IS A FORECLOSURE AN EXCUSE FOR TENANT TO STOP PAYING RENT?

By
Title Insurance with THE ZARETSKY LAW GROUP P.A. - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY
http://actvra.in/KFp

Can a foreclosure of a rental unit be an excuse for the tenant to stop paying the rent to the owner being foreclosed?  This question and several other related questions was answered by an influential appellate court in Florida this week and it gives much needed guidance to Realtors, landlords and tenants who are faced with banks foreclosing on rented property.

The appellate court gave a very clear story line to the situation so with some small edits, I have reproduced most of the decision (without the citations) below:

The Facts -

Landlord Tatiana Serova entered into a one year residential lease of a condominium unit with tenant Vladimir Plakhov. The unit was the onlyreal estate which the Landlord owned in Florida. The lease called for $2200 per month rent. At the inception of the lease in November 2008, the Tenant paid $6600—$4400 for the first and last month’s rent and $2200 as a security deposit. The lease did not limit the type of damages to which the security deposit could be applied. The Landlord deposited the security deposit in an account with her real estate management company. 

The Service on the Tenant of the Foreclosure Suit

 

The Tenant paid $2200 rent for December and $900 rent for January. The Tenant stopped paying rent because he became worried after he was served as a defendant in a foreclosure lawsuit brought by the Landlord’s lender; also, the Tenant received notice from the condominium association that the Landlord had not paid certain association fees. 

 

The Landlord Trying to Modify the Mortgage -

At the time, the Landlord was involved in discussions with her lender about modifying her mortgage and she entered into several payment plans with the lender in 2009; the foreclosure case was dismissed in 2011. Although the Landlord had missed a payment to the condominium association, she brought her payments current in February 2009. The Tenant moved out of the unit in April 2009. The Landlord immediately listed the unit for rent with a real estate agency, but was unable to obtain a tenant until November 2009, due to market conditions.

The Court’s Analysis -

There were three issues for trial:

(1) whether the lender’s filing of a foreclosure action “entitled the [Tenant] to breach the Lease agreement, to discontinue tendering rental payments to the [Landlord]”;

 

(2) whether the Landlord’s delinquency in satisfying condominium common area expenses “entitled the [Tenant] to breach the lease agreement”; and

 

(3) whether the Landlord properly mitigated her damages after retaking possession of the unit. The trial judge entered a final judgment for the Landlord for $16,700, computed as follows: $26,400 rent owed - $7500 rental payments - $2200 security deposit.

 

The tenant lost at trial on these issues and appealed.

The Appeal – No Problem with the Lease

On appeal, the Tenant raises a number of issues, none of which have merit. The Tenant first argues that he was entitled to a “directed verdict” because the Landlord did not offer a copy of the written lease into evidence. However, in his answer, he admitted the validity of the written lease attached to the complaint and he failed to identify any problem with the lease. 

 

The Appeal – Tenant is Not a Third Party Beneficiary of the Mortgage

The Tenant next contends that the lease was “void or voidable at its inception” because the Landlord violated a rider to the mortgage which provided that the property subject to the mortgage was to be used as the “borrower’s second home.” However, the mortgage did not vest any rights in the Tenant because the Tenant was not an intended third party beneficiary of it.  “A party is an intended beneficiary only if [both] parties to the contract clearly express . . . an intent to primarily and directly benefit the third party… .”   The Tenant was not entitled to use the rider to attack the validity of his lease with the Landlord. 

The Appeal – Was the Security Deposit Held Incorrectly

Next, the Tenant asserts that the Landlord failed to comply with section 83.49(2), Florida Statutes (2008), by failing to provide written notice to the Tenant “of the manner in which the landlord is holding the advance rent or security deposit.” However, that subsection “does not apply to any landlord who rents fewer than five individual dwelling units.” § 83.49(2)(c), Fla. Stat. (2008). The Landlord owned but one rental unit in Florida, so she was excused from the subsection’s notice requirements. In any event, the statute provides that  [f]ailure to provide this [section 83.49(2)] notice shall not be a defense to the payment of rent when due.”

The Appeal – Landlord’s Security Deposit Claim

The Tenant further argues that he is entitled to the return of his security deposit because the Landlord failed to comply with the notice requirement of section 83.49(3)(a), Florida Statutes (2009).  The Landlord’s obligation to provide this notice was excused by the Tenant’s failure to give the seven-day notice implicated when a “tenant . . . vacates or abandons the premises prior to the expiration of the term specified in the written lease.” § 83.49(5), Fla. Stat. (2009). The failure of the tenant to give this notice “shall relieve the landlord of the notice requirement of [section  83.49(3)(a)].”  In this situation, the Landlord and the Tenant are free to litigate over their entitlement to the security deposit without leaping any procedural hurdles. The Landlord established damages (unpaid rent) far in excess of the security deposit. The lease did not limit how the security deposit could be applied, so the trial judge properly applied it to reduce the amount of damages owed by the Tenant. The Tenant thus had an opportunity to establish his “right” to the security deposit within the meaning of section 83.49(5), but was unable to do so. 

