Who is responsible for the security deposit after a rental property becomes an REO?
Submitted by Michael
from CA
- 10/13/2009 - 3:15pm
As I understand it the bank must honor an existing lease agreement on a rental property assuming that it is not fabricated. Who is responsible for the return of the security/ cleaning deposit? Do most lenders negotiate a buyout to get the tenant to move early? If there is 6 to 12 months remaining what is a common offer. I think lenders give cash for keys to owner occupants so they will vacate do they do the same for tenants?
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Comments
The person you gave the deposit to is responsible for returning it.
Yes, the owner after a foreclosure must honor valid leases if they are at market rental rates.
Yes, most will offer "cash-for-keys" to either owners or renters to have you move early. Usually at least $500, almost never more than $5000, with $2000 being fairly typical.
A couple of lenders are starting to have programs to rent back to owners, or to let renters stay. Wouldn't count on it though.
I don't agree with Sean's assertion that "the person you gave the deposit to is responsible for returning it." The new owner, in this case, the bank, assumes all rights and liabilities of the lease. The bank is entitled to collect rents, and is responsible for the liability of the security deposit. This is the case in any sale, including a Trustee Sale.
Tom - what in the world gives you that ridiculous notion?
The buyer at a trustee sale is only subject to SENIOR liens and encumbrances, including leases. The majority of leases are JUNIOR to the loan, if recorded at all, and up until the recent change which prevents eviction prior to the end of the lease in a limited set of circumstances, buyers could simply evict tenants as their lease is WIPED OUT with the trustee sale and they are then just holdover tenants under the law with no rights under their now invalid lease.
Tom is right. Bank must return deposit. Sean apparently is not familiar with the Protecting Tenants at Foreclosure Act.
Dean - I've read it and completely disagree. Only right it provides tenants is "to occupy the premises until the end of the remaining term of the lease".
Says nothing about any other rights under the lease, and certainly does not make the buyer responsible for a deposit they never received.
Tom & Dean are correct. You have to read the Protecting Tenants at Foreclosure Act further till you reach the part saying, that the immediate successor in interest [pursuant to foreclosure] assumes such interest subject to: (1) the lease between the prior owner and the tenant...
Hi Anne,
PTFA is silent on the security deposit issue. This is why there is so much confusion and why most banks and auction investors will offer cash for keys.
Keep in mind that if you are going to argue that the new owner assumes the interest that would indicate that the current tenant would need to remain current on their rent in order to get the security deposit back.
PTFA is also silent on the issue of the rent that is due during the 90 day notification period. I think we can all agree that it was poorly written.
Anne - the language you quoted relates to section 8 tenancies, which I've only rarely encountered when buying foreclosures.
Is there a definitive answer on this? There seems to be a little debate on this (not on just this site).
I've purchased a couple of income properties and have ran into this very issue. Our lawyer basically told us the same thing that Sean did: we are not responsible for the deposit.
However, If the tenants do a quick internet search it seems like most of the information out there states that the new owner can be held responsible for the deposit. Regardless if this information is correct or not, the tenants will expect the new owner to be responsible for the deposit because as you know, everything printed on the Internet is true.
As a new owner of an income property, you want start off on the right foot with your tenants. In the end we just gave them a free month rent and applied it to the deposit because we did not want to evict them.
Sean, do you know a web resource that we could point them to correct this misinformation or do you have any suggestions to be able to correct this misconception with the tenants?
by the way the properties are in California... I don't know if this matters...
Hi Tim,
There is so much misinformation out there and the problem is compounded by a poorly written Protecting Tenants in Foreclosure Act. In most cases investors and banks choose to use a cash for keys negotiation to overcome some of the issues. The idea is to keep the lines of communication open and negotiate with the occupants so that you can ultimately avoid a costly eviction and inspire them to leave the property in good condition. You will always need to make contact to determine if they are a renter or an owner and if they have a lease (which under the PTFA you must honor provided it meets certain conditions) or if they are on a month to month agreement. At this time you can find out what their expectation are and how you will present your offer. It is always best to come to some agreement and prevent any damage to the property.
One thing I know for sure is that you do not have to be wrong to be sued and defending yourself and your actions can be very costly.
Thanks Michelle. We are negotiating with the tenants and in the end we are covering their deposits. Regardless if we are legally responsible or not, they believe that we are. In my experience, most tenants are honest and just want to pay their rent and live in peace. If we could definitively prove to them that we are not responsible for the deposit without going to court, I don't think they would expect it from us.
