The first step is obtain a copy of all written leases and sub-leases. Carefully review these documents then you want to examine each lease for the duration, if the tenant has the option to renew, rent amount, and security deposit amount. For example, if a tenant has a long duration lease with a small rent payment this may be something to consider when determining a purchase price. In addition, the purchaser should get a rent roll, which should contain the monthly rental amount for each unit and the corresponding security deposit.
In a real estate transaction the purchaser of an occupied building will receive a credit at closing for the amount of security deposits. However, the purchaser will then have to set up accounts for the security deposits. The seller will then keep the security deposits as he gave a credit to the purchaser in order to set up new accounts.[1]
The purchaser should also insist on the tenants signing an Estoppel Letter. An Estoppel Letter is a “signed statement by a party certifying for another’s benefit that certain facts are correct, as that a lease exists, that there are no defaults, and that rent is paid to a certain date. A party’s delivery of this statement estops that party from later claiming a different state of facts.’’ An Estoppel letter should state the security deposit amount and Monthly payment amount, date rent is due, and whether a lease exists or not. Once the Tenant signs the letter he is prevented from later denying the statements in the letter are true.
An Estoppel Letter is particularly useful if litigation does arise or if there are no known deposits and tenant later states he made a security deposit because it will be difficult for the purchaser to prove the security deposit amount as it will be your word against the tenants.
Finally, the purchaser should also require the seller to send letters of attornment to all tenants. A letter of attornment goes to each tenant and states that there will be a new owner and rent should be paid over to the new owner as of a certain date. It is important to have such a letter to avoid any confusion or delays in rent payment.
[1] N.J.S.A. 46:8-20: Procedure on Conveyance of Property