Question

When is a landlord required to notify tenants of property being sold?

Answer

Although I know for certain that most states do not require by law that the landlord notify tenants in advance of a sale, I don’t know for certain that none does. However, I’m not sure it matters because logic and my experience over more than 3 decades of real estate investment and management experience has been that it is usually best to provide such disclosure anyway.

Obviously, if a “For Sale” sign is installed on the property, the tenant will know of a possible sale. Even if the marketing of the property does not include on-site signage, the tenant will know that the property is being sold because it is almost always necessary that potential buyers (perhaps more than one) and/or their agents (e.g., lenders, appraisers, inspectors, contractors) visit the property once marketing begins, particularly after the first purchase offer is made, with this often being well in advance of escrow closing. While many of these tasks do not require access to interiors of units, it is almost certain that one or more tenants will notice strangers who are involved in surveying common areas.

For example, often prior to marketing of the property the owner hires contractors to do deferred maintenance and/or improvement and those vendors often know that they are doing the work because of a future sale. Curious tenants will likely obtain this info from those vendors. Thus, at least some tenants will know well in advance of other indications – perhaps before it is even listed for sale – that a sale will likely occur in the future. And, one tenant knowing something usually means all tenants know that thing.

Of course all access of leased premises would require advance notice of entry in accordance with state law and it would be nearly impossible and inadvisable to not disclose why access is being requested. More units often complicates matters.

Another practical issue is that an owner should do his/her best to avoid alienating tenants because this can result in tenants “bad-mouthing” the property to all who visit the property, including potential buyers. One must also keep in mind that tenants may refuse to allow access, perhaps because they’re alienated by the way they’re being treated during the marketing. This can occur in spite of the lease agreement explicitly allowing access for such reasons (as all agreements should) and if it does there is nothing that can be done about it except through the court, meaning delays. Their refusal cannot be overcome by force or deception.

Also, for multi-unit properties some of those tenants whose leases expire within the next month or so may if upset give notice of termination at the end of their lease term (30 days for month-to-month) resulting in greater than normal vacancy for the property, possibly reducing the price it can eventually be sold for and/or a lender’s willingness to make a loan, particularly in a bad rental market when tenants have more alternatives than usual. In a slow sales market that might require
many months to close escrow, the seller usually prefers to avoid vacancies.  Alienation of tenants can only increase the risk of increasing vacancies.

For reasons mentioned above and for other reasons, I feel it is usually in the interest of the owner to provide advance notice to tenants upon listing the property with an agent, even before, if there will be significant potential for disclosure by contractors as mentioned earlier. Most tenants will likely consider this to be a positive thing as it indicates that the owner has consideration for them. The owner must also keep in mind that sales can fall through, meaning that tenants’ lives must again be disturbed by the process related to some of the needs for entry.

Providing tenants with written notice of the potential sale also gives the owner a chance to reassure the tenants that their lives will go on pretty much as usual because (1) their lease agreement is fully binding on a future buyer, (2) their security deposit will be transferred to a new owner through escrow, (3) rent paid past the close of escrow will be credited to the new owner, (4) they will be notified immediately upon close of escrow and then be provided contact information regarding the new owner, (5) the need for access will be keep as minimal as possible, and (6) housekeeping will be of no interest to those permitted access. You may be able to think of other issues that might be of benefit to mention.

Although it is of value to reassure both residential tenants and commercial tenants, it can be of most importance to tenants of commercial property because commercial lease agreements are usually for multiple years (often 5 or more), include specifically scheduled rent increases, and include lease terms related to options for renewals and/or extensions. Often the survival of a tenant’s business is greatly dependent on the exact terms of the lease being in effect as originally agreed.

Because sales can and sometimes do fall through after all contractor visits related to the first potential buyer, there is potentially a multiple number of times that access will have to be provided.  Since access of leased premises is an invasion of privacy, a disturbance to peaceful enjoyment, and an inconvenience to tenants, it can be beneficial to provide tenants some financial benefit for inconveniencing the tenants. There are numerous ways to do so, but the simplest might be to reduce their rents a bit for a month or two from the time when the first sale-related access is required.