If you are willing to do cash for keys in excess of their deposit, you might as well pretend that part of it is their deposit, just to keep them happy. The only downside to that is that the tenant will then lose out on their absolute right to pursue the prior landlord for that deposit (and I believe many states also offer additional damages for failure to promptly return a deposit). If these "tenants rights" folks had a clue, they'd advise tenants to negotiate the best cash for keys deal they can with the new owner, and then take the landlord who actually received the deposit to court to recover that, with damages. Win-win.
Out of curiosity. We are in a similar situation as landlords. Could one go after the previous foreclosed owner to get the security deposits that they initially took from the tenants back?
You could likely have the person whose deposit it was sign over their rights to go after the prior landlord. Otherwise you weren't a party to the agreement and likely would not be able to.
Is an acting agent of a rental property responsible for paying the tenant their deposit back or is it the landlord/owners? Can the tenant take the agent to court?
Hi Rose,
You would want to review your rental agreement. In most cases a property management company is acting as an agent for the owner and your agreement is with this owner. In this case the owner would be responsible for paying you the security deposit. You could file a small claims suit and name the management company as well as the owner. Keep in mind that the penalties for failing to return the security deposit can be substantial. You may want to point this out to all parties. If they believe you are going to be pursuing this in small claims court and seeking damages this may give them some incentive to respond to you.
According to the law, the former landlord is responsible. The Supreme Court ruled that a security deposit is property of the tenant (a deposit is essentially held as collateral, as evidence many state laws require the landlord holds the deposit in a separate account that is safe from creditors). As such, when a house is foreclosed, the landlord's interest in the property is terminated and is therefore responsible to return the deposit.
The PTFA does not change this; it only protects the rights of the tenant to complete the term of the lease whereas before this act the lien being foreclosed was generally the senior obligation and thus terminated most leases.
The problem you run into is that most landlords facing foreclosure are not going to want to return a deposit. It is generally up to the tenant to see that they do as the successor cannot make demands on the part of the tenant. Since most tenants are often the most confused people in this process, making sure they get the deposit is often below more urgent concerns such as ensuring the rent is being paid the to correct party.
There are some states (California's civil code for example) that hold all successor's jointly and severably liable for the deposit. This means that although the former landlord is technically responsible, if the former landlord does not pay up, the successor is equally responsible.
The responsibility of the successor actually varies from state to state so it is best to double check state statutes to ensure you are not held equally liable under your state law in case the former landlord is difficult.
Bryan - great post, thank you. Can you point to the specific CA Civil Codes that hold successors liable?
Of course.
California Civil Code 1950.5(j) states that if the former landlord does not transfer the deposit to the new owner or back to the tenant along with a list of deductions, then the new owner is "jointly and severably liable"
Can the new owner sue the former landlord for the deposit?
Hi Annie,
The lease agreement would be between the prior owner and the tenant. I do not believe that the new owner would have any legal recourse regarding any security deposits held. If it was acquired through a trustee sale the leases would be wiped out and if the property was a traditional sale the security deposits and leases should have been included in the negotiations or at least disclosed.
are tenants protected by the (PTFA) in a trustee sale,or is the lease still wiped out though they meet (PTFA) requirments re;your "bonafide" lease? what does arizona civil code say about deposits? my landlord was a property mngmnt agent who claims my $1,000 deposit was put in a seperate account & it states on their companys website "deposit returned weather owner goes into forclosure" ,yet my agent isnt answering my calls and im not sure what to do. i actualy need my deposit in order to move, anyones help is greatly appreciated.
Hi Christine,
The PTFA absolutely protects tenants. If you have moved out of the property prior to the foreclosure then the landlord (or his agent) would be responsible for returning the deposit provided the property was left in reasonable condition. You would not be entitled to the security deposit prior to vacating the property.
If the property has gone to trustee sale then the new owner (lender/investor) would be required to give you a 90 day notice or honor the terms of your lease under the PTFA. Your security deposit would still be held by the prior owner and you could sue them in small claims court for the deposit.
Although the new owner (lender/investor) is not necessarily responsible for returning your security deposit they will typically offer a cash for keys incentive for you to vacate by a certain date and leave the property in good condition.
The bottom line is that you are not going to get any funds (cash for keys or security deposit) until you vacate the property and turn over the keys.
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