TASIA12 / ISTOCKPHOTO

Rental properties can be significant assets in estates, but they also present a challenge for executors. What obligations and responsibilities does an executor have to tenants, and how should those be balanced with responsibilities to beneficiaries?

Connie den Hollander, partner at Knott den Hollander in Saskatoon, Sask., says rental properties make estates more complex.

“It’s not like most other assets that you just take control of and decide whether to distribute to a beneficiary or sell in some way,” she says. “The decisions you make have to be governed under the umbrella of the residential tenancy legislation.”

By law, the terms of a lease still apply after an owner dies; tenants have a right to continue their tenancy. “If you have tenants, the executor steps into the shoes of the landlord,” den Hollander says, and must assume the landlord’s rights and obligations.

Those obligations can conflict with the executor’s duty to maximize value for beneficiaries. An executor may wish to renovate a property to make it more sellable, she notes, but that can’t interfere with “the tenant’s quiet enjoyment of the premise. You can’t just kick out a tenant and say, ‘We need you to leave so we can clean things up.’”

Ryan Scorgie, partner at Forward Law LLP in Kamloops, B.C., says executors need to thoroughly review tenants’ rights before making decisions about rental property. That’s especially important in tenant-friendly jurisdictions such as B.C.

“All of those rules fall on the executor,” he says. “And if there are any issues, it’s the executor who has to sort those out and be responsible for solving them.”

Such rules are particularly relevant when giving tenants appropriate notice of an eviction arising from a property sale. Even if the executor determines that liquidating a rented property makes most sense for the estate, they can’t simply evict a tenant to sell without giving appropriate legal notice. In B.C. that’s two months, plus one month of rent as compensation. It’s two months’ notice in Ontario and Saskatchewan, as well.

Failure to respect the rules could expose the estate to financial penalty. “Normally the estate overall will be the ‘person’ who’s liable,” Scorgie says. “But if there are actions that the executor should have taken but didn’t, they can be found responsible for that.”

Tyler Hortie, partner at Cohen Highley LLP in Kitchener, Ont., says it may not make sense for the executor to sell a rental property right away.

“Before you start terminating tenancies and getting the place ready for sale, canvassing the beneficiaries and understanding their interests is a really good idea,” he says.

A beneficiary who would rather receive the rental property in kind can save the executor considerable hassle, and potentially save the estate money. Receiving rental property as an inheritance is a cost-effective way to get into the rental market, he says.

The beneficiary must weigh this against the carrying costs of owning a rental property, the taxation of rental income and the eventual taxation of capital gains on a property that is likely not the beneficiary’s principal residence.

Even if the beneficiary decides to sell, it may not be necessary to rush the process.

“If you know it’s going to take you a year and a half to get the final clearance certificate from the CRA, and you’ve got three or four months left on the lease, and if you’re cash-flow positive or you’re net break-even, I think the better option is to wait until you have a full market to sell to—both investors and those who purchase for their own use—as opposed to taking it to market tenanted,” he says.

Taking on the role of landlord can mean extra work for the executor, but outsourcing the job to a property manager is a legitimate expense, Hortie says.

“The executor can download a lot of responsibility for the day-to-day to a property manager, and then simply be worried about the money coming in and the expenses going out,” he says.