Purchasing Homes with Secondary Suites or Carriage Houses

By Jesse Bernhardt
Categories: Blog, Real Estate

The Okanagan Real Estate market has seen a rapid decrease in the rental vacancy rate and a corresponding increase in rent charged by Landlords. Many purchasers are looking to capitalize on high rental rates by purchasing a home with a Secondary Suite or Carriage House. In addition to the normal due diligence that a purchaser undertakes when purchasing a home, when purchasing a home with a Secondary Suite or a Carriage House purchasers should consider the following additional due diligence items and potential issues:

1. Get a Copy of the Lease Agreement and Review it

You will be bound by the Lease Agreement that was put in place by the previous owner. Tenants have considerable rights and protections under the Residential Tenancy Act. Provisions with respect to what rent increases are allowed and how the Landlord may end a tenancy are very restrictive and unforgiving once a Lease Agreement has been signed. A month to month term cannot be terminated unless done so in accordance with the Residential Tenancy Act. The Lease Agreement should be accompanied by a copy of the Condition Inspection Report.

Practical Tip: Lease Agreements can state that the Lease expires at the end of a specified period and that a Tenant must vacate the property at that time. This is the simplest way to remove an unruly Tenant; however, if you prefer to keep your tenant, you can enter into a new Lease Agreement on substantially different terms at the end of the specified period.

2. Review the Municipality’s File for the Property

Most municipalities, including the City of Kelowna, keep a record for each residential property within city limits. Generally, the file contains all previous Building Permits, Compliance Inspections, Bylaw Infractions and Demolition Orders issued with respect to a property. In some cases you will find documents evidencing restrictions on the use of the property, particularly with respect to Agricultural Land Reserve property. In short, the file will contain everything you require to confirm that any Secondary Suite or Carriage House present on the property was properly constructed with the required permits and is authorized by the municipality.

3. What should I do if there is no written Lease Agreement?

Although we always advise against verbal agreements, the reality is that many Landlords have a verbal agreement with their Tenant that serves as a Lease Agreement. The first thing you should consider is adding a condition to your Purchase Contract that requires the Landlord to have the Tenant execute a Lease Agreement prepared by you or your Lawyer handling the transaction. This is a simple process! The Government of British Columbia provides a sample Lease Agreement and Condition Inspection Report on their website that you can download here. If a written Lease Agreement is not possible, you should have the Tenant and Landlord acknowledge the current rental rate, the damage deposit, and that the start-of-tenancy condition inspection was completed and there were no issues to ensure that there are no surprises in that regard. Use a simple letter signed by the Tenant.

4. The Illegal Suite

An illegal Secondary Suite is one that was not constructed with the appropriate building permit. There is cause for concern if you are considering purchasing a property with an illegal Secondary Suite because it may not have been constructed to proper specifications for life safety, and may never have been inspected by a Municipal Building Official. The following practical issues can impact you financially:

a. The Municipality. Bylaw Infractions are enforced by the specific municipality that the property is situated in. Generally, all municipalities will fine a property owner that is offside of a Bylaw including the use of an Illegal Suite. However, if an Illegal Suite is a major problem and the current owner has not complied with a municipalities requirement to stop using an Illegal Suite a municipalities may revoke the occupancy permit for the Illegal Suite or the property.

b. Insurance. You need to be very cautious in this regard to ensure that you are insured against property damage and personal injury that both may be caused by and may occur to the Tenant in the Illegal Secondary Suite. Generally, if you fail to disclose material facts to your insurer or insurance broker, your insurance policy will be void and you will have no coverage.

c. Financing. If you plan to obtain a mortgage for your purchase your bank may take issue with an Illegal Suite depending on the status of the property. If the municipality has revoked the occupancy permit for the Illegal Suite or the property you may not be able to obtain any financing at all.

One issue you should address with your realtor as a term in the Purchase Contract is that no new Lease Agreements should be entered into prior to Completion without your written consent. A home with a Secondary Suite or Carriage House can be a great investment. Do your homework to ensure that your investment pays off.

This article is provided as information only; it should not be construed as legal advice. To request a topic for an Article or for more information, please contact Jesse Bernhardt at 250-869-1191 or bernhardt@pushormitchell.com.