Buying a Home with Tenants in Toronto

Congratulation! You have found the ideal home! It might be a condo, house, or duplex you plan to live in or one you’re hoping to use as an income property.

There’s just one issue – there are renters already living there.

This is often the case with the types of homes in High Park, the Junction, Roncesvalles and Bloor West Village, where basements or multi-level homes have been converted into rental apartments, or properties that include retail and residential space.

Buying a home with tenants is a unique scenario. What do you do with the existing tenants? The transaction goes beyond the typical buyer and seller arrangement. It can be an especially complicated scenario for the buyer.

There is a lot to consider, whether you want to explore the possibilities of a vacant unit, evicting current tenants, or how the existing lease could impact the transaction.

You must also consider the critical legal ramifications on top of the practical implications. Here is everything you need to know about buying a home with tenants in Toronto.

Advantages of Buying a Home with a Rental Unit in Toronto

When considering the purchase of a home with an existing rental unit, such as a basement apartment, multi-unit property, or income property, there are several advantages that can make this an attractive option for homebuyers in Toronto. Here are some key benefits:

1. Supplemental Income

One of the most significant advantages of owning a property with a rental unit is the potential for supplemental income. The rental income can help offset mortgage payments, property taxes, and maintenance costs, making homeownership more affordable. This is particularly beneficial in a high-cost real estate market like Toronto.

2. Increased Property Value

Properties with rental units often have a higher market value due to their income-generating potential.

3. Flexibility in Living Arrangements

Owning a home with a rental unit provides flexibility in living arrangements. For instance, you can live in one part of the property while renting out the other, or you can choose to rent out both units if your living situation changes.

4. Tax Benefits

There are potential tax benefits associated with owning a rental property. Expenses related to the rental unit, such as repairs, maintenance, and property management fees, can often be deducted from your taxable rental income. Additionally, a portion of your mortgage interest and property taxes may also be deductible, which can result in significant tax savings.

5. Long-Term Investment

Real estate is generally considered a solid long-term investment. By owning a property with a rental unit, you can benefit from both the appreciation of the property value over time and the steady income stream from renting out the unit. This dual benefit can enhance your overall financial stability and investment portfolio.

6. Mitigation of Vacancy Risks

In a multi-unit property, the risk of total vacancy is reduced because it’s less likely that all units will be vacant at the same time. This can provide a more stable and predictable income stream than owning a single-family rental property.

7. Potential for Future Expansion

If you purchase a property with a rental unit, there may be opportunities for future expansion or conversion. For example, you could convert additional space into another rental unit or upgrade the existing unit to increase rental income. This growth potential can further enhance the property’s value and income potential.

But What Happens When You Buy a House with a Tenant in Toronto?

The first consideration is if there is an existing lease. A lease between the seller and tenants will legally remain in effect even after the closing date. A change of ownership does not cancel a lease. Even if you intend for it to be your primary residence, you can’t evict with an existing lease in place.

When you purchase a tenanted property, you assume the tenant, including the lease, terms of the lease, and current rental rate. The lease terms should be included in the Agreement of Purchase and Sale.

You can’t ask the current owner to evict the tenant. You must wait until the lease is over. The landlord can ask if the tenants want to leave, but they are not obligated to do so.

To get a vacant home, you can also negotiate a closing date that coincides with the end of the lease. Additionally, you may ask for an incentive from the buyer to take the tenants on, but the seller is not required to oblige.

Regardless of how you want to handle an existing lease, it’s essential to carefully follow Ontario’s Landlord and Tenant laws.

Purchasing a Home with Month-to-Month Tenants

When a residential lease expires in Ontario, the tenants automatically shift to a month-to-month tenancy.

If the tenant is on a month-to-month agreement, there are more options for taking possession of a vacant home. You can specify in your offer that you want vacant possession, putting the onus on the seller to work with the existing renters to end their tenancy. The only way to legally end the tenancy is if you, a family member, or a caregiver intend to take over the vacant unit.

Legally, the tenants must be given a 60-day written notice that the lease is being terminated. If you are looking for quick possession, it may not be possible with existing tenants. Additionally, you must provide one month’s rent as compensation for terminating the rental agreement.

It is important to remember that you must provide the tenants with an N12 (a notice of Eviction for Personal Use). It stipulates that any rental unit will be occupied by:

• you (the buyer/landlord)
• your spouse
• a child or a parent of you or your spouse
• a person who will provide care services to you or a family member.

