Lease Assignment (Including Market Value)
There are three types of lease assignments:
- No assignment at all if lease says not assignable.
- Permitted assignments where new tenant takes the place of the leaving tenant.
- Permitted assignments at market value.
One of the hottest topics among Life Lease landlords and tenants is the issue of Lease Assignment at Market Value. Although it can be a little complicated, in its simplest form it is easily understood. For ease of description we will refer to "Lease Assignment" knowing that the term includes the concept of "Market Value".
What is Lease Assignment at Market Value?
Lease Assignment means that the current tenant, or their estate, has the option to "sell" the right of access to the life lease to anyone who meets the requirements for the facility -- age, credit, specific policies such as smoking or pet policies, etc. --at a price negotiated between the departing tenant (or their estate) and a prospective tenant. The price will be the current market value of the unit, which would be expected to be higher than the value at the time the departing tenant, came in. If the original lease was a non-assignable lease but is now assignable, then the price would be expected to be above the Entrance Fee paid.
Who Gets the Sale Money?
At the very least, the sale price would be expected to be higher than the Entrance Fee originally established by the facility. If the negotiated price is higher than the original Entrance Fee, then the departing tenant keeps the difference, with some exceptions. The "gain" for the departing tenant recognizes the lost investment revenue for the Entrance Fee -It usually pays no interest --as well as compensation for the tenant's share or the reduced mortgage during the tenancy.
In all cases. the amount of money equivalent to the Entrance Fee for the specific suite in question must go into the Refund Fund. Whether this is done as a simple paper entry (money in = money out). or in the actual exchange of the Entrance Fee (refund to departing tenant, new Entrance Fee from new tenant) is the decision of the management of the facility. Most managers prefer that a new lease be signed by the new tenant and the departing tenant's lease is cancelled, triggering a refund of the Entrance Fee to the departing tenant.
Are there any fees when assigning a lease?
The only fee a landlord can charge or collect from a tenant for assignment of Lease is $75.00 as per the Life Lease Act. There are no other fees allowed when assigning a lease.
Some examples.
- Pre-lease payments are only allowed while the complex is in the planning or construction stages. Once there are tenants living in the building the landlord can only ask for an entrance fee.
- Deposits: A landlord can only collect a deposit (security and/or pet deposit) when an applicant is accepted. The amount of the deposits alllowed are stipulated in the Residential Tenancies ACT.
- No others fees are allowd for assignment of lease.
What is the Controversy with Lease Assignment?
The original purpose for the Life Lease Model in Manitoba was to provide affordable housing to seniors. Most non-profit agencies used the Life Lease model as a means to construct the building without major financial commitment for them. It was expected that future tenants would be able to access Life Lease housing at a reasonable price because the Entrance Fee remains the same forever. Tenants would only be required to pay a rent that was necessary to maintain the facility.
The concept of Lease Assignment at Market Value changes this model because the Entrance Fee may remain the same but the sale price for access to a Life Lease will increase or decrease according to market forces. However current tenants end up subsidizing new tenants because they have Reserve Fund and possibly a Refund Fund.
Proponents of Life Lease without assignment also point out that Lease Assignment at Market Value opens the tenant to a potential loss if the real estate market experiences a significant decline. However, this risk also applies to Life Lease without Assignment since a decline of market value to a level near or below the Entrance Fee will make the Life Lease model unattractive.
Then Why Go To Lease Assignment?
Proponents of Life Lease Assignment offer many reasons to include Lease Assignment at Market Value as part of their tenant agreement.
- The original concept is not being met since most people renting Life lease suites are selling their homes or farms to live in a comfortable, modern, viable and cost-effective alternative to condominiums, for-profit apartments or assisted living residences. The less affluent seniors for whom the concept originally was intended can't afford the current Entrance Fee as it is. Newer Life Lease facilities require a significant Entrance Fee payment.
- Tenants of Life Lease facilities without the right to assign their lease are locked into a downward slide in their economic security. While they get no growth in their investment (the Entrance Fee) the cost of assisted living residences, nursing homes and other for-profit accommodations are increasing significantly according to market values. With the growth of the seniors segment of the population. the demand will continue and the costs will continue to rise. So. the current tenants will not be able to afford other accommodation when the time comes for them to move out of the Life Lease facility,
The concept of affordable housing for one group of seniors comes at the expense of affordable housing for another group of seniors.
- Tenants without assignment ability are directly subsidizing those that come later. Current tenants are paying down the mortgage. building up the equity of the Reserve Fund and covering all the costs of maintaining the facility without any opportunity for growth in their investment. The ability to assign the lease would give them some reasonable expectation of growth on investment.
- Although real estate markets may experience significant declines from time to time. the historic over-all trend is upwards or stable. It would be a very unusual situation to fund that the market value paid for a life lease assignment is less than the Entrance Fee for it. If such were to occur, then the overall demand for Life Lease suites would drop off completely since the market would provide ownership at a cost less than the Entrance Fee. Current tenants without lease assignment would face an economic loss the same as tenants with lease assignment privileges.
- When all the facts are taken into consideration, it is the opinion of the MLLOA that the risk-benefit analysis clearly supports the concept of Lease Assignment at Market Value for Life Lease facilities.
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