What is a Stigmatized Property?
In real estate a stigmatized property can be one that buyers, even tenants, may reject, prefer to avoid or devaluate for reasons not related to its physical condition. Stigmas can include murder, suicide, any criminal activity and some negative public perception not related to a home’s physical condition.
Despite the legalization of marijuana many sellers and buyers view it as a negative. According to a recent survey:
64% of Sellers felt that smoking marijuana in the home would harm its resale value and 57% believe growing the legal limit of four plants would impact on their home’s value negatively.
52% of Buyers said they would not consider buying a home that grew the legal limit.
So, smoking and/or growing cannabis in a home is viewed as a stigma for a majority of buyer and sellers.
More and more, brokerages include a typical clause in agreements in which sellers represent and warrant that during their ownership, the buildings and structures on the property have not been used for the growth or manufacture of illegal substances. We have amended the clause to include the growth or manufacture of legal substances as a reference to marijuana’s new status and its continued negative perception with both buyers and sellers.
How Does This Warranty Effect Rental Property?
As or April 1st, 2018, landlords must use the new mandatory lease agreement for any tenancy from that date forward. Ontario also gives landlords the option to include as a schedule to the new agreement that can include a clause that prohibits the smoking, vaping or growing of cannabis. This restriction, however, cannot be added to tenancy agreements existing prior to April 1.
The Warranty When Selling Income Property
Recently an offer to purchase was presented on a four-unit apartment that included the clause referenced above about the property not being used for the growth or manufacture of legal or illegal substances. As part of the counter offer, the seller and his lawyer deleted the clause for valid reason. As rental units the seller was unaware of the tenants’ activities regarding cannabis. What’s more, with legalization, tenants with rental agreements prior to April 1 are entitled to grow up to four cannabis plants per household, and the landlord has little recourse if any.
Enforcement of Legal or Illegal Limits
Even if a new mandatory lease were in place that included the cannabis restriction, how could a seller warrant that the tenant did not abuse the agreement? It would be risky to do so as enforcement by the Seller is not easy.
Even enforcement by the landlord of limiting growth to four plants might be difficult in some instances.