What to do with inherited property that is leased?
Tenants, leases, and inherited property. What happens when you inherit property but it comes with a tenants? Are there options for handling with this lease?
Q: My brother and I inherited several acres of commercial property from our parents. The land came with a poorly written lease. The lease was for 50 years with no escalation clause for the rent. The tenant pays the property taxes but the rent we receive is a pittance.
This property is in northern Virginia in an expensive area. In five years, this lease will be up for renewal. The rent will go up a bit but well below the market rent for the property.
Must we adhere to this lease? I had nothing to do with it originally and do not agree with it. This seems to me like my parents trying to rule us from the grave.
If you own the property, you can do as you wish
A: Another unhappy heir. We get that you may be unhappy with the way your parents arrange their estate. And that you don’t like the arrangement regarding your inheritance. We can also understand that you might not agree with something that was set in motion a long time ago, well before you inherited the land and perhaps before you were even born.
But, you may not get to decide this. Whoever originally owned the land (your parents, or perhaps even your grandparents) set in motion a plan whereby there would be income for 50 years. And, they were well within their rights to do it this way. It was their land. Not yours. They could have sold it off and avoided giving you the land or the cash.
We often get letters from readers insisting that their parents or relatives had no right to do something with a piece of real estate these readers have now inherited. Let’s be clear: if you own property, you can do as you wish with it while you own it. That includes leasing it for less than the going rate. For any length of time.
Unless, the owner has somehow granted a right to a child or relative to the home or land while they owned the home or land, the child or relative has no say to what the owner should do with the home or land.
Inheriting leased property
Now, let’s talk about the lease. Fifty years is a long time to lease property. It’s hard to imagine why your parents wanted to commit the property to a very long-term lease back in 1969 or 1970. Anything can happen in that time frame.
You mentioned that the lease was poorly written but you don’t say why you think it was. Your focus is on the below market rate rent. That rent might have been quite reasonable when the lease was signed. But below market rent doesn’t mean the lease was poorly drafted.
Maybe the rent was considered excellent for the time period. Maybe your parents couldn’t have imagined the kind of growth and development you’ve seen in the past 10 to 20 years. Sure, most leases allow for rent to be renegotiated, or adjusted for inflation or to market rates. Yours doesn’t. And, so the leases are unfavorable.
But, you still own the land. Your tenants pay the expenses and you get a small amount of rent but don’t have to worry about any expenses relating to the land itself. (You just have to make sure the tenant is paying the property taxes in full and on time.)
Local real estate attorney can help when lease is up for renewal
You mentioned that the lease is up for renewal in five years. Does the tenant have the right to renew the lease under the same terms or negotiated terms? What happens if you sell the land? Would that break the lease?
Pull out the lease and sit down with a local real estate attorney to discuss the terms and what you want to do. Does the tenant wish to renew? Perhaps the tenant would like to get out of the lease also. If the tenant has an automatic 50-year renewal, do you have the right to renegotiate terms?
Leases can be technical documents and when a tenant fails to abide by the terms of the lease, the tenant can lose a right to renew or can be evicted by the landlord. Your real estate attorney can guide you on next steps.
It sends shivers up our spines when you say that it feels like your parents are controlling the land from the grave. We see it differently. They made a decision many years ago for their own reasons that had nothing to do with you. You’re still benefiting financially, though perhaps not as much as you would like. Perhaps with some good counsel, you’ll be able to find a way to generate a more favorable return on your investment.