What Is A “Tenant In Perpetuity?”

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…

TenancyAgreement

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:


 

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.

 


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?

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…

 

38 Comments

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  1. Zoe says:

    Sandra is correct, the tenant is not related to the owner, not sure why anyone would agree to this type of tenancy.

  2. lui says:

    Wonder if the tenant is a relative of the owner and couldn’t they be evicted when the lease is over and say the buyer wants to move their relatives into the rental unit?.What kind of insanity the seller was in to write this into a lease.I’m sure when it comes to money terms the tenant may get a nice move out bonus.

  3. Sandra says:

    This is covered under the Residential Tenancies Act 2006, Section 51. The tenant was a sitting tenant before the building was ‘condo’d’ (changed from rental units to legal condo units). Tenant stays forever. There are quite a few of them around Toronto. This is why the asking price is so low on the unit. Can’t get them out.

    1. Condodweller says:

      Those were rental buildings turned condo. This is a house. I have seen coops listed with this clause in the past.

      1. Sandra says:

        Yes, this was a house which had separated rented units. The owner changed the rental units to legal condo units. It falls under the RTA.

  4. Paul says:

    “I’ve sold more condos to investors in 2017 than in any previous year”

    That was the most alarming line to me in this whole post.

  5. Steve says:

    Apologize for all the cuts to many interrupts as I was saying have a water meter turned permit after permit ever get stuck in traffic city repair one person works five stand and the pothole takes forever just like the part of the dwelling they left and that light switch take forever think how much you will save on hydro and water

  6. Steve says:

    The seller probably protecting family or friend but make them a below market offer c if they bite and if they do after the sale.Can u say a major renovation have u ever tried living while the place is under co

  7. Tarea says:

    A lot of the questions you posed in this article could have been answered by reaching out to the realtor hired by the owner

  8. Ralph Cramdown says:

    Apropos of nothing, but why do the stock photos of “house keys” or whatever writers search for when needing a generic illustration for stories like this, always feature european-style keys? Nobody on this side of the Atlantic uses keys that look like that except for their grandfather clocks, do they?

    1. Kyle says:

      It’s not a geography thing, just an age of the home thing. Older homes with original doors in Toronto often still have/use those keys. Many of the keys are long gone, but I have several doors with the cartoon-esque key hole in my house and a few of the original keys left.

  9. steve says:

    Super bad idea … no reasonable buyer will touch this.

  10. ed says:

    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,

    Including utilities!
    Electric heat!
    Aaaaggghhhhh!!!

    1. Sandra says:

      The rental rate isn’t in perpetuity, just the tenancy itself. You can still raise the rent by the legally allowable rate per year.

  11. Condodweller says:

    Is it possible this was a government owned property at some point and it was sold to the owner with the condition of the perpetual lease? Perhaps it was sold at a discount and now the owner is asking market rate just to see if anyone bites? David or other resident realtors should be able to look up the history of the house correct?

    P.S. David keeps saying that you cannot contract out of law. I don’t know about real estate law, however, I believe you can contract out of other laws as long as it isn’t obviously bad for the one party. Prenuptial agreements and divorce agreements come to mind.

  12. Free Country says:

    I agree that if you are looking for a property to occupy, don’t even bother considering these questions and just walk away.
    If you are just looking for an investment, however, one approach would simply be to take the current rent of $1524.22 per month in perpetuity, apply a discount rate (per month, remember) and you come up with a present value. If I remember finance 101, 4% annual discount rate would be 0.3333% per month, for a present value of $457,311. That is a starting point for negotiation. There will of course be other considerations and adjustments – who pays the utilities and property taxes, and will you (as owner and landlord) bother paying for any upkeep or maintenance? But if you are just looking at it as an investment, a purchase for $450k (depending on the discount rate that you apply), plus the potential upside of the tenant possibly leaving (death? moving for a job elsewhere? simply deciding on their own to move elsewhere?), then it’s actually an attractive proposition. For an investor, not someone looking for a home to live in.

  13. Mike says:

    This is similar to my case before the courts of Shotgun Infinity vs. All My Friends

    It would never hold up in court. The Residential Tenancy Act gives way to other law and commercial contracts must be “reasonable” to be considered enforceable. You’re not going to find many people who will believe a contract for low rent and utilities for infinity is reasonable.