I recommend that you also do some Internet research of your own regarding the issue for your state.

Buying At Bankruptcy Auctions

Bankruptcy sale properties are probably not as well known to be potential sources of properties as are foreclosures and tax sales. However, they can be a good source for acquiring good properties at under-market prices.

Bankruptcy is a legal procedure handled by the federal judicial system. Bankruptcy cases cannot be filed in state court.  Each of the 94 Federal Judicial Districts handles bankruptcy matters, and in almost all districts, bankruptcy cases are
filed in the Bankruptcy Court. Although bankruptcy is a federal matter, state laws affect certain aspects of the matter such as exemptions regarding what assets can be retained by the debtor. Sale of real estate occurs when a person or
business entity files for bankruptcy under a chapter of the Bankruptcy Code that provides for sale of assets, usually Chapter 7, with the proceeds of sale being applied against liabilities of the debtor.

When a Chapter 7 petition is filed, the U.S. Trustee (or the Bankruptcy Court in Alabama and North Carolina) appoints an impartial case Trustee to administer the case. The primary role of a chapter 7 Trustee is to liquidate the debtor’s
nonexempt assets in a manner that maximizes the return to the debtor’s unsecured creditors. The Trustees are assisted by attorneys, accountants, appraisers, real estate brokers, and other necessary service providers, all
being paid out of the assets of the one who files bankruptcy. Real estate is usually sold at auction through a real estate broker who is licensed in the state where the property is located. The broker is responsible for marketing
the property and conducting the auction. The broker receives a percentage of the sale price, some of which might be shared with a broker who represents the successful bidder.

Exempt assets are those of the debtor’s assets exempt under the Code or are subject to valid liens, for example, a mortgage or IRS lien. Nonexempt properties, both real property and personal property, are almost always sold at auction.
This mode of liquidation is considered most likely to result in the highest sale price, thus, most likely to maximize return to creditors.

There are specific procedures that must be followed, including providing notice to the public and conduction of the actual auction. The listing real estate broker and auctioneer (often a different person) do not warrant the accuracy of any of the information provided about the property. Registered bidders are advised of the requirements in advance of auction day and on auction day. However, announcements made from the auction block will take precedence over any printed material provided or any prior oral statements made. In the event of any dispute between bidders, the Auctioneer’s decision will be final.  The Auctioneer has the right to refuse admission or ask an attendee to leave the auction.  The Auctioneer
also has the right to withdraw or add any property to the auction.

The auction will take place on a specified advertised date and may take place on-site of the subject property or at some other specified location. Usually, prospective buyers must register in order to bid at the auction. Registration may be allowed on the day of sale or be required by some date prior to that day. A specified deposit (cash or cashier’s check) is usually required to receive a bidder’s number on the day of the auction. This deposit is typically in the range of $500 to $1,000, but may be significantly more for larger properties. The funds must be cash or certified funds, usually made payable to a specified title company. This deposit will be refunded to all unsuccessful bidders immediately after the auction.

For parties interested in purchasing the property, but unable to attend the auction, arrangements can usually be made to participate by phone or written bids or via an authorized representative.

Bankruptcy auctions require a significant deposit upon successful bid, and require short escrows.  As for foreclosure and tax sales, properties are sold “as is.” Usually, no contract contingencies for financing, inspections, or other due diligence tasks will be accepted. One must complete all inspections and other due diligence and have their financing ready to go prior to the sale date. Terms are cash to the Court. The properties will usually be available for inspection by appointment only. The potential bidder may utilize professionals in performing due diligence.

It is strongly recommended that all prospective non-cash purchasers pre-qualify themselves prior to auction.  If closing is delayed by actions or failure to comply with these auction terms and conditions by a Successful Bidder, default may be declared and the earnest money deposit may be retained by the Trustee.

There may or may not be a minimum or reserve bid on the property. The successful bidder (buyer) will usually be required to immediately make a deposit, usually about ten percent (10%) of the total contract price. The deposit must usually
be a cashier’s check, or by wire transfer. This deposit is usually non-refundable except if the sale is not approved by the Court.

