What becomes of the rental agreement if the owner of the property changes?

Many of us live in rental apartments, and real estate investments are often made specifically for the purpose of renting them out. But what happens to the rental agreement when the owner of the property changes? What should the tenant, the seller of the property and the buyer of the property know? In this article, we’ll take a look at these questions under Estonian legislation.


Transfer of rental agreement

Once the immovable property has been transferred to the tenant, the rights and obligations of the landlord arising from the rental agreement are transferred to the new owner of the immovable in accordance with the Law of Obligations Act. It means that if you, for example, have moved into a rented apartment as a tenant, the apartment is in your possession and the rental agreement is automatically transferred to the new owner. If the new owner wants to enter into a new rental agreement with you after purchasing the apartment, there is really no need to do that. Such issue may be on the agenda, for instance, if the new owner wants to change the terms of the contract for you –e.g., to increase the rent. If you do not wish to enter into a new contract, the new owner of your apartment will only have to accept the situation or cancel the rental agreement. An open-end rental agreement, as a general rule, can be canceled with a 3-month notice. However, a fixed-term rental agreement can usually only be cancelled for good reason – for example, if the tenant is late in paying the rent for three months.

Termination of a fixed-term lease upon a change of the landlord

If, as a general rule, a fixed-term rental agreement can be cancelled only for good reason, there is one difference when changing ownership of an immovable. The buyer of the immovable property may cancel the rental agreement within three months of the acquisition of the immovable property, giving a 3-month notice. For example, if the new owner of the apartment informs the tenant the day after the purchase of the apartment that he wishes to terminate the rental agreement, such agreement will still continue for another three months. If the new owner announces his intention to terminate the rental agreement one day before the end of the 3-month period, the agreement will also last for another three months –so, the maximum duration of the lease can then be nearly six months, depending on a prior notice of the new owner. However, if more than three months have passed since the change of ownership of the immovable property, the new owner of the immovable property loses the right to terminate the contract on that basis and again needs good reason.

It is also important that in the case of a lease of a residential and commercial space, the new owner of the immovable property has the right to terminate the lease only if they urgently need the rented space themselves. In the case of an apartment, this may mean, for example, that the new owner needs to move into it himself. If, however, the new owner of the apartment bought it for investment purposes, they will most likely not need the apartment themselves and will not be able to cancel the rental agreement with you.

You still have to move out, but the rent for an equivalent apartment is higher – what now?

If you had a fixed-term rental agreement and the new owner of the immovable property was entitled to cancel it on the basis of the above specification, the previous owner will be liable for anydetriment caused to the tenant by the termination of the lease. Let’s say, you rented a two-room apartment in the downtown and you had a three-year lease that would last two more years. However, if the prices for rented apartments have risen in the meantime, or if a previous owner of your apartment was just a good person who rented the apartment for less than the market price, you can claim the rent difference. For example, if you paid €300 a month for an apartment but now find a similar apartment for €400 a month, the previous owner of the property will have to pay you the difference of €100 for the duration of your lease – that is, if your lease would have lasted two more years (24 months), the previous owner must reimburse you 24×100 €, or 2400 €. Of course, the detriment to the tenant may not be limited to the difference in rent – the cost may also include costs of moving, etc.

Selling a rented property and want to mitigate risks of your obligation to compensate?

If you are selling an apartment or house that you have previously rented out under a tenancy agreement and want to avoid having to compensate the tenant for the cancellation of the tenancy agreement, there are two ways to mitigate the risks.

The first option is to include a clause in the contract for the sale of the immovable property stating that the buyer of the immovable property may not terminate the fixed-term lease or otherwise he is liable for the detriment caused to the tenant. Of course, this does not exclude the right of the new owner of the apartment to terminate the lease within three months of the date of purchase, nor the right of the tenant to claim damages against you under the law. However, this means that if the new owner still exercises this right of cancellation under a fixed-term lease, you will be able to claim damages from the new owner based on the contract of sale. In other words, if the tenant is harmed, you will still have to make up the detriment to the tenant. Nevertheless, after you have compensated the tenant, you can recover the detriment from the new owner of the property who bought it from you.

Another way to exclude the possibility of such infringement is to make an entry in the land register. Namely, the tenant has the right to demand that the lease be entered in the land register and that each subsequent individual owner of the immovable property must allow the lessee to use the immovable property in accordance with the rental agreement. In the case of such a land registry entry, the new owner of the immovable property does not have the right to terminate the lease, and therefore the tenant cannot be infringed.

What should the buyer look out for when purchasing a property?

When purchasing an immovable property, especially a residential or commercial property, always check whether the previous owner has entered into a lease for the property and whether the property has been given to the tenant. If the property is rented out, be sure to check the rental agreement. When buying an investment property to rent it out in the future, make sure the rent meets your expectations. Also, look at other terms of the lease, such as the duration of the lease – for example, given the growth of the rental market, a lease for a fixed number of years may not be reasonable. If the terms of your fixed-term lease are unsuitable for you and you do not need, e.g., an apartment for your own residence, have the apartment seller to enter into a new contract with the tenant, which is meeting your requirements. If he does not succeed, it may be wise to try the next apartment while looking for a purchase.

When purchasing an immovable encumbered with a lease, be sure to also monitor whether the lease is for a fixed term or for an indefinite period. You can terminate the lease without notice at any time with a 3-month notice. Still, you can cancel a fixed-term lease in up to three months after the purchase of the property with a 3-month notice. However, in the case of residential or commercial premises, you can only terminate the lease if you urgently need the property yourself. If you cancel the lease on this basis, the previous owner of the immovable is generally liable for the detriment caused to the tenant by the cancellation of the lease. However, if, for instance, a clause is included in the sales contract stating that you may not cancel the fixed-term lease, this clause will not deprive you of that legal right, but the previous owner may in turn claim the damages.

Be sure to always check the land registry entries when purchasing a property. For example, if a lease has been recorded in the land register, you cannot cancel such lease even on the basis of the difference in the ownership of the property. Also, various servitudes or mortgages may be entered in the land register, which may subsequently become problematic.

To sum up

 

  • Upon the change of ownership of an immovable, the rights and obligations arising from the lease contract shall be transferred to the new owner of the immovable. It is not necessary to enter into a new lease between the new owner and the tenant.
  • The open-end contract may be terminated at any time with a3-month notice. An open-end lease can be canceled up to three months after the change of ownership of the immovable property.
  • A fixed-term lease of residential or commercial premises can only be cancelled within three months after the change of ownership of the immovable property if the new owner urgently needs the rented space himself, for example, an apartment to live there.
  • Upon cancellation of a fixed-term lease contract in a case of change of ownership of the immovable, the lessee shall have a claim against the previous owner of the immovable for the detriment caused by termination of the lease contract.
  • The contract of sale may stipulate that the buyer of the immovable property may not terminate the fixed-term lease. The statutory right to terminate the lease, however, does not deprive the buyer of that right, but in such a case, the seller has a right to claim for damages against the buyer.
  • An entry concerning a lease entered in the land register ensures that each subsequent landowner must allow the tenant to use the property in accordance with the lease. In this case, the lease cannot be canceled even if the owner of the immovable property changes.