So, it is illegal to evict the current tenants in order to get new tenants and raise the rent. If you evict tenants with an N12 form but then get new tenants who are not you or your family, that is considered a “bad-faith eviction.” In this case, the tenants can sue for wrongful eviction.

Becoming a Landlord

If you decide to keep the existing tenants, you must abide by the current lease agreement. That includes maintaining the existing rent cost. The law allows you to raise the rent by approximately 2.2 percent every 12 months. This amount is designated by the provincial government each year and can change. You can not exceed that rental increase.

You may ask the tenants to sign a new lease with a modified rent if they rent from month to month. However, they are not obligated to do so and can continue renting under the terms they agreed to with the previous landlord.

If finding new tenants is essential, you can make a financial offer to make moving worth their while. This is sometimes referred to as “cash for keys.”  It will cause an immediate financial loss, but you could make it up with an increased rent with a future tenant. If the tenants decide to vacate, they must sign an N11 (an Agreement to Terminate tenancy).

While a tenant cannot be forced to sign an agreement to end the tenancy, you still have the right to take your case to the courts to break a lease and end the tenancy when the landlord-tenant relationship has become fractured.

Therefore, as you complete an N11 form, this is what you will need:

• Name of the landlords and tenants
• Rental unit address
• Date the tenancy will end
• Signature of all parties (if possible)

Renovating a House with Tenants

When purchasing a new home, you may have plans to do a large-scale renovation. Legally, you can evict the tenants to perform a major renovation. You must give them 120 days’ notice beforehand.

Once the work is complete, the tenant has the right to move back into their previous unit. This is known as their “right of first refusal” to occupy the premises. The rent must be the same as before the renovations. The one catch is that the tenant must inform you before they move out that they want the unit after the renovation.

Get it in Writing

You must get everything in writing no matter what happens and who the tenant or landlord is. This is a critical practice of renting from a landlord or renting to a tenant. By obtaining every little aspect of your homeownership or tenancy, you can shield yourself should anything accelerate to an Ontario Landlord and Tenant Board hearing (more on this below).

Getting To Know the Landlord and Tenant Act

Regardless of the arrangement you want to take with a tenanted property, it is essential to review the Residential Tenancies Act. It is the law, and you must comply.

As this is a legal matter, your purchase deserves all the care required. Consider hiring an experienced real estate lawyer or an experienced paralegal to ensure you are adequately informed about the Residential Tenancies Act and that all the necessary stipulations are in the purchase agreement.

What You Need to Know About Landlord and Tenant Board Hearings

The Ontario Landlord and Tenant Board (OLTB) is a tribunal managed by the provincial government. It establishes resolutions relating to landlord and tenant issues. Landlords and tenants can file applications to the OLTB. Often, both parties will have to attend an OLTB hearing, which can be an intimidating exercise if it is your first time.

Here is what you need to know about Landlord and Tenant Board hearings:

Pay a Visit. It is highly recommended that you visit the location first to become more familiar with your surroundings and what to expect in a tribunal environment.

Be Professional. Whether you are a tenant who had a bad experience with the landlord or you are a landlord who lost thousands of dollars due to the tenant, you must be professional at all times. This can consist of being polite and respectful and dressing the part by sporting business casual attire. And, most important of all, be patient!

Documentation. The most important facet of a hearing is documentation. You must be prepared to bring as much evidence as possible to convince the board that you are correct. In addition to having all of the relevant documents, they should be organized and ready to submit. These documents can include paperwork, pictures, and witnesses (more on this below).

Bring Witnesses. Bringing witnesses to the hearing can also be a vital experience. If the individual refuses to attend the hearing, the board can submit a summons to require the witness to appear. Just be ready for this process, which will take a while.

Respect. In addition to respecting the other party, you will also want to politely address the Board Member as Chair or Madame Chair.

Sign In and Speak First. Be sure to remember to sign in when you arrive to confirm your participation. Additionally, if you initiated the hearing process, you will be speaking first to present your case to the board through an opening statement, information, and documentation.

Yes, this can be a nerve-wracking experience, but with enough preparation and research, it will be much easier than you thought! The Smith Proulx Team is here to help you understand and explore your options.

This article is not intended as legal advice. We recommend obtaining the guidance of a qualified paralegal or lawyer to navigate landlord/tenant issues.