Foreclosure risk: the writing's on the wall

Rent it Right

By Inman News Feed
Add Comment Add Comment | Comments: 0 | Posted Feb. 4, 2010

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Rent it Right

Janet Portman
Inman News

Q: Our daughter found a notice of default on her front door last week, telling her that foreclosure was imminent. She called the owner, who straightened things out with the bank, but we're really worried that our daughter will eventually be displaced by a foreclosure. What can we do to protect her interests? If she moves, what can we do to make sure she won't end up with a home that gets foreclosed? --Peggy M.

A: Until recently, protecting the interests of in-place tenants when their rental is in foreclosure was strictly a matter of state law. In most situations, the mortgage predated the lease, and the tenants lost their leases when the bank foreclosed. Some states gave tenants a longer notice period than they'd otherwise receive, but the bottom line was that the lease was over.

Now, thanks to 2009 federal legislation that took effect in May, tenants have more protection, nationwide. In every state, a lease will survive if the bank takes over after a foreclosure. If a buyer at the foreclosure sale intends to occupy the unit, that buyer must give at least 90 days' notice before ousting the tenant.

Your daughter can hardly monitor the landlord to make sure he's current on his payments. No laws require banks to fill you in predefault. But some states have passed laws requiring a notice of default to be sent to any occupying tenants as well as the owner.

Getting one of these is not good news, but at least it gives tenants a heads up and the opportunity, for example, to forego renewing a lease if renewal is imminent. Tenants who fear the worst may even decide to break their leases and move out, taking the risk of being sued for the rent on the balance of the lease in exchange for the opportunity to move at their own pace.

Tenants who are in the process of looking for rentals may have better ways to avoid a foreclosure down the line. In many states, new laws require landlords to disclose to tenants whether the property is at risk.

In Minnesota, for example, once a landlord has received notice of a deed cancellation or notice of foreclosure, the landlord may not enter into a periodic tenancy where the tenancy term is more than two months, or a lease where the lease extends beyond the redemption period -- other restrictions may apply, too. (See Minnesota Statutes, Section 504B.151.)

In Oregon, a landlord must disclose in writing the existence of any notices of default or pending foreclosure suits before signing a rental agreement. (See Oregon Statutes, Section 90.310.)

You can also do some sleuthing on your own. Check out a potential landlord's financial situation by going to the local courthouse or its Web site and searching the records for evidence of any foreclosure judgments or actions against the landlord. How about records showing financial problems, like bankruptcies? Call your Better Business Bureau and find out if they have records of complaints against the owner.

Finally, don't neglect the obvious: a conversation with the current tenants, in which you can ask about any default notices these tenants may have received, and deferred or neglected maintenance (a sure sign of financial distress). If the property appears run-down, that's a red flag, too.

Q: I'm renting to a couple of college students and have both sets of parents as lease guarantors. Last month, the tenants had an accident in the kitchen that resulted in several hundred dollars' worth of repairs. I notified the guarantors and asked them to repay me, but they refused, saying that they're obligated only if the tenants can't pay, and because I hold a security deposit, it's clear that the tenants' money (the deposit) should pay for the damage. Am I required to use the security deposit before turning to the guarantors? --Ann N.

A: Like many landlords, you're doubtless concerned about depleting the deposit before the end of the tenancy, when you may need all of it to cover unpaid rent or needed repairs (beyond normal wear and tear). To protect the deposit, you could have your tenants pay now for repairs required during the tenancy.

Or, you could use the deposit to pay for the repairs and then demand that the tenants top it off to the original amount. If they refused to do so, you could look to the guarantors, or you could serve a pay-or-quit notice. It's far better to get reimbursed up front.

But to whom may you look for reimbursement? Your ability to demand payment from the guarantors instead of the tenants depends on your lease guarantee clause. A thorough, unconditional guarantee will have these elements:

  • The clause should clearly make the guarantors "jointly and severally" liable, with the tenants, for all monetary obligations under the lease.
  • Your clause should warn the guarantors that they are not entitled to notice should the tenants fail to pay. It's up to the guarantors to keep track of the tenants' performance under the lease.
  • Finally, your clause should state clearly that you're not obligated to get the money first from the tenants. Practically speaking, that means you can send the bill directly to the guarantors.

Here's an example of a clear lease guarantee: "Co-signer agrees to be jointly and severally liable with tenants for tenants' obligations arising out of this lease, including but not limited to unpaid rent, property damage, and cleaning and repair costs. Co-signer further agrees that landlord will have no obligation to give notice to co-signer should tenants fail to abide by the terms of the rental agreement. Landlord may demand that co-signer perform as promised under this agreement without first using tenants' security deposit."

Take a look at your lease guarantee and see how it measures up. If your clause simply makes the parents guarantors of the lease, without more, you will need to learn whether a "typical" guarantee, in your state, is unconditional and contains all of the elements noted above. Next time, make it clear in the lease from the outset.

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