When a commercial property owner dies, the lease agreement with their tenants does not end. The property and its leases become assets of the owner’s estate, and the person in charge, known as the executor or administrator, immediately steps into the role of the landlord. This creates an instant and powerful conflict.
The executor is bound by a strict legal rule called a fiduciary duty, which requires them to act solely in the best interests of the estate’s beneficiaries, often under the supervision of a probate court. However, they are also bound by landlord-tenant laws and the specific contracts signed with business tenants. This clash between the short-term, legally-rigid world of estate settlement and the long-term, operational demands of property management is where costly mistakes are made. In fact, with U.S. office property vacancy rates hitting a record 19.6% in 2025, an inexperienced executor can quickly turn a valuable asset into a financial drain.
This guide breaks down this complex process into simple, actionable steps. It is designed for the executor, beneficiary, or heir who has been unexpectedly handed the keys to a commercial property.
Here is what you will learn:
- đź“ś Why a commercial lease doesn’t end when the owner dies and what this legally means for you.
- ⚖️ How to navigate the probate court process without getting bogged down or making expensive mistakes.
- 🤝 The exact steps to take with existing tenants, from collecting rent to handling repairs and lease renewals.
- đź’° The massive tax trap you must avoid and the single biggest tax break you must take advantage of.
- 🤔 A simple framework to decide whether to sell the property for quick cash or keep it for long-term income.
Deconstructing the Challenge: The Players, The Documents, and The Two Worlds You Now Inhabit
Managing an inherited commercial property means you are operating in two different worlds at the same time: the world of probate law and the world of real estate management. Each has its own key players, critical documents, and non-negotiable rules. Understanding how they interact is the first step to success.
The Key People and Their Roles
Your new reality involves a cast of characters, each with a specific legal role. The Executor (or Administrator if there is no will) is the person named in the will or appointed by the court to manage the estate. You are the temporary CEO of the deceased’s financial life, and you answer to the Beneficiaries (the people who will inherit the assets) and the Probate Court.
The property’s Tenants are not part of the estate, but they are a critical third party. They have legal rights defined by their lease, and you, as the executor, must respect those rights. Finally, there is your Professional Team—the probate attorney, CPA, commercial property manager, and real estate broker—who provide the specialized expertise needed to navigate this process.
The Documents That Govern Your Actions
Three documents are central to this process. The Will is the deceased’s instruction manual for how their assets should be distributed. The Commercial Lease is the legally binding contract between the estate (which you now represent) and the tenant. It dictates everything from rent payments to maintenance duties.
The third document, Letters Testamentary (or Letters of Administration), is your golden ticket. Issued by the probate court, this document is the official proof that you have the legal authority to act on behalf of the estate. Without it, you cannot open an estate bank account, sell the property, or formally manage the assets.
The Two Worlds Collide: Probate Law vs. Landlord-Tenant Law
The core challenge is balancing your duties under two different sets of laws. Probate law, governed by state statutes like the California Probate Code, imposes a fiduciary duty on you. This means you must manage the estate’s assets with extreme care, loyalty, and good faith, always prioritizing the beneficiaries’ interests.
At the same time, landlord-tenant laws and contract law require you to fulfill the estate’s obligations as a landlord. You cannot simply evict a tenant because you want to sell the building quickly. The lease is a contract that survives the owner’s death, and the estate—and by extension, you—must honor it.
The Executor’s Mandate: Understanding Your Fiduciary Duty and Its Consequences
As an executor, you are a fiduciary. This is not just a title; it is a legal standard that demands the highest level of trust and responsibility. Every decision you make must be for the benefit of the estate and its beneficiaries, not for your own convenience or personal gain.
Why This Rule Exists
The fiduciary duty exists to protect the beneficiaries from mismanagement. Because you have control over assets that are not yours, the law holds you to a strict standard. This rule ensures that you preserve the value of the estate, pay its debts, and distribute the remaining assets fairly and according to the deceased’s wishes.
