When a jointly owned property is under an active lease to a third-party tenant, dissolution proceedings must account for the tenant’s rights and the lease terms. The tenant’s presence affects both the timing and method of dissolution.
The Tenant’s Rights in Dissolution Proceedings
A tenant has legal rights that persist even when the ownership of the property changes. Dissolution proceedings do not automatically terminate a lease. The tenant is entitled to continue occupying the property under the terms of their lease, and any sale transfers the lease obligations to the new owner.
This means potential buyers must be willing to purchase a tenanted property, which typically affects the price they are willing to pay.
Options for Partners When the Property is Leased
Partners in a leased property have several options for dissolution. Wait for the lease to expire before proceeding with sale. Negotiate with the tenant for early termination, potentially in exchange for compensation. Proceed with sale subject to the existing tenancy. Divide management rights if physical division is possible.
The best option depends on the lease terms, the tenant’s cooperation, and the partners’ timeline and financial needs.
Impact on Valuation
A property with a sitting tenant is generally worth less than the same property vacant, because the buyer’s ability to use or redevelop the property is restricted. The discount depends on the remaining lease term, the rent level relative to market, and the type of tenant.
An experienced appraiser will assess the tenancy’s impact on value accurately.
Protecting Partners’ Interests During the Tenancy Period
When dissolution proceedings extend over a period during which the property remains tenanted, clear arrangements must be in place for collecting rent, paying expenses, and managing the property. Disputes about these operational matters can complicate the dissolution.
A partnership management agreement covering the period until dissolution is completed protects all parties.
