit as a primary residence.
How is a seller to know if a buyer will want to keep the property as an investment and be willing to take on the existing tenancy, or if they want to purchase the home to live in? They won’t until they get an offer. If a buyer does want to live in the property and makes an offer, most buyers will need to get a mortgage to purchase, have an interest rate lock that expires in 45 days, and be required to occupy the home within 30 days after closing, so what are buyers and sellers to do?
For a full cash sale, once the offer is accepted, the seller can provide the tenant(s) with ORHA Form #5A - Notice of Termination-Qualifying Landlord Reason, check the correct box, provide the evidence of the accepted offer to purchase, and pay the tenant the relocation expense of one-months’ periodic rent unless exempt. (Owners of four or fewer dwelling units are exempt from the payment of relocation expenses.) The notice must be prepared and served in accordance with ORS 105, and will remain in effect for the next owner. Even with an all-cash sale, however, the buyer could end up purchasing a huge liability if the seller failed to prepare and serve the notice in accordance with the law. The tenant could choose to stay and challenge the notice. If the buyer proceeds to eviction court, and they have inherited a defective or imperfectly served notice of termination, they could lose the case in court, have a judgment against them, possibly have to pay the tenant’s attorney, and start over again.
In a case where a seller believes that it is likely the property would be sold to a buyer who wants to live in the property, and will need to get a mortgage to purchase, the best option may be to remove the tenant for another Qualifying Landlord Reason, such as the owner intends to undertake repairs or renovations to the unit within a reasonable time and the unit will be unsafe or unfit for occupancy during repairs or renovations.
The question then becomes, how significant do the repairs or renovations need to be in order to claim the right to terminate? It depends. The owner may be challenged and have to justify their decision to a judge, so need to be prepared to think about this ahead of time. Many repairs or renovations would make a property unsafe or unfit for occupancy, and most contractors will refuse to do substantial work in a unit with tenants in place, but sellers should make sure they can justify the level of work they are doing to prepare to sell.
Realtors encourage sellers to spruce up the unit prior to marketing, so a full interior repaint would likely qualify as would replacement of flooring throughout, kitchen or bath remodels, etc., but things like new windows may not as new windows can be installed from the outside and would not make the property unfit for occupancy during the install. (As a side note, remember that your insurance company will likely not provide full coverage for your unit if it is vacant for more than 30 days, so sellers should have a plan for that, such as a house sitter.)
The Duplex Rule
SB 608, does provide a narrow exception to the new termination rules for owners with two units on the same tax lot where one unit is their primary residence. The new law continues to allow termination of tenancy for no-cause with a 60-day notice, or with a 30-day notice if the property is to be sold and the buyer intends in good faith to occupy the tenant’s unit as their primary residence. If the buyer does not intend to occupy the tenant’s unit as their primary residence, then the tenant comes with the property. There are pitfalls in this scenario as well, and while the exemption exists for this type of property, landlords are still obligated to payment of the relocation expense of one-months’ periodic rent at the time the notice is delivered, unless exempt. (Owners of four or fewer rental dwelling units are exempt from payment of the relocation expense.) Use ORHA Form #5C – Notice of Termination – Two-Unit/Owner-Occupied Property.
If the duplex is being held as an investment property and the seller does not live in one unit, but the buyer wants to occupy one side as their primary residence after closing, the same rules would apply as if for a single-family home. If the tenancy has been in place for more than one year on the side the buyer wants to live in, the seller would either have to issue the 90-day notice of termination – Qualifying Landlord Reason, for one of the four reasons allowed by law, or sell the property as-is and the buyer can issue the notice for the qualifying reason of wanting to live in the unit as their primary residence. Once the notice expires and the tenant vacates, the buyer can then move in.
Cash for Keys
This is a tried and true method for regaining possession of a property and nothing in the new law prohibits both parties from making a mutual termination agreement. Just make sure that the terms are clearly spelled out in writing, and that the agreement states what will happen if the tenant complies and what will happen if they don’t comply (It’s a smart decision to have an attorney draft the agreement). Also, don’t hand over the cash until the resident is ready to hand over the keys.
Marketing an Investment Property
SB 608 does not impact property sales where the seller and buyer are both investors and the buyer won’t be living at the property, but there are still issues that can make the property easier or more challenging to market – mostly in regards to the price of rents, the quality of the tenancies, and the completeness of the seller’s documentation.
Owners who have under-market rents will find that their properties cannot prove sufficient cash flow to meet the demands of sophisticated investors, and they won’t be able to command the same price. If you are planning to sell an investment property in the not-too-distant future, and your rents are below market, plan ahead to increase rents within the limits imposed by SB 608 until your rents are market rate so that your property can command the best sales price.
The quality of the tenants can help or hurt investment property sales as well. Residents who are keeping to their lease and caring for the property are a fantastic marketing asset for sellers; problem residents are not.
The completeness of the seller’s tenancy documents can also help or hurt the sale. If there are gaps or flaws in your paperwork, fix them now before you market your property for sale, or be prepared to accept a lower price as a buyer will have to agree to accept the increased liability and correct the deficiencies.
What does good paperwork look like? The rental agreement and all addenda are complete, initialed, signed and dated by all adult occupants; the seller has good documentation on the condition of the units on move in; there are accurate tenant ledgers; and good notes and copies of notices regarding lease violations during the tenancy.
Without good paperwork, a buyer may be purchasing liability. For example, the seller is marketing their property built prior to 1978, but has no signed lead-based paint disclosure. The penalty for this violation if reported to the EPA, is $6000. The buyer could require as part of the sale, that the seller fixes the deficiency in the paperwork so that they are not taking on that kind of liability. Or the buyer could agree to accept responsibility for fixing that problem after the sale, but use that deficiency to negotiate a lower price. To ensure they are fulfilling their fiduciary duty to their clients, Buyer’s Agents should request copies of all leases, addenda, and tenant ledgers and review them for completeness, or have an attorney review them. Also, any existing notices of termination should be reviewed by an attorney or professional consultant to ensure that they will hold up in court if the buyer purchases a property before a notice of termination expires.
Depending on the timeframe required for renovations, if owners are planning to renovate ahead of marketing their property, they should think about providing notice to vacate in November, December or January to hit the sweet spot on the sales season. I can’t stress enough how essential it is that owners ensure their notices of termination are prepared and served perfectly. A defective notice of termination can result in a loss in court. For sellers that can mean a lost sale; for buyers it can mean a long delay in being able to occupy the property; and for both it can mean a court judgment against them, payment of attorney fees to the prevailing tenant, and starting the process all over again.
Also, sellers need to consider that even with a good notice of termination in place, the tenants may not move out, requiring an owner to initiate an eviction action in court. If uncontested, the court process takes two or three weeks, with more time added if there’s substantial abandoned property to address; if contested, the process can be delayed further, so owners should factor that into the timing of the notice to vacate. And just to complicate matters even more, remember that tenants may still provide just 30 days’ notice to vacate which could throw off the timing as well.
A property sale with tenants in place for more than one year now requires better advance planning by sellers, more thorough investigation by buyers, and for realtors, it requires a higher level of due diligence than ever before. Fulfilling their fiduciary duty to their clients means educating themselves on the mandates of SB 608 and all of its intricacies to provide their clients with the best information possible as to the benefits, drawbacks and possible outcomes of selling rental property.
This column offers general suggestions only and is no substitute for professional legal counsel. Please consult an attorney for advice related to your specific situation.