Apply deposit toward rent in landlord foreclosure?

Rent it Right

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted May. 26, 2011

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Rent it Right

Janet Portman
Inman News™

Q: We have learned that our landlord is in foreclosure, but we don't know how quickly the bank will move. Meanwhile, she expects us to pay rent, but we seriously doubt that we'll ever see our security deposit. I asked if we could apply the deposit to the next month's rent, and of course she refused and told us she'd terminate the lease if we tried that. Any suggestions? --Albie A.

A: You aren't alone in facing the dismal prospect of paying rent to a landlord who is so short on funds that she can't make her mortgage payments. You are also not to be faulted for fearing that your deposit, if it hasn't been used up already, will not be returned to you.

When property changes hands, owners are legally required to either return the deposit or transfer it to the new owner, and this rule applies whether the new owner is a foreclosing bank or someone who buys the house in a regular sale. But in foreclosure situations, the defaulting owner seldom returns the deposit or gives it to the bank.

In most states, the new owner in this situation is held responsible as a matter of law for returning the deposit. This is only fair, as the bank had the opportunity to require the former owner to transfer the money, but banks have not been known for following through with these details. And many tenants, caught in foreclosed rentals that have deteriorated, are so demoralized and intimidated that they move on and fail to press the issue.

One state is considering a common-sense approach to the dilemma faced by a tenant whose security deposit will never be returned. Oregon legislators are considering a bill (Senate Bill 293) that would allow tenants, upon learning that their rental is in foreclosure, to serve notice to their landlord that their deposit is to be used as rent.

Considering that many deposits are multiples of the monthly rent, this effectively gives tenants two or more months in which they at least need not keep paying rent to a defaulting owner. It also means that if the foreclosure goes through, there will be no deposit to cover any damage or otherwise unpaid rent. But most of the time, banks aren't sweating these details, either.

The Oregon bill provides that a landlord who rescues his property from foreclosure is entitled to require the deposit to be replenished. Tenants in this situation would have two months to return the money.

Q: While on vacation, I let a friend stay in my apartment. He accidentally left the freezer door open, which allowed the freezer to defrost. Water flooded the kitchen, soaked the floor, and ruined the downstairs' neighbor's ceiling and walls. Can the landlord stick me with this repair bill? Will my renters insurance policy help me? --Robert G.

A: The answer to the first question is "yes." By law and by contract (leases often repeat the law), tenants are responsible for damage that they or their guests cause to the rental premises. The fact that you were not home and didn't cause the damage yourself won't do you any good.

The responsibility is based on the contract you have with the landlord (your lease), and the only issues the landlord would have to prove are that the damage originated from a negligent act by someone who was in your home with your consent. After that, the only question is whether the landlord's repair expenses are reasonable.

Of course, the landlord could, if he chose, also look to your house sitter to make good on the damages. As a matter of law, people can be called to account for the damage they cause to other people's property. This is a different kind of claim, called a tort claim. But landlords usually look first to their tenants, both because it's simpler (there's no question that the tenant is legally responsible for the damages) and because the landlord usually has a security deposit to apply to the expenses.

Security deposits, however, are typically too small to adequately cover structural repairs on the scale you describe. Besides, once used up, a deposit has to be replenished by the tenant, unless the landlord is willing to continue to rent without that assuring pile of money available for damage repair and unpaid rent. Few will do so, which means that the tenant will be expected to come up with the cost of repairs.

Your renters insurance policy will cover you, up to a point. The landlord will demand that you cover his repair expenses, and you'll submit the claim to your carrier for the cost to repair your floor and the downstairs neighbor's ceiling and walls. But alas, the policy will cover only the damage to your neighbor's unit.

That's courtesy of a fine point of insurance law that even many insurance pros overlook: A liability policy will cover you when there's damage due to water only if you've damaged property that is not under your "care, custody and control."

Note that the issue isn't who owns the property; it's who controls it. The downstairs neighbor's ceiling and walls are clearly not under your care, custody and control, which means the damage to these areas will be covered. But your hardwood floor is "yours," as far as the policy is concerned, so that damage won't be covered.

Don't get sidetracked by the fact that it was your friend, not you, who left the freezer door open. He was there with your consent and, legally speaking, his mistakes while in your rental can properly be laid at your feet. For that reason, when the landlord hands you the bill, you are entitled to submit the claim to your carrier. And you should expect that the insurer will step up, at least as far as damage to the neighboring unit is concerned.

It's also worth asking your landlord to submit the claim to his own insurance carrier. He has a property policy that is designed to cover just such physical damage to the property. Then, the carrier could subrogate, or look to the person who caused the damage. In this case, that would be your friend (and it might also be you, but more on that below). But unless your friend voluntarily pays up, they'll have to sue him.

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