The Dire Consequences of a Breach
Breaching your fiduciary duty can have severe personal consequences. If your actions—or your failure to act—cause a financial loss to the estate, you can be held personally liable for the damages. This means the court could order you to repay the estate from your own pocket.
| Fiduciary Misstep | Direct Negative Outcome |
| Using estate funds to pay for a personal vacation. | This is self-dealing. The court will order you to repay the funds and may remove you as executor. |
| Selling the property to your cousin for a below-market price. | This is a conflict of interest. Beneficiaries can sue you for the difference between the sale price and the fair market value. |
| Forgetting to pay the property’s insurance premium. | If a fire occurs, you are personally liable for the full value of the uninsured loss. |
| Ignoring a tenant’s request to fix a leaking roof. | The tenant can sue the estate for damages, and the property’s value decreases, both of which are losses you could be liable for. |
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Navigating Probate Court: The Slow, Public, and Expensive Path
Probate is the formal, court-supervised process of validating a will, appointing an executor, and overseeing the administration of an estate. For assets like commercial real estate that are titled solely in the deceased’s name, probate is almost always unavoidable. It is a process that is notoriously slow, public, and expensive.
The Step-by-Step Court Process
While laws vary by state, the process in a state like California generally follows a set path. It begins with filing a Petition for Probate (Form DE-111), which asks the court to validate the will and appoint you as executor.
Next, a Notice of Hearing (Form DE-121) is mailed to all heirs and beneficiaries and published in a local newspaper. This informs interested parties of the court date and gives them a chance to object.
At the hearing, if everything is in order, the judge signs the Order for Probate (Form DE-140). The court clerk then issues your Letters (Form DE-150), the official document granting you authority to manage the estate. This entire process, from filing to getting your Letters, can take several weeks or months.
The Timeline and Costs of Probate
Be prepared for a marathon, not a sprint. A straightforward probate case in California is legally required to be completed within a year, but complex estates involving commercial property often take 18 months or longer.
The costs are also significant. Fees for the attorney and the executor are statutory, meaning they are set by law as a percentage of the estate’s gross value. Combined with court filing fees and appraisal costs, total probate expenses can easily reach 4% to 7% of the estate’s total value.
| Estate Value | Statutory Fee (Per Party: Executor & Attorney) |
| $1,000,000 | $23,000 |
| $5,000,000 | $63,000 |
| $10,000,000 | $113,000 |
| Note: Total statutory fees are double the amount shown, as both the executor and the attorney are entitled to this fee. Source: |
The Executor as Landlord: Managing Tenants During Probate
Once you have your Letters, you are officially the landlord. Your primary responsibility is to maintain the status quo and preserve the asset’s value. This means professionally managing tenant relationships, collecting rent, and addressing maintenance issues.
Your First Communication with Tenants
Your first action should be to provide formal written notice to all tenants. This is not a casual email; it is a legal notification that establishes your authority and sets clear expectations. This notice must include your new contact information, instructions on where and how to pay rent (payable to “The Estate of”), and the new procedure for submitting maintenance requests.
It is also wise to request an estoppel agreement from each tenant. This is a signed statement from the tenant that confirms the key terms of their lease, such as the rent amount, security deposit, and lease term. This document protects the estate from any “handshake deals” or unwritten promises made by the previous owner.
Rent, Repairs, and Renewals: The Day-to-Day Job
Throughout the probate process, you must continue all landlord duties. All rent collected must be deposited into a dedicated estate bank account. You cannot mix these funds with your personal money.
You are also legally obligated to maintain the property. This means responding to repair requests promptly and keeping the building safe and operational. Deferring necessary maintenance to save money can backfire, leading to bigger problems, tenant disputes, and a breach of your fiduciary duty.
Handling lease renewals is a strategic decision. If a sale is likely, you might offer a short-term or month-to-month renewal. If the plan is to hold the property, securing a long-term renewal with a quality tenant is crucial to maintaining the property’s value.