The successful highest bid will be subject to Court approval. However, as the major benefit of an auction is to obtain the highest possible sale price in a given market, the high bid will usually be approved by the bankruptcy court.

The balance of the price must usually be placed in escrow within a short period after the date of sale, often in the range of five to ten business days. Unless creditors chose to dispute the facts of the bankruptcy, most proceedings
regarding real estate involve a Judge only in that he usually approves (1) the price and terms of sale, (2) the terms of the listing with a broker, and (3) the actual sale to the successful bidder.

Close of escrow will be scheduled for as soon as possible thereafter, usually based on the Trustee’s estimate of the time required for Court approval and typically on the order of 30 days.

The Court will usually deliver title free and clear of secured liens as well as any other valid liens of record, but subject to tax pro-ration, restrictions, reservations, and easements of record, zoning, environmental protection, and other municipal, federal and state laws or facts which an accurate survey and/or inspection of the tract being sold might show.

A preliminary title report is often available for inspection prior to the sale.  However, if not provided, a potential bidder should certainly invest in the cost of obtaining one. Often the buyer must pay all escrow and closing costs,
including an owner’s title insurance policy if one is desired (highly recommended). Property taxes will usually be prorated to the close of escrow.

There are advantages to purchasing a property from bankruptcy compared to purchasing a foreclosure or tax sale property. One is that there is usually little risk of the property being withdrawn prior to sale due to curing of defaults. Another
is that there is no redemption period after completion of the sale. Another possible advantage is that the properties available from bankruptcy auctions are sometimes in better condition than from foreclosure or tax sale auctions,
partly because the Trustee may be willing, if funds are available in the bankruptcy estate, to invest a little money in order to maximize the sale price.

However, bankruptcy income properties usually have problems. In fact, this is sometime one of the reasons why the owner filed bankruptcy. One possible problem is high vacancy rates, even zero occupancy. This is, of course, usually more of a
problem the larger the property. It is also usually a bigger problem for commercial properties compared to residential units. This is because commercial financing is usually more difficult to obtain, particularly for a low occupancy
property, and because it can take longer to rent up commercial units compared to residential units. However, as the difficulty of renting vacant units is directly related to the rent for units of a particular quality in a particular
location, the risk depends on the price being paid for the property.

Although, as mentioned earlier, bankruptcy properties are sometimes in good condition, such is not always the case. Some properties may have serious deferred maintenance issues – after all, if the owner had insufficient funds to avoid
bankruptcy, he may have been unable to properly maintain the property for quite some time. However, this is not necessary the case for all of a given bankrupt owner’s properties being sold. The degree of deferred maintenance often depends
significantly on the time period of the owner’s descent into bankruptcy.

If specified in published auction information, a commission will be paid by the listing broker to a licensed broker who represents the buyer for the sale. To qualify for the commission, the broker or salesperson must usually register as
the prospect’s agent by some specified date prior to the auction. Furthermore, the licensed broker or salesperson must usually accompany the prospect to the auction. Some of the requirements for a particular auction are set by the
Bankruptcy Court Trustee and some by the listing broker.

Question 1

Should I rent to an applicant who has good credit (Credit Score: 790) and appears to pay his bills as agreed, but has filed 9 Chapter 7s and a Chapter 13?

Answer 1

Without additional details regarding all information you might have regarding the filings, I can only discuss some general issues related to applicants who have filed for bankruptcy.

Most importantly, landlords have the right to set specific tenant selection criteria which has a business purpose and this can include a bankruptcy filing as a reason for rejection of the application as long as the landlord has a policy that says someone who has been involved in a bankruptcy is not acceptable. The policy should be written and should state what bankruptcy issue is considered unacceptable – e.g., which Chapter(s) and whether it matters if an applicant has simply filed or the bankruptcy was completed.

Federal fair housing laws do not include a protected class for financial condition or past financial history.  If the landlord’s criterion is rejection of every applicant who has filed for bankruptcy and the criterion is applied to every applicant without discrimination, the rejection of the application is a legitimate business decision by the landlord.

