If you're an independent rental property owner without a head for paperwork, you may wind up in a holdover tenant situation that works for both sides indefinitely. But on the other hand, you might find yourself in a limbo where you can't improve the property or raise rent because you can't get the holdover tenant to leave. And as a buyer, you might inherit a holdover tenant that could turn into either a great situation or an expensive eviction.
What is a holdover tenant?
In order to know whether this type of tenant is benign or disastrous, you first have to understand how they come to exist. Very simply, a holdover tenant is one that has no current lease but still lives in a rental unit with no written lease terms. They might not want to sign a new lease, or they might be perfectly happy to if the landlord were to send it to them. They may be attempting to avoid a rent increase, or they might be paying fair market rent happily every month, with no reminders needed. They might think they're in a month-to-month lease situation, while in fact they aren't because the landlord did not put such a clause in the original lease.
There's plenty of information online about how to evict a holdover tenant -- or how to get rid of one without evicting -- but many landlords have no problems at all with holdover tenants. In fact, they've created the situation. Have you?
What creates a holdover tenant?
If a lease expires and no one bothers to execute a new one, voila: You have a holdover tenant. For the tenant, it may seem like a casual month-to-month situation. Obviously, this can be ideal for some tenants who plan on making a move at a not-yet-decided time. But for landlords, it's not the same as a month-to-month situation, because that also should be covered by a lease.
The problem with holdover tenants is that they're not technically under any sort of legal contract, so in a worst-case scenario they can become a liability: causing damage to the unit, paying less rent than expected, moving unapproved pets in, or all sorts of other things. And while the landlord that let them get to this status might turn a blind eye, other people, such as the HOA, the building manager, or especially a buyer, may feel very differently. It's not actually a comfortable situation for either party when no written lease agreement delineates someone's right to occupy someone else's property.
However -- and this is important -- as long as you accept rent from the tenant, they're legally allowed to be there. In some states, accepting a month's rent with no lease triggers a renewal of the previous lease terms. In others, it triggers a periodic tenancy.
What to do about holdover tenants
So if you're a new owner trying to get rid of a preexisting holdover tenant situation -- or if you're a long-term owner trying to improve your property so you can raise rents – the first thing is, don't take the holdover tenant's money.
Once you've stopped accepting holdover rent, holdover remedies are available. These include:
- Present the tenants with a new long-term lease to sign.
- Offer a month-to-month lease (perhaps at a higher monthly rent).
- Send a notice to cure, if you're a new owner, advising the holdover tenant that a new lease must be created to cover the tenant's continued occupancy.
- Inform the holdover tenant you'll be initiating a holdover proceeding. This is technically an eviction, although not for the normal monetary reasons, and most good-faith tenants won't want this.
- Serve the holdover tenant with a notice of termination (the preliminary to eviction in many states, and required by many in rent-controlled or subsidized housing).
Tenancy at will
A tenant lives in a property with no lease but with the consent of the landlord.
Tenancy at sufferance
A tenant lives in a property with no lease and without the consent of the landlord.
Interchangeable with month-to-month, since there's no set end date.
As a buyer, how do you avoid holdover tenants?
Say you see an ad on a real estate platform promoting a great investment property that has every unit occupied with long-term tenants in good standing, listing how much rent it brings in monthly. This looks great, right? Not so fast.
Before committing, don't just ask what kind of lease the tenants are on -- an owner might say "month to month" thinking it's the default, when actually the longtime tenants aren't on a lease at all. Instead, ask the owner or the owner's agent for each tenant to fill out an Estoppel Agreement (AKA Estoppel Certificate, AKA Tenant Rental Information Declaration). This is a legal document wherein the tenant describes their situation and status, including the following:
- What the lease terms are
- What's the monthly rent
- What oral agreements are in place between them and the landlord