The Inheritor’s Crossroads: A Framework for Deciding to Keep or Sell
Once the estate is stabilized, you and the beneficiaries face a major decision: keep the property for long-term income or sell it for a lump-sum distribution. This choice involves financial, practical, and emotional factors, and there is no single right answer.
The Biggest Tax Break in the Tax Code: The “Step-Up in Basis”
The most important financial concept to understand is the step-up in basis. Under federal tax law (specifically, IRC Section 1014), the cost basis of an inherited asset is “stepped up” to its fair market value on the date of the owner’s death.
This rule can result in enormous tax savings. For example, if your father bought a commercial building for $1 million and it is worth $5 million when he dies, the $4 million of appreciation is completely forgiven for capital gains tax purposes. The new cost basis for the estate and the heirs is $5 million.
This creates a powerful incentive to sell the property relatively soon after inheritance. If you sell it for $5.1 million, you only owe capital gains tax on $100,000 of gain, not the full $4.1 million. Furthermore, any gain on inherited property is automatically considered a long-term capital gain, which is taxed at much lower rates than ordinary income.
Comparing Your Two Paths: A Pros and Cons Framework
The decision to keep or sell involves weighing competing priorities. Using a structured framework can help clarify the best path forward for the beneficiaries.
| Factor | Pros of Selling | Cons of Selling |
| Financial | Provides immediate cash for distribution and ends ongoing expenses. | You lose a potential source of long-term rental income and future appreciation. |
| Practical | Ends all management responsibilities and simplifies the estate. | A probate sale can be a long, court-supervised process, especially with “limited authority.” |
| Tax | Capital gains tax is minimal or zero due to the step-up in basis. | You lose future tax benefits like depreciation deductions. |
| Family Dynamics | Gives cash to heirs who need liquidity, potentially resolving disagreements. | Can cause conflict if some beneficiaries have an emotional attachment to the property. |
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| Factor | Pros of Keeping | Cons of Keeping |
| Financial | Creates a steady stream of passive income and allows for future appreciation. | The property carries ongoing costs (taxes, insurance, maintenance) and market risk. |
| Practical | Continues the legacy of the deceased’s business or investment. | Requires active management, expertise, and time, even with a property manager. |
| Tax | Allows you to take annual depreciation deductions to offset rental income. | Rental income is taxable, and a future sale will incur capital gains tax on all post-inheritance appreciation. |
| Family Dynamics | Can be a source of generational wealth if managed well. | Can become a source of ongoing conflict if heirs disagree on management (“heirs property” dilemma). |
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Navigating Common Conflicts and Mistakes
The administration of an estate is fertile ground for disputes. Being aware of the common pitfalls can help you avoid them through transparency, clear communication, and professional conduct.
Top 5 Mistakes an Executor Can Make
- Co-mingling Funds. Never deposit estate rent checks into your personal bank account or use estate funds to pay your personal bills. This is a serious breach of duty and can lead to legal action and personal liability. Â
- Making Side Deals. Do not make verbal agreements with tenants or beneficiaries. All agreements related to rent, repairs, or asset distribution must be in writing and consistent with the will and the lease. Â
- Showing Favoritism. As executor, you must treat all beneficiaries impartially. You cannot give one sibling a better deal on a buyout or distribute assets unevenly unless the will specifically directs you to do so. Â
- Acting Without Authority. Do not attempt to sell property, distribute assets, or even pay bills before the court has officially appointed you and issued your Letters. Any actions taken before this grant of authority are legally invalid.
- Going It Alone. The single biggest mistake is trying to handle a complex commercial real estate probate without professional help. The legal and financial risks are too high. Hiring a probate attorney and a CPA is not a luxury; it is a necessary cost to protect the estate and yourself. Â
Three Common Scenarios and Their Solutions
Real-world situations are rarely simple. Here are three common scenarios that arise during the probate of a commercial property and how to handle them.