    Don’t believe me, put in an offer for any house you like for one hundred-billion dollars and a conveyance of $2. You now have legally binding contract but a contract that is in no way enforceable.

    The these clauses is to get the property at a price where it makes sense to litigate.

    1. Ralph Cramdown says:

      “Well your Honour, it’s like this. When I made a deal with B, which involved a promise to continue to uphold B’s promise to C, I was lying.” Sorry, where does your argument go after that? The court would shove its fist so far up your alimentary canal that it’d be the court’s words that come out next time you open your mouth. But feel free to give it a try.

      1. Mike says:

        Why have a judicial process then?

        You can sign anything you want, it has to be deemed reasonable by the court. You’re not arguing the binding contract, you’re arguing the fact that even though you agreed to it, the terms are unreasonable.

        You wouldn’t have a chance in Quebec under civil law but in Ontario you’d have no problem arguing the deal is not reasonable.

        1. Ralph Cramdown says:

          “It’s like this, your Honour. Regardless of whether the original lease was a bad deal, or unconscionable, or signed under duress, I, as the buyer, agreed to its terms, when I could have just as easily bought any other property which didn’t have such a crappy lease attached to it. Now I want you to free me from keeping my promise, because I’m a slippery bastard, and am hoping that the Court will agree that I don’t have to keep my promise, because my fingers were crossed behind my back when I signed.”

          Regardless of whether the original contract was bad, unenforceable, iffy or whatever… You make that contract good, enforceable etcetera when you knowingly subsumed. The original lease doesn’t appear to be illegal or unconscionable, just a really bad bargain. Good luck with that.

          1. Ralph Cramdown says:

            I should say that the original lease wasn’t necessarily bad… maybe the tenant paid $20k in exchange for the perpetuity, maybe it was signed a long time ago and the landlord thought it was a good deal at the time… All we can say for sure is that the part of the contract that the buyer is being asked to assume isn’t so good a deal, at the price the seller is asking.

            It has been interesting to think about, though. How can a maybe bad and maybe unenforceable contract turn into an enforceable contract when another party subsumes it? Even if the first owner had Alzheimer’s or was tricked or what have you, that doesn’t let the new buyer off the hook if HE knew of the lease terms.

    2. Sandra says:

      This is legal and binding under the RTA 2006 – not contracting outside the law. It’s covered in Section 51. This was a rental building which was then turned into condo units.

  14. Dan says:

    While I am not a lawyer, regarding the increasing rates, it appears that you may not. “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”

    It looks like an alternative to trying to do a reverse mortgage from the sellers point of view, and would potentially free up cash flow if they still had a mortgage on it.

    I was looking for the link to the article, but I recall there was another house owned by someone slightly famous in Toronto which had a similar condition attached to it -it was sold and they could live there until their death but it was at a much higher price point (sorry I can’t find it). There was a similar clause with the Playboy mansion as well if I recall correctly.

    For a buyer, it could make sense if -cash flow wasn’t a large issue; the tenet was older or in ill-health; it is significantly under priced from market value; and you would be able to carry the costs of what would likely be a net loss on a month to month basis for the foreseeable future. At this price point, I think it would be a tough sell.

    1. Condodweller says:

      It occurred to me as well that this may be a financial planning exercise for the owner to stay in their home after a sale without the downside of a reverse mortgage. AFAIK you must own the property outright in order to do a reverse mortgage though.

      I was actually brainstorming a similar idea and whether any investor buyer would agree to lease back to the owner after the sale with the a similar condition of perpetual lease however with a reasonable annual increase.

      I mean as long as the tenant has a good history of paying rent on time this may be a good thing for an investor as long as the price reflects the adverse lease conditions.

  15. Ralph Cramdown says:

    From your limited description, ain’t nothing wrong with the property that price won’t fix. The question is, how motivated is the seller? If you offer low, the tenant gets an opportunity to match, so your best bet is to go in with an all cash offer with a quick closing, and hope the tenant can’t arrange financing in time… if you want to buy, that is.

    As for breaking the lease, good luck with that. I hate statutory interpretation, but paragraph one of the Residential Tenancies Act starts off “The purposes of this Act are to provide protection for residential tenants …” Given the typical power imbalance between landlord and tenant over the centuries during which the common law has evolved, the assumption generally is that anyone wealthy and smart enough to own income property does not need protection from tenants who manage to negotiate overly favourable leases.