While recognizing that bankruptcy is a legal right allowing relief from certain debts, a landlord wants a tenant who has a satisfactory history of credit management. Specifically, the landlord wants a tenant who has the ability and willingness to pay rent. A bankruptcy filing indicates the applicant was, apparently thought he was, or wanted creditors to think that he was unable to meet his financial obligations during a certain period. The underlying event necessitating bankruptcy may have compromised the applicant’s ability to meet future financial obligations. The landlord may not want to take a chance.

However, some landlords set financial criterion that allows some flexibility in evaluating bankruptcy filings. The reason why the applicant filed and/or completed bankruptcy can be most important. Sometimes circumstances beyond control force one to choose bankruptcy. Examples include serious medical problems or a divorce. Landlords may give greater importance to the applicant’s credit management history since the bankruptcy filing. For example, a bankruptcy filing will stay on the applicant’s credit record for seven to ten years, depending on the Chapter filed under. If the applicant is nearing the end of that record period and the bankruptcy has been fully discharged, the landlord, while still taking the bankruptcy into account, may focus on the most recent year period of credit history (for instance, the last three or four years.) The landlord may also elect to offer tenancy based on acceptance of conditions such as a co-signer or guarantor, a higher security deposit (as allowable by state statute), or a shorter-term lease. The landlord is still bound by fair housing laws and cannot discriminate by selectively offering different terms to different classes of applicants that are protected
under federal, state, or local fair housing laws.

There is another consideration in that, assuming he/she has adequate income, the applicant should be more credit worthy after a bankruptcy than before. First, discharged old debts will no longer have a claim on future income and rearranged payment plans can solve cash flow problems. Second, bankruptcy cannot be filed again for a number of years.

For applicants who have fully completed a bankruptcy, a landlord must consider under which Chapter of the Bankruptcy Code the bankruptcy was done.

Furthermore, one must realize that not having filed bankruptcy doesn’t always mean much, as anyone who has never filed for bankruptcy could file at any time because (1) even though there is nothing to indicate a problem in their record, as there are debts that don’t appear in the credit record or (2) soon after they move in unexpected medical expenses quickly drive them into bankruptcy. A landlord cannot file a lawsuit for collection or eviction once the bankruptcy filing has
occurred without permission of the Bankruptcy Court.

While a landlord might theoretically collect some of any unpaid rent from before the filing, my experience has been that it is likely the amount will be significantly less than owed or nothing at all because the Court will consider a landlord’s claims of less importance than those of other creditors.

Chapter 13 is a repayment plan for individuals based on current and expected future income. The debtors can impose a Court-approved debt management plan on the creditors and enforce the plan against uncooperative creditors. The debtor keeps his property and makes regular payments to the Trustee out of future income to pay creditors over time, usually 3 to 5 years. Repayment in Chapter 13 is usually not in full, but can range from nothing to 100% depending on the debtor’s income and the types of debt.

Accordingly, a landlord needs to know the final approved payment plan of the bankruptcy in conjunction with relatively certain income in order to determine whether the applicant can be expected to pay the rent or whether, for the same reason, an existing tenant should be allowed to remain in tenancy. If the debtor has a good job which he/she has had for a reasonably long time, he/she might be in a better financial condition and more able to pay the rent on time than many
applicants who have never filed for bankruptcy.

Chapter 7 is a liquidation proceeding in which the debtor’s non-exempt assets, if any, are sold by the Chapter 7 Trustee, with the proceeds being distributed to creditors according to the priorities among creditors established by law. A Chapter 7 usually discharges all debts except for those which the debtor agrees to keep – e.g., he/she doesn’t discharge his/her car loan because a vehicle is necessary to remain employed or keep a business going.

Filing for Chapter 7 is in no way the same as obtaining a discharge of debt under Chapter 7.  Theoretically, one could file as often as he’s willing to pay the related attorney fees and filing fees. That is, if the Court denies his filing one
month, he could file again at a later date. Such multiple filings might indicate fraud against creditors. If, however, one obtains a discharge of debt under Chapter 7, he cannot obtain another discharge for at least 8 years.

