When to pay out in a tenant buyout agreement
If you have reached an agreement with a tenant who will move out in exchange for compensation, a rent waiver, or both, a lingering question remains - when should the tenant be paid?
When a tenant buyout agreement has been brokered in good faith, hopefully, all of the boxes are checked. We have engaged in a leveraged discussion, we have complied with our legal obligations, and have had a keen eye on numbers. Ideally, we have had a “heart to heart” with the tenant without the need for a tenants’ attorney whose sole purpose is to drive up the price of the vacancy.
By saying “we,” ideally it has been the rental property owner because as we said earlier, when Bornstein Law does the actual negotiating, it often causes the tenant to hire their own attorney and the costs get ratcheted up.
If we have arrived at a dollar amount that will not break the bank, fantastic. But we are not at the finishing line yet - we have to decide when to pay the tenant and see this process through.
Keep in mind, the tenant who has entered into a buyout agreement can experience buyer's remorse. In San Francisco, tenants have 45 days to rescind the agreement. In Oakland, tenants have 25 days to rescind, although that can be negotiated downward to 15. Berkeley residents have 30 days to change their minds.
If the tenant accepts money from the landlord as part of a voluntary move-out but fails to move out, it is not a “just cause” to evict the tenant. The owner can certainly sue the tenant for a breach of contract and seek attorneys’ fees, but this can be a long process and the tenant cannot be evicted for backing out of the agreement. We want to make sure the tenant is 100% on board with the agreement. Clearly, the whole goal is compliance with the agreement, not enforcement of the agreement.
Our hard-won experience at Bornstein Law has taught us to make payments in installments, and this includes giving the tenant a little bit of money on the front end to incentivize the tenant to begin looking for a new place. Some landlords may object and insist that no money will exchange hands until the tenant moves out. It only makes sense, right?
We disagree with the conventional wisdom to pay the tenant all of the funds when the keys are handed over because it is important to remember that a tenant surrender of possession agreement is voluntary. We want to emotionally and psychologically hook the tenant into the deal. We want the tenant to begin searching early on for a new residence. By getting some upfront funds, the tenant usually gains a sense of duty to live up to the terms of the deal.
Generally speaking, we like to give outgoing tenants a little bit of money once the agreement is reached, more money after the rescission period expires, and the bulk of the money once the tenant moves out.
How many times do tenants rescind the agreement or breach the agreement?
It is abysmally low if the owner has been properly coached by Bornstein Law. Out of 100 agreements forged, perhaps one or two tenants have cold feet or do not move out once it’s time to vacate.
If the tenant rescinds during the window of opportunity they have to change their mind, it’s usually because they realize they shortchanged themselves and want more money. If a tenant breaches the agreement and doesn’t move out, it’s usually because they didn’t find another place to live just yet.
Drafting the actual five or six-page contract is a little tricky, but it’s not rocket science. The concerns we have are how to arrive at a deal, and to keep the deal on course. Bornstein Law knows the ins and outs of tenant buyout agreements like no other firm in the Bay Area. There are several advantages to these agreements and during the pandemic, they have become all the more attractive because there are few other vehicles to transition tenants out of a rental unit.
Certainly, reach out for informed advice on how to ethically, properly, and efficiently structure these deals.