Guide to Purchasing an Apartment with a Tenant

What Does It Mean to Purchase an Apartment with a Tenant?

Purchasing an apartment with a tenant means buying a property where an apartment or part of it is leased to a tenant under a valid legal contract. When you buy a rented apartment, you are not only purchasing the property — you are also acquiring legal and financial obligations toward the existing tenant. This differs from purchasing a vacant apartment, where you have full freedom to rent or occupy the property as you wish.

In Israel, tenant rights are protected under the Housing Lease Law (this law protects tenants and imposes legal obligations on apartment owners). When you purchase an apartment that already has a tenant, you inherit all the rights and obligations of the previous owners toward that tenant.

Why Are Rented Apartments Available in the Real Estate Market?

Rented apartments appear on the real estate market for various reasons. Property owners, for personal or economic reasons, choose to rent the apartment rather than sell it vacant. In some cases, the tenant has lived in the apartment for many years, and the new owners must respect their legal rights. In other cases, a rented apartment may be cheaper than a vacant one, since the purchaser will have to deal with the existing tenant.

Critical Difference: Rented Apartment versus Vacant Apartment

When you buy a vacant apartment, you are the full owner of the property and can do almost anything with it. When you buy an apartment with a tenant, your rights are limited by law. You cannot easily evict the tenant, you cannot increase the rent without their consent, and you must continue to pay for property maintenance, insurance, and property tax like any other owner.

Tenant Rights Upon Sale of the Apartment

When a rented apartment is offered for sale, tenant rights are at the heart of the legal matter. In accordance with the Housing Lease Law, a tenant has strong rights that are not terminated due to the sale of the property.

Right of Continuance — The Strongest Right

The right of continuance is the tenant's right to continue living in the apartment even after its sale. New owners cannot evict the tenant simply because the apartment has changed hands. This right exists as long as the tenant pays the rent in full and complies with the terms of the contract.

The right to increase rent is limited by law. The rent cannot be increased freely — there are limits on the annual increase rate, and an increase must be made with advance notice of a certain period (usually at least 90 days). This is very significant: if you purchased an apartment at very low rent, you cannot suddenly increase it to market rent.

Protection Against Arbitrary Eviction

The tenant is protected against arbitrary eviction. A tenant cannot be removed from the apartment unless there are specific legal circumstances, such as prolonged non-payment of rent, serious breach of contract, or genuine need of the owners or their family members to live in the apartment. Even in these cases, there is a legal procedure that is protected by law.

Right to Maintenance and Property Care

The tenant has the right that the owners (that is, you, if you purchased the apartment) maintain the property, repair defects, and ensure that the apartment is in proper condition. If you fail to do so, the tenant can deduct from the rent, file a claim, or even terminate the contract.

The Process of Purchasing an Apartment with a Tenant — Step by Step

Step 1: Legal Review of the Lease Agreement

Before you commit to a purchase, you must carefully examine the existing lease agreement. This document is the legal instrument that defines the rights and obligations of both parties. Review the date the contract was signed, the duration of the lease, the amount of monthly rent, adjustment conditions, and any special terms (for example, whether the tenant pays for repairs or the owner does).

A lease agreement signed in the past may contain terms that do not align with current law. In some cases, an older agreement may provide less protection for the owner. A legal review of the contract by a lawyer experienced in real estate law is essential.

Step 2: Review of Rent Payment Status

Check whether the tenant pays rent regularly. If there are accumulated debts, the previous owners must inform you of this. If there is non-payment, this could affect your decision to purchase or the price you are willing to pay.

Step 3: Conduct a Title Search (Deed Search)

As with any real estate purchase, you must review the taboo (land registry certificate) to verify that the seller is the legal owner of the apartment and that there are no liens or charges against it. This is done through the State Land Registry Office.

Step 4: Assess the Impact of the Tenant on Value and Income

Working with a lawyer experienced in real estate, calculate the impact of the existing tenant on the current value of the apartment and on your future income. This may affect the price you are willing to pay.

Step 5: Amendment or Update of the Lease Agreement

At times, when purchasing a rented apartment, the seller and buyer (you) wish to amend or update the lease agreement to clarify new rights. This may involve updating the rent amount, terms, or the duration of the contract. Any change must be made with the consent of the tenant.

Step 6: Signing the Purchase Agreement

The purchase agreement should include clear provisions related to the tenant: who pays for what, what are the tenant's rights, and what are the obligations of the new owners. This agreement should be detailed and accurate to prevent misunderstandings in the future.

Step 7: Official Transfer of the Apartment

After the purchase agreement is signed and payments are made, the apartment is transferred to your name at the Land Registry Office. The tenant remains in the apartment, but you are now the legal owner.

Comparison of Scenarios: Purchasing a Rented Apartment vs. a Vacant Apartment

As can be seen, purchasing a rented apartment is a complex decision. It may be worthwhile if the price is very low or if you are interested in steady income from rent, but it involves substantial legal and financial risks.

Costs and Bureaucracy in Purchasing a Rental Property

When you purchase an apartment with an existing tenant, there are several costs you must consider, beyond the purchase price itself.

Legal Costs

You need a lawyer experienced in real estate law to review the lease agreement, update it if necessary, and ensure that the purchase agreement protects you adequately. These legal costs vary depending on the complexity of the case, but they are significant.

Capital Gains Tax

As with any real estate purchase in Israel, you must pay capital gains tax (tax on capital gains). This tax is calculated on the difference between the purchase price and the "base value" determined by the Income Tax Authority. The amount of this tax depends on certain factors, such as the holding period of the previous owners.

Registration Costs

The Land Registry will charge you registration fees when transferring the apartment to your name. These costs vary depending on the property value.

Insurance

As an owner, you are required to insure the apartment. Insurance costs vary depending on the property value and the type of insurance you choose.

Municipal Tax and Development Fees

You must pay municipal tax (Arnona) to the municipality and development fees (Arnona Maimun) to local authorities. These amounts vary depending on the property location and value.

Maintenance and Repair Costs

As an owner, you are responsible for maintenance and repairs of the apartment. These can be substantial, especially if the apartment requires major repairs or if it is part of a jointly-owned building with high management fees.

How Experienced Lawyers Can Help You

Purchasing an apartment with a tenant is a complex legal transaction that requires thorough examination and expert advice. Mendelbaum, Gor, Witzman-Gor & Co., Attorneys at Law, with over 18 years of experience in real estate law, can assist you at every stage of the process.

Lease Agreement Review: We will carefully examine the existing lease agreement, identify risks, and explain your rights and obligations as new owners. We will check whether the contract complies with current legal requirements and whether there are clauses that could be problematic.

Tenant Status Review: We will examine the tenant's payment history, ensure there are no accumulated debts, and assess the risk of non-payment in the future.

Contract Update and Drafting: If necessary, we will help you update the lease agreement, modify terms that do not suit you, and ensure the new contract is fair and lawful.

Price Consultation: We will help you assess the tenant's impact on the apartment's value and your future income, so you can decide whether the offered price is fair.

Protected Purchase Agreement: We will ensure your purchase agreement properly protects you and contains all clauses related to the tenant.

Representation in Disputes: If a dispute with the tenant arises in the future (for example, non-payment of rent, breach of contract, or eviction request), we will represent you in legal proceedings.

An initial consultation meeting with the firm is free of charge. During this meeting, you can present your case, ask questions, and receive an initial assessment of the risks and opportunities. We will help you understand all legal aspects of the purchase.