Selling a Property with a Rental Suite - What issues are there?

Your rental suite may be a big plus when it comes to selling your home, but there are issues to consider.

Selling a home with an income-generating rental suite has many advantages to potential purchasers, thus giving you, the seller, an edge on the competition in today's evolving real estate market. In general, a rental suite is qualified when the secondary accommodation has its own separate entrance, a kitchen, living area and a bathroom with either a shower or bathtub.

But what type of suite does your property contain? Is it a legal authorized suite, an authorized illegal suite or an illegal unauthorized suite? Let's explore the differences.

A legal, authorized suite is a suite that meets the conditions of your local municipalities zoning by-laws and building code, has the necessary building, plumbing and electrical permits and pays the secondary suite utility and service fees.

On February 7, 2011, the City of Surrey adopted a bylaw acknowledging that illegal suites do exist and instead of exhausting manpower to attempt to fight a losing battle, they authorized a secondary suite service fee. The service fee covers the cost of city services including infrastructure such as water use and garbage pickup and is paid annually. Most other municipalities do not authorize without legalizing and licensing.

A seller with an unauthorized, illegal suite is at risk and should be aware that at any time their municipality can demand that they legitimize their suite or remove it. The alterations needed to legalize or remove an illegal suite can be pricey; the process frustrating and time consuming.

Now that we have categorized the type of rental suite your property contains, your sale is inevitably affected by whether buyers can qualify for a mortgage to purchase your home.

Here’s what mortgage broker Sarah Bess Miller of DLC Canadian Mortgage Experts has to say:

“Rental income can be helpful to buyers qualifying to purchase your home by giving them a bit of a financial buffer every month. This type of additional income and how it applies to mortgage financing varies from lender to lender. Qualification and approval is dependent on a number of factors and whether your income-generating suite is legal, illegal, authorized or unauthorized can be a factor.

“When it comes to illegal vs. legal suites, most mainstream lenders will allow rental income from either type of suite. From my own experience there are very few who will require your suite to be legal or authorized in order to use this type of income to qualify for a mortgage.

“As a general rule of thumb, all three mortgage insurers and most lenders will allow your potential purchaser to add 50 per cent of their annual rental income to their employment income for qualifying purposes. For example: if the buyer makes $60,000 per year as an office manager and the suite will generate $12,000 in income annually, we can submit the deal with $66,000 annual income. Some will even allow 100 per cent of the rental income to be added to annual income depending on the situation.”

Although the differences in the type of suite your property contains can affect how buyers qualify to purchase your home, it is imperative to be aware that your tenant’s rights apply regardless.

Now we have focused on determining the type of suite that your home contains and the effect it has on buyers qualifying to purchase it, we will now be outlining the rights and responsibilities of both seller and tenant when selling and showing a property that contains a rental suite.

As outlined in the BC Residential Tenancy Act, the seller/landlord must inform the tenant that the property is for sale and give the tenant 24-hour written notice to show the property, which must include the date, time and reason for entry. Notice is given a minimum 24 hours in advance, not to exceed 30 days; generally with showing requests between the hours of 8am-9pm.

When dealing with a tenant that is hard to reach, the seller must schedule viewing times in advance. Once proper written notice has been given, the landlord has the right to show the unit, even if the tenant is not home. When giving advance notice, make sure the notice does not infringe on the tenant’s right to privacy.

Here’s an example of infringement: “Dear tenant, I wish to show this suite next Tuesday, March 17, Wednesday, March 18 and Thursday, March 19 each day between the hours of 1-5pm.Thank you, Landlord.” The excessive time span “between the hours of 1-5pm” takes away from the tenant’s right to privacy by attempting to place a 12-hour reservation over a three-day period. A more acceptable request would be one hour per day.

Uncooperative Tenant?

If a tenant unreasonably denies access to show the suite or supplies potential purchasers with inaccurate or misleading information, you have a few options to pursue.

1. Approach the tenant and try to resolve the issue.
2. Supply the tenant with information regarding the BC Residential Tenancy Act, outlining the landlord and tenant’s rights/responsibilities.
3. Serve one-month written notice to end tenancy for cause.

Dealing with a difficult tenant can be challenging and frustrating, especially when trying to sell your home. In my experience, only one of my sellers found it necessary to exercise and enforce the third option. In most cases a resolution can be reached to the satisfaction of both parties, even after a series of less than favorable incidents.

Assumption of Tenancy

When the property sells and the tenancy is to continue, an additional agreement is not necessary as the purchaser assumes the tenancy with the original terms and conditions. If desired and agreed upon by both parties, a new agreement can be drafted to reflect a change of landlord information. This new agreement may be with or without amendments to the current terms and conditions of the original agreement.  

Sellers make sure the contract of purchase and sale does not state vacant possession as the assumption of an existing tenancy will contradict this.

If the tenancy (month to month) is not to continue with the new owners you, as the original seller, must give the two-month notice to end tenancy and compensate the tenant with an amount equal to one month’s rent. Please note: compensation is owed even if the tenant gives notice to leave earlier.

Fixed-term tenancies always survive the sale. Neither the seller nor the new owner can end a fixed-term tenancy early. The only way to end this type of tenancy early is if both parties agree and complete the Mutual Agreement to End Tenancy form.

Being a landlord carries a great deal of responsibility and it should be approached in a professional, business-like manner. Exercise courtesy and care while interacting with your tenants when transferring these responsibilities as a seller onto a purchaser, and be certain to abide by the guidelines and parameters set out by the BC Residential Tenancy Act.

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