06/20/11: Selling Your Rented House Requires Tenant Involvement
By: Benny L. Kass
Q: I own a house in the District that I have been renting for a number of years. I would like to sell it by way of a Starker exchange, but understand that I have to give my tenants a right to purchase. Exactly how does this work, and will it interfere with my right to swap the property?
A: The District has a unique law favoring tenants called TOPA – the Tenant Opportunity to Purchase Act. Oversimplified before a landlord can sell the rental property, the tenants in that property must be given the right to buy.
There are different rules depending on how many rental units the landlord owns. If there are more than four units in a building, the law requires that a tenant organization be created, and advise the District and the landlord no later than 45 days after receiving the TOPA notice that the tenant organization has been formed and is interested in buying. In such a case, the tenant association has at least 120 days to negotiate a contract, and up to 240 days to obtain financing and actually go to settlement.
It should be noted that if there are five or more rental units in a building, only the tenant association has the authority to negotiate with the landlord.
If there are two to four units, no tenant association is required to be formed. For the first 15 days, a group of the tenants have the right to advise the owner of their interest in purchasing. If that does not happen, then any one of the tenants has another 7 days to tell the landlord of his/her interest. Once this notice is provided, the tenant (or tenants) have 90 days in which to enter into a contract, and another 90 days to obtain financing and go to closing. However, upon request by the lender for more time, the landlord must provide an extension consistent with that lender’s request.
Let’s concentrate, however, on single family homes. When a landlord wants to sell the property, he has two alternatives. He can send a TOPA form entitled “Offer of Sale without a Third Party Contract,” or another form entitled “Offer of Sale with a Third Party Contract.” both forms require the selling price and the material terms of the sale to be included.
Which form should be used? If you think your tenant is serious about buying, I would use the form “without” a contract. It clearly expedites the process. The tenant has 30 days from the date of receiving the form in which to advise the landlord (and the District) of her interest in purchasing. She then has an additional 60 days to negotiate a contract, and then another 60 days to go to settlement, although if her lender needs additional time, the tenant has yet another 30 days period of grace.
Regardless of which TOPA form is used, the landlord is required to send one in English and one in Spanish. Several years ago, a landlord’s lawyer in court questioned why the Spanish requirement. The lawyer told the Judge “neither my client, the tenant nor I speak or read Spanish”. To which the Judge responded “neither do I but that’s the law.”
Landlords must send a copy of the TOPA form to the District’s Department of Housing and Community Development (DHCD). This presents an ethical dilemma for many landlords. Landlords in the District are required to obtain a Basic Business License. Once that is obtained, the landlord must then file with the Department of Consumer and Regulatory Affairs (DCRA) as to whether he is exempt from rent control – i.e. owns four or less rental units in the District, or register the property if he is not exempt.
Too many landlords are not aware of these legal requirements. And while you don’t need to have a BBL to issue a TOPA notice, you run the risk that DCRA could issue a notice of noncompliance.
To be on the safe side, however, since your buyer will need title insurance, you should file the TOPA notice. Because tenants can file suit against a potential purchaser claiming that they never received the TOPA notice, even after the property is sold to a third party, the title insurance industry is extremely skittish about giving buyers – and lenders – a clean title insurance policy. Accordingly, title attorneys must satisfy themselves that all procedural requirements were met. Additionally, tenants are also asked to sign an Affidavit that they have received the TOPA notice, that they have elected not to exercise their tenant rights, and that they have not assigned their rights to any third party.
Assignment of rights has become an interesting sideline for many speculators. Under DC law, not only does a tenant have the right to buy the property in which she is residing, but she also has the right to assign the TOPA rights to a third party. Typically, the tenant will get a sum of money in order to transfer the TOPA rights, and the third party will either flip the contract to someone else, or actually go to settlement.
Can you arrange a Starker (1031 exchange) for your rented property? The answer is yes, but there are risks. In order to have a successful exchange, you must identify the replacement property within 45 days after you sell the relinquished property (your current house) and actually go to settlement within 180 day from the date of sale. In today’s market conditions, because it is often difficult to find an acceptable replacement property, many exchangers start looking even before their current house is sold.
However, the TOPA process can drag on for a long period of time. And ultimately, the tenant may not be able to qualify for a mortgage loan, and the landlord has to start the selling process all over again. So houses that may have been considered as a potential replacement property may be long gone.
TOPA was enacted in1980, and has generated both controversy and a lot of litigation. Regardless of which side you are on, the rules and requirements must be carefully followed. As the Judge said “it’s the law”.