Accordingly, similar to Chapter 13, a landlord needs to know which debts were not discharged, ongoing payments regarding those items and bankruptcy in conjunction with relatively certain income in order to determine whether the applicant or an existing tenant can be expected to pay the rent.

Finally, I would comment that you should certainly be discussing the matter with the applicant if you are considering him as a tenant. Sometimes there are derogatory items in credit reports that can be ignored once the landlord has all the details of the issues and has independently confirmed them.

For a lot more discussion regarding tenant bankruptcy see our Mini Training Guide titled “9 Tenant Bankruptcy Issues.”

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Question 2

I’m trying to find out what the rate of depreciation is for carpet under California law.
Answer 2

I’m not certain whether you are inquiring about (1) depreciation under the IRS Code (which will likely be the same when reported on state income tax returns) or (2) how to take depreciation into account when charging a tenant for damages.
While they are both issues regarding depreciation, the answer will be significantly different.

The depreciation that is allowed when charging for damaged carpet is not likely defined by law. However, if the matter goes to court before a knowledgeable judge and with the tenant being knowledgeable or having a competent attorney then the method used must be reasonable. This usually means that when calculating damage the landlord must take into consideration:

• expected life of the carpet when new,
• condition of the carpet when the tenant moved in (if not new),
• length of tenancy,
• condition of the carpet when the tenant moves out, and
• that the tenant cannot be charged for normal wear & tear.

The rate of depreciation for income tax purposes is specified under the IRS Code and depends on:

• recovery class,
• applicable recovery period,
• convention,
• placed-in-service date,
• basis for depreciation, and
• depreciation method.

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Question 3

I have been using many addendums to the California Residential Lease Agreement. Which ones are currently required for residential properties leased in California in 2013 – e.g., Bedbug, Mold, Carbon Monoxide Detector, other.

Answer 3

It is my understanding that the following disclosures must be provided in CA, either, as required for some, within the lease agreement itself, or, an option for others, by an independent document or an addendum to the lease. The issues mentioned are not necessarily the only ones of concern or the latest versions of the laws, as laws are continually changing. Also, there may be federal or local laws that are more stringent than the state’s. Accordingly, I highly recommend that you independently research the disclosures and other issues related to federal, state, and local laws.

Most issues must, by law, be disclosed to the applicants/tenants prior to executing the lease agreement and most must be disclosed in writing. Even if not required by law, all disclosures should always be made prior to lease signing and be made in writing, preferably with signatures of all adult occupants – which should always be all occupants having legal capacity, i.e., all who are at least the legal age or are legally emancipated minors – so that the landlord can prove having made disclosure.

• Lead hazard disclosures as have long been required.
• Prior to commencing lead paint renovations, certain other disclosures may be required – certain types of housing units are exempt.
• Every lease agreement must include a statutorily-defined notice regarding the existence of public access to database information regarding sex offenders.
• If any gas or electric service for which the tenant will be paying for and the lease premises also serves other areas – e.g., common areas or other rental premises. If so, the manner by which costs will be fairly allocated must be
  disclosed.
• If there are military ordnance locations within one mile of the property, the landlord must disclose in writing that these locations may contain potentially explosive munitions.
• Prior to lease execution, landlord must provide written disclosure when landlord knows or has reason to know that mold exceeds permissible exposure limits or poses a health threat and must provide a consumer handbook developed by the state department of health services that describes the potential health threats from mold.
• Landlord must give each tenant a copy of the notice provided by the registered structural pest control company if a contract for periodic pest control service has been signed.
• If landlord has applied to demolish the unit, landlord must provide written notice of the fact to prospective tenants before accepting any deposits or screening fees.
• For leases signed after January 1, 2012 by someone who has not previously occupied the unit, landlord must provide a lease clause describing the areas where smoking is limited or prohibited.
• For a rental property of 1 to 4 units, prior to signing a lease agreement the landlord must provide written disclosure of the receipt of a notice of default.  This disclosure must be available in a number of languages.
• Contamination related to illegal drugs can require specific disclosures.
• Although only required for businesses that employ 10 or more persons, it is recommended that landlords post a Proposition 65 warning notice on the premises.