The Appeal – Constructive Eviction because the Tenant was Served with Foreclosure of the Leased Property

Next, the Tenant contends that he was constructively evicted by the Landlord’s dealings with her mortgagee.  A ‘constructive eviction’ is an act which, although not amounting to an actual eviction, is done with the express or implied intention, and has the effect, of essentially interfering with the tenant’s beneficial enjoyment of the leased premises. It may constitute a constructive eviction if the landlord does any wrongful act or is guilty of any default or neglect whereby the leased premises are rendered unsafe, unfit, or unsuitable for occupancy in whole, or in substantial part, for the purposes for which they were leased. Whether a constructive eviction has occurred is a“question of fact determinable by the trier of fact in light of the appropriate principles of law.” Whatever inconvenience the Tenant experienced by being served in the foreclosure action did not rise to the level of constructive eviction because the unit was not “rendered unsafe, unfit, or unsuitable for occupancy in whole, or in substantial part.” Moreover, the Tenant never gave the Landlord the notice to cure required by section 83.56(1) which is a precondition to the tenant’s ability to terminate the rental agreement for the failure of the landlord to comply “with s. 83.51(1) or material provisions of the rental agreement.”

The entire case is found at Plakhov vs. Serova.

_________________________________

 

© 2012 Richard P Zaretsky, Esq.

 

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make. This article is for information purposes and is not specific advice to any one reader.

 

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE 561 689 6660 RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide! Shortsales@Florida-Counsel.com New Website www.Florida-Counsel.com.

 

See our easy to find articles at TABLE OF CONTENTS - SHORT SALE AND LOAN MODIFICATION ARTICLES

 

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Re-Blogged 5 times:

Re-Blogged By Re-Blogged At
  1. Yolanda Hoversten 10/28/2012 09:16 AM
  2. Wallace S. Gibson, CPM 10/28/2012 09:47 AM
  3. Ginger Harper 10/28/2012 03:49 PM
  4. Praful Thakkar 10/28/2012 10:08 PM
  5. Evelyn Kennedy 10/29/2012 07:57 AM
Topic:
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Location:
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Tags:
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Ambassador
1,334,593
Richard Iarossi
Coldwell Banker Residential Brokerage - Crofton, MD
Crofton MD Real Estate, Annapolis MD Real Estate

Sadly, this is a situation that is coming up more and more frequently in foreclosure and short sale rentals.

Oct 28, 2012 09:27 AM #13
Rainmaker
163,803
Cory Fitzsimmmons
ReThink Real Estate Group - Golden, CO
Realtor - Denver, CO

Interesting!  Thanks for sharing and I am sure the laws are different here in CO but a common issue nevertheless.

Oct 28, 2012 09:48 AM #14
Rainmaker
323,152
Yolanda Hoversten
Berkshire Hathaway HomeServices Elite Properties - O'Fallon, IL
Broker - O Fallon, IL Real Estate
Thank you, Richard for the great analysis. Reblogged.
Oct 28, 2012 09:49 AM #15
Rainmaker
514,531
Kevin J. May
Hobe Sound, FL

Nice clash between the moral and legal obligation Richard.  We've seen lenders advise tenants to stop paying rent also.  Many of the owners can't stay afloat for too long when that happens.

Oct 28, 2012 10:07 AM #16
Ambassador
633,657
Doug Rogers
Bayou Properties Realty - Pineville, LA
Your Pineville Louisiana Agent

The threat of being booted out with little notice would give me some concern. Plus, what are the odds of getting the deposit back if the owner is in foreclosure?

I would hope the landowner would at the very least disclose that he/she is not paying the mortgage.

Oct 28, 2012 10:39 AM #17
Rainer
126,802
Jon Karlen
Finish Line Realty - Shelbyville & Louisville Ky Real Estate - Shelbyville, KY
Louisville & Shelbyville Kentucky real estate

Very interesting case - and should have a big impact as a precident for future situations.

Oct 28, 2012 11:24 AM #18
Rainer
112,378
Matthew Sturkie, CRS, GRI 909-969-3805
Action Realty - Apple Valley, CA
CRS, GRI 909-969-3805

Hi Richard, excellent post and an issue that comes up frequestly here in California.  In my opinion, foreclosure is not an excuse for a tenant to stop paying rent. I agree with John in comment #12.       

