What Happens to Your Tenants When You Sell the Building?

You’re selling the building. Your tenants are still running their businesses inside it.

Owners worry about this, and so do tenants. Will the leases end? Who gets the deposits? Do the tenants have to sign anything?

Here’s what actually happens.

The Short Answer

In most cases, very little changes for your tenants.

• Their leases stay in place
• They keep paying the same rent, just to a new landlord
• Their security deposits move to the new owner
• The buyer takes over your obligations under each lease

A sale changes who owns the building. It usually doesn’t change the deal each tenant signed.

California law firm Garmo Law notes that a new owner is generally obligated to honor existing lease terms until they expire. That’s the general rule in most states, though your leases and local law control the details.

What Transfers With the Building

At closing, a few things move from you to the buyer:

• The leases themselves, usually through an assignment of leases
• Tenant security deposits
• Prepaid rent for days after closing
• Your obligations as landlord going forward

Security deposits are the one that trips owners up. They’re not yours to keep. The Garmo Law explainer states that the outgoing owner must transfer security deposits to the new owner, who then becomes responsible for returning them.

Here’s how the money usually works at closing. These figures are illustrative, using the building from Article 2.

• Monthly rent collected on the 1st: about $17,083
• Closing date: the 21st of a 30-day month
• Days the buyer owns that month: 10
• Rent credited to the buyer: about $5,694
• Tenant security deposits credited to the buyer: $34,000
• Total credits to the buyer at closing: about $39,694

Those credits come out of your proceeds. Plan for them.

What Tenants Have to Do

Most tenants don’t have to do much. But the buyer will usually ask for two things.

Estoppel certificates. Each tenant signs a statement confirming their rent, lease dates, deposit, and that there are no disputes. We covered these in Article 5. They’re the paperwork tenants most often delay.

SNDAs. If the buyer is financing, their lender may ask tenants to sign a subordination, non-disturbance, and attornment agreement. In plain terms, the tenant agrees to recognize the new lender’s rights, and the lender agrees not to disturb the tenant as long as the tenant pays rent.

Check your leases. Many require tenants to sign these documents within a set number of days when asked.

Check Your Leases for These Clauses

Before you list, read every lease for clauses that could affect your sale:

• Right of first refusal (ROFR): the tenant gets to match any offer you accept
• Right of first offer (ROFO): you must offer the building to the tenant first, before going to market
• Purchase options: the tenant may have the right to buy at a set price or formula
• Termination rights: some leases let a tenant or a new owner end the lease on a sale
• Renewal options: these affect how a buyer values the income

A tenant’s purchase rights can complicate everything. As a real estate broker’s analysis explains, a right of first refusal to buy the property raises more issues than one to lease space, such as whether the right survives if the first sale falls through. Those questions need to be answered in the lease itself.

If any lease has these clauses, talk to your attorney before you sign an LOI. Ignoring a ROFR can blow up a deal at the closing table.

How to Tell Your Tenants

Timing matters. Tell tenants too early, and you risk rumors, nervous tenants, or a key tenant starting to look elsewhere. Tell them too late, and estoppels arrive late.

A practical approach:

• Keep the sale confidential while you’re marketing, especially for an off-market sale (Article 7)
• Tell tenants once you’re under contract and estoppels are needed
• Give them a clear timeline and a contact for questions
• After closing, send a joint notice from you and the buyer with the new landlord’s contact and payment details

Your tenants are part of what you’re selling. Treat them well through the process.

Recap

• Leases generally survive a sale, and tenants keep paying the same rent to a new owner
• Security deposits and prepaid rent transfer to the buyer and come out of your proceeds
• Buyers usually ask tenants for estoppel certificates, and lenders may ask for SNDAs
• Check every lease for rights of first refusal, rights of first offer, purchase options, and termination rights
• Tell tenants once you’re under contract, and send a clear handoff notice after closing

Final Word

Selling the building doesn’t end your tenants’ leases. It hands them to someone new. Read every lease before you list, plan for the closing credits, and keep tenants informed at the right time, because a buyer is paying for their rent.

See how leased commercial properties are presented to buyers. Browse commercial listings at hutfin.com.