Again, the above discussion summarizes those issues of which I am currently aware and as I understand them. It may not include all issues of importance to CA landlords and the brief summaries provided may not include everything that a landlord must know in order to comply with federal, state, and local laws. Also, the law may require written disclosure even if the above summary does not so state.

Lease Agreements – Part 3

We continue our series regarding “Lease Agreements” with a discussion of what should be in a lease agreement and what should not be.

Lease Issues

There are many issues that must be included in all lease agreements, whether residential or commercial. There are still more issues that should be included, and yet more that will be covered in a “good” lease. In general, all leases, whether residential or commercial, may cover the following or similar issues (not necessarily in order of importance):

• Date of execution.
• Lessor (landlord) and lessee (tenant) information – may be a property management company for lessor and lessee will usually be the one responsible for paying the rent.
• Identification of the leased premises – street address, unit number, city, state.
• Term of the lease – beginning and ending dates.
• Security deposit, other deposits and fees, and/or last month’s rent – the amount must be within maximum limits allowed by state law, and should specify when and how the deposit will be returned, must disclose where deposits be
  kept in some states, and can state the rate of interest to be paid to the tenant where interest is required.
• Rent issues – amount, pro-rated amount for partial month, manners of payment (cash, personal check, bank check/money order, electronic), when due, where paid, any grace period, and sometimes specified future increases.
• Late charges – within the limits allowed by particular state.
• Penalties for returned personal checks or other transaction failures.
• Conditions of possession including rent & deposits that must be paid at execution, before possession, and/or following lease commencement.
• Any repairs or improvements to be completed by the landlord before possession or by a later specific date.
• Joint and several liability for all who sign the lease.
• Utilities paid by landlord and utilities paid by tenant.
• Appliances or equipment provided or not provided by landlord.
• Maintenance responsibilities of each party.
• Use of premises: Residential – residential purpose only, names of all occupants, and not to be used for illegal purposes. Commercial – specific allowed and prohibited business uses.
• Pet policy – prohibition or specific ones allowed or not allowed, must not discriminate against assistance animals.
• Alterations, additions – those allowed and those prohibited – including no addition or changing of locks without written permission.
• Access by landlord or landlord’s agents, specifying notice period for non-emergency; some states allow lease agreements to supersede statutes.
• Assignment and/or subletting and/or roommate, prohibition or conditions and approval process.
• Abandonment or extended absence by tenant without notice to landlord.
• What happens in event of fire or other casualty making space unusable.
• Lease renewal procedures.
• Holding over terms – usually reverts to month-to-month, but sometimes automatic renewal for specific term, often with rent increase and/or other changes in lease terms in either case.
• Hazardous materials prohibition.
• No smoking allowed – many landlords and property managers are now prohibiting smoking in their units and some city governments passing ordinances prohibiting smoking in multi-unit residential buildings.
• Eminent domain.
• Lease subordinate to mortgages and lease not to be recorded.
• Binding on heirs.
• Notices – address and manner of delivery for legal notice to each party.
• Parking restrictions and/or assignment.
• Insurance: Residential – advise or require tenant to insure own possessions;
• Commercial – requirements to provide specific insurance coverages.
• Remedies are cumulative & non-waiver (specific waiver of terms doesn’t waive future right to enforce).
• Tenant’s remedies in case of landlord default.
• Landlord’s remedies in case of tenant default.
• Tenant not to withhold rent unless there is a valid reason allowed by statute.
• Termination notice requirements and vacating procedures, including penalties in accordance with state law.
• Abandoned property – as allowed by state law.
• Homeowner/property owner association issues.
• Severability and survival of lease clauses and validity of each part.
• Grounds for termination – defaults of material terms & conditions and specific items, e.g., criminal activities.
• Estoppel and/or Attornment.
• Dispute resolution – mediation or arbitration.
• Rules and Regulations – state that they are made part of the lease agreement (usually reference to separate document).
• Attorney fees and Court costs.
• Entirety of agreement.
• Additional terms and conditions of importance that are not contained within the printed agreement – for example, modifications necessary for handicap accessibility.
• Signatures.
• List of exhibits, if any.
• Indemnity clause.
• Disclosures.

