BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Tenant Deposits in Short Sales
Q: I am representing a buyer in a short sale where there is a tenant in the home on a lease with six months left. The listing agent tells me that the seller is broke, is collecting the rent from the tenant and spending it, and no longer has the $3,000 security deposit that the tenant paid at the beginning of the tenancy. And, a Notice of Default has been recorded against the property. We just received approval for the short payoff from the seller’s lender, so it looks like the sale will go through.
Can the seller just keep collecting the rent and spending it? Isn’t that illegal? Who has to pay the tenant the security deposit when they move out? How can I help my buyer?
A: Under the standard Deed of Trust in California, until such time that there is a foreclosure, the owner/landlord/borrower has the right to collect rents even though s/he is not paying the lender’s mortgage payments. This is because he still owns the property and all the lender has is a lien on the property. So, there is nothing illegal, per se, in the landlord continuing to collect the rents.
Some Deeds of Trust have an Assignment of Rents provision, in which case the lender can go to court once the borrower is in default and get a court order which orders the tenants to pay rent to the lender. But, the landlord is entitled to collect rents until that court order is issued. So, there is nothing that you can, or should, do here.
In all residential sales, when the property sells, the landlord is obligated to turn over all of the tenants’ security deposits either to the new buyer, or return them to the tenants. In short sales, the seller usually has spent the security deposits and cannot do so. In that case, the new buyer is stuck with having to pay the security deposits to the tenants, even though they did not receive them from the seller.
The buyer can sue the seller for those missing security deposits, (probably small claims court if the total security deposit is less than $7,500 for non-corporate owners). If the buyer obtains a judgment against the seller, that judgment can be collected years later, even if the seller is broke now.
PRACTICE TIP: If your short sale buyer is concerned about not receiving the security deposits for the tenants, recommend in writing that they discuss the matter with a landlord-tenant attorney prior to removal of contingencies.
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© Copyright Broker Risk Management 2010 06/18/10