As Property Nears Foreclosure, Try to Compromise With Tenants

Q I own a rental property occupied by tenants who are two months into a one-year lease. The bank will foreclose on this property soon. I would like to know whether I am legally entitled to collect rent during this process.

My tenants think not, saying that a few days ago, a representative from the bank left a letter with them addressed to me. The envelope says "Notice of Intent to Foreclose." The tenants claim that I am no longer the owner, so they don't have to pay rent, but I told them that I continue to be the legal owner until this process becomes official. Should I start an eviction process because of the tenants' failure to pay? -- Paul S.

AIn most states, a foreclosure is accomplished by a sale on the courthouse steps. If no one bids, the lender keeps the property. In a few states, a judge can declare the property transferred to the lender. This is known as a strict judicial foreclosure.

But in every state, the owner needs to be informed, sometimes multiple times, that the ax is about to fall. It sounds like the "Notice of Intent to Foreclose" was your lender's formal announcement that negotiations are over and a sale (or judicial foreclosure) will take place. Because that sale or decree hasn't happened, the property is still yours and your tenants do have to pay rent to you. After the foreclosure, the rent goes to the foreclosing lender or new owner.

As with many things in the law, there are exceptions. In states that allow tenants to withhold rent when the owner has not maintained the property in a "fit and habitable" condition, the tenants could stop paying rent if you (or the bank or new owner) neglect your maintenance responsibilities. Sadly, many landlords have failed to maintain property that they know they will soon lose, and increasingly, banks and even new institutional owners have let foreclosed properties lapse into disrepair.

You can't guarantee how the new owner will treat the property, but you can make sure that your tenants have no legitimate reason to withhold rent by continuing to maintain the property.

Whether to begin eviction is another matter, and a delicate one. Keep in mind that after the foreclosure, these residents are almost surely going to be told to move, will incur moving expenses and inconvenience, and may end up with a comparable rental at a higher rent. In fact, they could sue you for the monetary consequences of your failure to deliver on your lease.

Schedule a time to talk with your tenants and explain the legal reality that you are, however fleetingly, still the owner. Do your best to assure them that you will not abandon your responsibilities as long as you own the property. But in view of the expenses the tenants will incur when the bank swoops in, you might offer to compromise on this last month or two of rent. If the residents refuse to meet you partway, you could point out that you are within your rights to file for eviction for nonpayment of rent. Even if you (or the bank or new owners) dismiss the case, the fact that such a case was filed may show up in future tenant-screening reports, much to your tenants' disfavor. This consequence may spur them to compromise.

I was recently asked to move out of a shared living arrangement by the original tenant. I wasn't happy about it, but I moved out amicably. But now I cannot get my security deposit returned. I've been pretty much shut out in the cold and can't even get the remaining tenant and the new tenant to reimburse me for the final utility bills, which were all in my name.

Incidentally, although the original resident told me when I first moved in, "We don't need anything in writing amongst friends," I scratched together a document we both signed that stated that I was buying out the departing tenant and that the original tenant would refund my deposit if I left. What should I do? -- Kevin M.

It's a good thing you followed your instincts and asked the original tenant to sign a document specifying what would happen if you moved out and another person took your place. No matter how friendly the situation appears at first, it's always a good idea to write down who has paid what to whom, and how the deposit will be managed if a roommate leaves and someone else takes his place. Normally, the incoming roommate buys out the departing one, minus the amount they can expect the landlord to keep for damage and cleaning attributable to the departing tenant. However, your arrangement -- where the original tenant acts as the keeper of the deposit and probably collected a deposit from the new roommate -- should have worked fine, too.

The only way to get your deposit back is to take the original tenant to small-claims court, where you can sue for enforcement of a contract -- that piece of paper he signed, promising to refund your deposit. Most courts will insist that you try mediation before going before the judge, and hopefully your ex-roommate will see the writing on the wall and settle with you. In the same lawsuit, you can ask for your roommates' contribution to the utility bills you paid on behalf of everyone.

Janet Portman is a lawyer and managing editor at Nolo. She specializes in landlord-tenant law and is co-author of "Every Landlord's Legal Guide" and "Every Tenant's Legal Guide." She can be reached atjanet@inman.com.

© 2008 Janet Portman

Distributed by Inman News