The art of the tenant buyout deal
A tenant surrender of possession agreement, known more popularly as a tenant buyout agreement, is a meeting of the minds between the landlord and tenant that results in the tenant vacating the rental unit on their own accord.
The tenant voluntarily leaves the premises in exchange for compensation, a rent waiver, or both. There are a host of advantages to entering into a tenant buyout agreement.
More than “cash for keys,” a tenant buyout agreement releases all legal claims that can arise from the tenancy and gives the owner maximum flexibility. This means the owner has free rein on how to use his or her property.
A tenant buyout is not a highly regulated no-fault eviction. Nor is it an owner move-in or relative move-in eviction (OMI/RMI) that requires owners to live up to certain obligations like living in the residence for years. The owner can certainly stay in the rental business, unlike an Ellis Act eviction.
For the past 10 years, we would venture to say that our offices have probably brought more buyout agreements to a successful conclusion than any other law firm in the Bay Area. Depending on city or county, the actual document is five to six pages long - it is not brain surgery. The main concern is how to arrive at the agreement, and we impart some hard-won advice in this negotiating process.
Leaving attorneys out of the conversation
Whenever possible, Bornstein Law prefers that owners broach the topic of possibly buying the tenant out and engage in ongoing discussions with the tenant, with attorney coaching. The reason we would ideally like to be behind the scenes and not make unilateral contact with the tenant ourselves is that a call or a letter or email from an attorney can spook the tenant or give him or her some impetus to propose a huge dollar amount.
If the tenant hears from Bornstein Law, it is likely he or she will reach out to an attorney of their own. A savvy tenants’ attorney, who understands the value of a vacant unit, will more often than not make unreasonable demands. We will get a phone call something to the effect, “Mr. Bornstein, our client will gladly entertain leaving the residence in exchange for a waiver of 2 months rent and $95,000.” In a perfect world, we would like to leave legal counsel out of the conversation, but we know that this is not a perfect world we live in.
Sometimes, the landlord-tenant relationship is so acrimonious that productive chat cannot occur. Perhaps the owner is a bull in a china shop. In these cases, Bornstein Law is able to be an intermediary and enter into the buyout discussions.
Ask open-ended questions
One of the first rules of negotiation is to understand the interests of other parties and what they are looking for. It is often prudent to ask the would-be outgoing tenant open questions like, “what would you need to make an orderly transition?” Many times, the tenant needs less than what the owner is prepared to give. So, for example, the owner has looked at his or her numbers and is prepared to offer the tenant $20,000 and two months of waived rent, but doesn’t divulge that number. Instead, the owner asked the tenant what amount is necessary to voluntarily vacate and the tenant says $10,000 and a one-month rent waiver. Clearly, this is more advantageous for the owner, and they just saved a lot of money because the ball is put into the court of a tenant who sinks their teeth into a lower dollar amount.
Have “leveraged" conversations
Another principle of negotiation is to operate from a position of strength, yet all too often, we see landlords operating from a position of fragility. They will say something like, “Let’s set up a time for you to sign some disclosures, and then we can expound on it.” In this case, the tenant holds all of the cards. The tenant is likely to respond that they have been there for a long time, enjoy living in the unit, but would gladly entertain an offer of leaving for $200,000. This is what we would call a non-leveraged discussion.
So how do we have a leveraged discussion and be in a position of authority? That depends on whether you are negotiating with a perfect tenant or a problematic tenant. Let’s dive into using leverage with less than ideal tenants.
An easy example would be a tenant not paying rent during the pandemic. Perhaps they have been furloughed from their job and haven't paid rent for months. In this case, the landlord may say schedule a meeting to discuss how to resolve unpaid rent.
Joe, I feel your pain, but I need rent to sustain life. I was hoping we could strike a win-win. I understand you are in tough times now - we all are - so what I am willing to do is give you money to help you get back on your feet and move out, to start a new chapter in life. The rent owed has been deferred, but it’s not gone or erased. I hate to tell you, the courts are starting to open back up and as much as I hate to, I’m going to have to file an eviction action for non-payment of rent and go to small claims court to recoup the past due rent. I don’t want to do that, Joe, so tell you what. I may have some solutions. Can we meet?
Then get the disclosures signed.
When a tenant is creating a nuisance, it may be another opportunity in disguise. Take, for instance, someone who is having loud parties that are bothering neighboring residents. You might start a conversation like this:
Martha, I’ve been a little disappointed by neighbor complaints of your intermittent parties. It is interfering with the quiet enjoyment of other tenants, and there have been reports of damages to the windows. These are grounds for an unlawful detainer action. I don’t want to escalate it to that point. You’ve been in the building a while, and out of respect, rather than filing an eviction for a nuisance, can we schedule a time to talk about other options?
How to get the conversation rolling with model tenants
In many cases, owners will not have any gripes whatsoever about the tenant and it’s difficult to find any leverage. If the tenant religiously pays on time, does not create any disturbances, and is otherwise a desirable tenant, one surefire way to get their attention is to signal your intent to sell the property.
Starting off the conversation might look something like this:
“Jim, you and Elena have been fabulous tenants, but candidly, I have been thinking about getting out of the landlording business and selling the property to spend more time with my daughter in LA. I don’t know what the future holds for you, with a new owner of the building. I just wanted to give you the heads up that I'm considering selling. Would you be open to meeting about what some of the options are? Then get the disclaimers signed.
In what setting should you begin the conversation?
We’ve always recommended a coffee shop or other comfortable setting to negotiate a tenant buyout agreement. Enter COVID and this may not be possible, or the tenant might be adamant to correspond via email or insist that negotiations are in writing. If the communication is through email, we would like to see in the subject line, “confidential, privileged settlement discussions.”
You want any email or written communication to be crafted properly because if a buyout agreement does not come to fruition and it’s necessary to evict the tenant later on, there is a paper trail that shows you offered a tenant buyout ethically and in good faith. If you have to evict the tenant, we want to create the optics that in fact, an unlawful detainer action became the last resort, and the eviction was not in retaliation for the tenant declining a legal, ethical buyout offer.
In our next post, we will talk about how to schedule payouts when the tenant agrees to the buyout.