Residential leases often cover the following issues that are not usually part of a commercial lease:

• Occupancy – the maximum number of persons that will reside in the premises should be in line with federal, state, and local guidelines and must not cause discrimination against protected classes.
• Lead-based paint disclosure if built before 1978 – may be separate document and must be as specified by federal and state laws.
• Waterbed clause – may be separate agreement or in Rules & Regulations.

A pet agreement or lease clause should be clear regarding which types of “creatures” are allowed and/or prohibited. When dogs are allowed, the clause must also define breeds because certain breeds are excluded from liability insurance coverage in some policies.

Unlawful Provisions

Some types of lease provisions are not permitted by law. The lease should not contain provisions that require the tenant to waive his or her rights under federal, state, or local laws. Such waivers are unenforceable and may cause the lease to be voidable. They can make the landlord subject to penalties. The following are some common examples of unlawful lease provisions:

Provisions contrary to anti-discrimination laws – The lease may not contain provisions that violate federal, state, or local fair housing laws or the Americans with Disabilities Act. For example, it is illegal to include a lease provision that
prohibits subleasing to members of minority groups or a provision that charges a higher security deposit to a disabled tenant or to a family with children.

Eviction of the tenant without due process – The tenant may not be removed from the unit without notice or a hearing on the issue. Similarly, in almost every state leases may no longer contain a landlord lien clause, a provision that permits a landlord to take possession of the tenant’s personal property without due process because of non-payment of rent. In fact, many states have very complex laws regarding how the landlord must handle abandoned property even when the departed tenant owes the landlord a substantial amount of money.

Waiver of habitability by the tenant – The lease may not contain a provision in which the tenant agrees to waive the landlord’s warranty of habitability or hold the landlord harmless for breaches of the warranty. The “as-is” clause
that is sometimes found in real-estate purchase agreements is not a valid lease clause in most states. In most states a landlord is required to keep a residential rental premises habitable. Additionally, the landlord can be held responsible for injuries that result from the condition of a rental property, regardless of a habitability lease provision, or the tenant agreeing to correct the problem.

Typically, the term habitable includes major systems such as roof, plumbing, heating and/or cooling equipment (depending on location), structural elements, or any unsafe condition. Carpet stains, paint defects, and other cosmetic items generally do not affect the habitability of the home unless they present a health hazard.

Waiver of the landlord’s legal responsibilities – Provisions that waive the landlord’s legal responsibilities are void. Two examples are: a provision that prohibits the tenant from holding the landlord responsible for the landlord’s negligent acts or a provision that attempts to circumvent landlord tenant law.

Provisions that penalize the tenant for complying with the law – The lease may not contain a provision that penalizes the tenant for informing government authorities of any landlord violation of the law. For instance, a lease provision that calls for immediate eviction if the tenant informed the building or health authorities of an unsafe condition on the premises is not permitted. In fact, laws of most states now address so-called “retaliatory eviction” and
prohibit eviction for any cause immediately (sometimes up to 6 months) following a complaint to authorities.

Question

I rented an apartment to a couple over 5 years ago. At that time, I collected a security deposit of $650. The lease was for 1 year. We have been operating under the month to month provision of the contract for the last 4 years.

Unfortunately, the couple separated a year ago and the divorce is imminent. The woman has been living at the apartment alone since then, paying the rent herself.

Yesterday, she informed me of their separation, although I had suspected it for a while. She asked if I would remove him from the contract since he no longer lived there or contributed to the rent payment and utilities. My question involves the security deposit. Although the man has made no claim to his share of the deposit, I assume that he still has some claim to half of it. At what point does he lose claim to it, if ever.