Scenario 1: The Uncooperative Tenant A tenant is refusing to allow property showings for a potential sale, creating a major roadblock.
| Ineffective Response | Consequence |
| Threatening the tenant with immediate eviction. | You likely have no legal grounds for eviction, and this will only escalate the conflict, leading to legal fees for the estate. |
| Offering a verbal promise of “cash for keys.” | Without a written agreement, the tenant can take the money and still refuse to leave, leaving you with no recourse. |
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Solution: Review the lease agreement with your attorney to understand your rights of entry. Communicate with the tenant in writing, offering a formal and legally sound “cash for keys” agreement that specifies a move-out date and the payment amount. This turns a conflict into a business transaction.
Scenario 2: The “Heirs Property” Dilemma Three siblings inherit a property. One wants to sell for cash, one wants to keep it for income, and the third is undecided but worried about costs.
| Ineffective Response | Consequence |
| The executor sides with one sibling over the others. | This is a breach of the duty of impartiality and will likely lead to a lawsuit from the other beneficiaries. |
| The heirs do nothing and let the property languish. | The property falls into disrepair, loses value, and one heir could eventually force a “partition sale” through the court, often at a below-market price. |
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Solution: The executor should remain neutral and facilitate a business-like discussion. The best path is for the heirs to form a legal entity, like a Family LLC, to hold the property. This forces them to create an operating agreement that outlines management roles, how costs will be paid, and buyout provisions, providing a clear framework for resolving disputes.
Scenario 3: The Surprise Deferred Maintenance After taking control, the executor discovers the deceased owner neglected the property, and it now needs a $100,000 roof replacement.
| Ineffective Response | Consequence |
| Ignoring the problem to avoid the expense. | A roof leak could cause catastrophic damage to the building and tenants’ property, exposing the estate (and the executor personally) to massive liability. |
| Using estate funds for the repair without notifying beneficiaries. | Beneficiaries may object to the large expense, accusing the executor of mismanagement or overpaying for the work. |
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Solution: Immediately get multiple bids from reputable roofing contractors. Present the bids and the risk assessment (i.e., what happens if the roof is not replaced) to the beneficiaries in writing. This transparency demonstrates you are acting prudently and fulfilling your duty to protect the estate’s assets.
Frequently Asked Questions (FAQs)
1. Do I have to honor the tenant’s existing lease? Yes. The lease is a legally binding contract that transfers to the estate. You must honor all its terms, including rent amount and expiration date, until it is legally terminated or renewed.
2. Can I be held personally liable for the estate’s debts? Yes. If you distribute assets to beneficiaries before all estate debts and taxes are paid, you can be held personally responsible for those unpaid obligations.
3. Do I need the court’s permission to sell the property? Yes, in most cases. The level of court supervision depends on the authority you are granted. “Limited authority” requires a court hearing to confirm the sale, while “full authority” is more streamlined.
4. What is a “step-up in basis” and how does it save on taxes? It adjusts the property’s cost basis to its fair market value at the owner’s death. This often erases decades of appreciation, meaning you only pay capital gains tax on growth that occurs after you inherit it.
5. Is profit from selling an inherited property a short-term or long-term capital gain? It is automatically treated as a long-term capital gain, regardless of how long you’ve owned it. This is beneficial because long-term gains are taxed at lower rates.
6. How much does probate cost? Probate can cost 4% to 7% of the estate’s gross value. This includes statutory attorney and executor fees, court costs, and appraisal fees.
7. How long does the probate process take? A simple probate may take a year, but an estate with commercial real estate can easily take 18 months or longer to fully settle, especially if there are complications or disputes.
8. What if my siblings and I can’t agree on what to do with the property? This is a common problem. The best solution is to form a legal entity like an LLC with a clear operating agreement. As a last resort, one heir can petition the court to force a sale.
9. Can I hire a property manager and pay them from the estate? Yes. Hiring professionals like property managers, attorneys, and accountants to help manage estate assets is a legitimate and recommended expense of the estate.
10. What happens to the property’s mortgage when the owner dies? The mortgage must still be paid by the estate. Beneficiaries who want to keep the property will typically need to either assume the loan or refinance it in their own names.