Oct 28, 2012 11:32 AM #19
Rainmaker
1,284,459
Carla Muss-Jacobs, Principal Broker/Owner
BuyersAgentPortland.com | (503) 810-7192 Portland Metro Exclusive Buyers Agent | 100% Buyer Representation ~ 100% o... - Portland, OR
Buyer Focused ~ Buyer Results

If the payment of rent was an issue when the tenant was named as a defendant, they should have covered themselves a little more and paid it into court until the issue(s) were resolved. 

Oct 28, 2012 01:40 PM #20
Rainmaker
134,415
Paul Francis
Prudential Americana Group - REALTORS - Las Vegas, NV
Las Vegas Real Estate - Summerlin Homes - 702.592.

It's pretty much spelled out and pretty easy to decipher in Nevada. As long as the tenant is notified of the circumstances going on the lease is enforcable. Even if the house gets foreclosed on and it's a legitimate lease.. the tenants still have rights.

Oct 28, 2012 02:12 PM #21
Rainer
236,286
Donald Reich
Prudential Centennial - New Rochelle, NY

WOW!     The foreclosure crisis really brings all sorts of issues. Every case is different, so be careful, and make sure you have the a counsel of a good lawyer

Oct 28, 2012 02:14 PM #22
Rainmaker
214,197
Richard Zaretsky
THE ZARETSKY LAW GROUP P.A. - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

#20 has it right.

My article on how the tenant is legally able to protect itself both for the security deposit, eviction, and the Federal Protecting Tenants in Foreclosure Act is spelled out in my blog TENANT PROTECTION LAW AND FORECLOSURE PROBLEMS and TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS.

Oct 28, 2012 02:58 PM #23
Rainer
82,264
Ben Gerritsen
Vintage Lending, NMLS ID: 287106 - Salt Lake City, UT

Tenants must also keep in mind that if they would like to purchase a home in the future, they will need to have their rental history verified. If they stopped making payments, this will only delay the time in which they can qualify for a mortgage. If they provide a roadblock to someone else, they are only providing a roadblock to themselves.  

Oct 28, 2012 03:17 PM #24
Rainmaker
541,553
Ginger Harper
Coldwell Banker Sea Coast Advantage - Southport, NC
Your Southport~Oak Island Agent!

I think that many times the tenant thinks that if it is in foreclosure...why do I have to pay.

Little do they think of the ones that have been forced into foreclosoure or needed an out causing the foreclosure in the first place.

Oct 28, 2012 03:49 PM #25
Ambassador
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Praful Thakkar
Keller Williams Realty - Andover, MA
Andover, MA: Andover Luxury Homes For Sale

Richard, I leave these issues to the attorney - though it is interesting to know that many states do favor tenants whereas your story is different!

Oct 28, 2012 10:06 PM #26
Rainer
277,279
Steven Cook
No Longer Processing Mortgages. - Tacoma, WA
- Pierce, King, Kitsap, Thurston, Mason Counties

Richard -- thank you for another thorough, well explained post on this important topic.  I agree with Ben (#24) regarding future home rentals/purchases by the tenant.

Oct 28, 2012 10:58 PM #27
Ambassador
1,563,910
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 800-610-7253 DRE01267479 - Costa M

Richard - Quite an interesting recitation of the issue, facts and law.  Thank you.

Oct 29, 2012 12:00 AM #28
Rainmaker
192,406
Brian Kuhns
Coldwell Banker Roth Wehrly Graber - Fort Wayne, IN
Fort Wayne Real Estate by Brian Kuhns

Interesting case and I assumed the tenants responsibility would remain unchanged unless their right to the property had changed. Thanks for posting and congrats on the feature

Oct 29, 2012 05:45 AM #29
Rainmaker
1,158,659
Myrl Jeffcoat
GreatWest Realty - Sacramento, CA
Greater Sacramento Real Estate Agent

You illustrate an issue I hadn't thought of before.  When you stop to consider the number of homeowners, who have gone out and bought another home, while still owning an existing home, they ultimately stop making payments on, a tenant to that home could be truly as risk for a can of worms, they didn't ask for. 

Oct 29, 2012 08:22 AM #30
Rainmaker
331,764
Inna Ivchenko
Mannis Real Estate Group - Calabasas, CA
Los Angeles / Valley Homes

Oh, God, I had such experience with my tenants.... few times. Tenants do worry when they paid substantial security deposit and suddenly( owner/landloard usually forgets to inform them about default) they receive notices of trustee sale and a lot of 'weird ' people knock on their door offering pre foreclosure assistance.

Oct 29, 2012 01:14 PM #31
Rainmaker
403,146
Richard T. Dolbeare
Keller Williams Realty - Lihue, HI
R(B), ABR, CRS...Hawaii Multi-Island Specialist

It's a good outcome but was it worth the landlord's time?

Oct 29, 2012 11:18 PM #32
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