  16. Appraiser says:

    A property to be, and probably will be – avoided.

    1. Ralph Cramdown says:

      Gads! My comment above was based only on what David told us. Now that I know about the property, updated advice would be:
      a) offer what you’re willing to pay, conditional on the owner getting the tenant out, by whatever means (e.g. writing a cheque)
      b) conspire with the other unit owners to get the tenant evicted for bad behaviour.

      I’ve never understood the appeal of owning a 1/3 or 1/4 share of a detached, with the other owners able to sell to any old [censored] at any time. Like getting into a small business with unknown current and future partners.

      1. Agnese says:

        That’s what I don’t understand, yes our market is unpredictable right now, but people are not stupid desperate. I’m pretty sure that the property has been relisted because I swear I saw it some months ago. I would never in a million years buy into such ridiculousness, i’m curious if anyone else finds the situation the same. I could only see someone wanting that house or fighting to evict the tenet if they had some sort of emotional attachment to it. Sure its absolutely beautiful from the outside but the inside needs a complete gut. Also the place was not staged which begs the thought do the sellers actual feel so confident that the property will sell under the listed circumstances. You are essentially loosing money with this property right when you buy it. That being said though I noticed a lot of older street shops will sell the bottom half but keep the apartment on the top for themselves (shocking** as the bottom half is potentially worthless unless you are a starbucks or shoppers etc), I guess it’s comparable to that, no?

      1. Agnese says:

        My goodness that townhouse is a sight to see. I feel as if they are reaching with the price though, all things considered.

      2. Craijiji says:

        “Good for a first time buyer”…ya, if you also want to be a first time landlord…haha

    2. David (Not the David who runs this website) says:

      Agnese, thanks for the listing link. That property is located in a rather bad part of town, even if there was no “perpetual tenant’ I’d still think twice about buying it. That’s one of the places in Toronto where I would never go after dark and I wouldn’t hang around there for long even during the day.

      From the listing and the photos, it looks like someone spent a lot on keeping the place in good repair and looking good. Just looking at the decor and furnishings, I’m guessing that the current tenant(s) are older and have lived there for a long time and want to stay there.

      Even if the home’s value increases considerably in the next few years or so, the fact that a potential buyer would be stuck with a tenant paying less than market rent is a big turn off. On the other hand, maybe this home would appeal to some foreign buyer who needs a place to park their money and who has no intention of living in it.

  17. ed says:

    Another question. How old is the tenant? 95 and ready to kick the bucket?

    1. CB says:

      That was my guess. I know a lawyer that bought a house from an elderly woman, and she had lifetime rights.

    2. Ralph Cramdown says:

      This is the rare occasion where “tenant is a smoker” could be considered a plus.

    3. Buckley B. Buckington says:

      Reminds me of:

      In 1965, at age 90 and with no heirs, Calment signed a deal to sell her apartment to lawyer André-François Raffray, retaining a life estate. Raffray, then aged 47 years, agreed to pay her a monthly sum of 2,500 francs (€381.12) until she died. Raffray ended up paying Calment the equivalent of more than €140,000 which was more than double the apartment’s value. After Raffray’s death from cancer at the age of 77, in 1995, his family continued the payments until Calment’s death. Calment’s comment on this situation was reported to be, “In life, one sometimes makes bad deals.”[1]

    4. Interested Party says:

      As suggested by others, tenant situation is in accordance with RTA based on apartment-to-condo conversion, unit is being sold by original conversion developer as it could not be sold at the time due to tenant situation.

      Apparently tenant is 59 and in good health, with no intention of moving out or being bought out (unless maybe figure in hundreds of thousands is on offer). Uses property on a more part-time basis when in town for medical appointments, mostly living out of second home elsewhere and vacation property in Mexico. So potential is there for tenant to remain in place for well over 30 more years.

      Looking at this from a perspective of truly a perpetual apartment rental with ~2% annual rent increases, negative carry costs / need to continually pump in equity effectively FOREVER, what % discount rate would be most appropriate in order to value these cash flows for the purpose of calculating the “haircut” to apply to market value of property in order to come up with an offer (assuming one is crazy enough to consider such a highly, highly iliquid investment)?

TWEETS