How do I handle rent refunds to roommates in general when one decides to leave? What should I put in the contract to handle one of the roommates leaving after the term of the lease has expired and the tenants are then month to month?

Answer

I am not an attorney, but will give you my opinion about the issue based on a lot of experience as a landlord and property manager as well as having some knowledge of various other legal issues.

First, my understanding is that your current lease is with both husband and wife. Absent a Court order, you cannot legally remove the husband from the lease without his written agreement. Doing so would put you in the position of breaking the lease as far as he is concerned, possibly reducing your chances of recovering future rents and damages owed under the lease, even potentially making you financially liable if one if the husband wishes to litigate.

Second, when there are marital problems and the potential for legal separation and/or divorce, a landlord can get into a major hassle by siding with one of the parties against the other.

Third, it is potentially to your disadvantage to remove the husband from liability on the lease unless you are certain that the wife is in fact capable of paying the rent herself. As a general rule the more individuals liable for the lease the better for the landlord. Accordingly, if a co-tenant departs during the term of a lease, there is seldom a reason why the landlord should release that person from responsibility during the remaining original lease term, under some circumstances even when another person replaces him/her as co-tenant.

In a case such as yours, you should consider refusing to allow removal of the husband from the lease during the remainder of the lease term. You should consider that many divorces result in the wife’s financial position becoming significantly
reduced. Although this is not as big an issue now that the lease is month-to-month, for lease terms that still have long times to go it is because it is more likely that she might not be able to pay the rent for the remaining year of the
lease than that both together would be able to pay it.

You should have no legal obligation to release one party from the lease even if there is a divorce. Both parties usually remain legally responsible for all joint liabilities following a divorce even though the Judge might assign liabilities
between the parties when dividing the community assets and liabilities. For example, if the Judge awards a particular jointly held Visa credit card to one of the parties, Visa can still collect from the other party if the first party
fails to pay and failure to maintain credit accounts by one party after a divorce will often damage the credit record of both parties if they were joint account holders. The same principles would usually apply to a lease or any
other contract executed by both.

If, however, you are willing to release the husband from the lease because (1) you are certain that she will have the ability to pay the rent no matter what happens regarding her action or (2) you wish to provide charity, then you could tell the wife that you cannot remove the husband from the lease without his written agreement.

If he consents to removal and you agree to do so, then you will need to think about documentation. Whether you have the wife execute a new lease or adequately amend the existing one is probably not significantly critical, though I would
usually much prefer the former over the latter. However, keep in mind that either way, you should (1) have the wife execute the required document(s) before accepting removal of the husband, (2) consider this an opportunity to make any
other changes to the lease that you might consider desirable, and (3) make sure the documentation makes it clear who is responsible for any damages to the premises as of the date of amendment or new lease – that is, any changes in
condition of the property from the move-in condition at original possession date until the time of modification. Related to those issues, if you haven’t recently done a comprehensive inspection of the unit, I suggest that an inspection prior to document execution be part of the deal and that any damages be paid for by one or both parties prior to execution of any documentation.

The security deposit issue should be dealt with in writing. As a general principle, whether co-tenants are spouses or unrelated parties, security deposits and rents should always be considered a single total amount rather allocated among co-tenants. The landlord should initially only accept one full security deposit (in cash or bank check) and the FULL rent each month (in cash or bank check for the initial first month’s rent) from one person. The residents can fight it out among themselves for the “privilege” of making the payments, but if anybody offers to pay their “his or her share” of the deposit or rent, the landlord should refuse to accept, referring them to the lease agreement which should have so stated.
Accepting multiple separate checks can result in additional problems if one or more, but not all checks bounce. Furthermore, such acceptance may also indicate waiver of the “joint and several” words of the lease mentioned above.

For a husband and wife, the security deposit must be considered to be jointly owned by the two of them even if both did not sign the lease agreement. Nothing should be refunded until all documentation has been executed by both spouses and the wife provides cash or certified funds to cover what is being refunded to the husband. It would be simpler for the two spouses to settle the security deposit issue between the two rather than receive funds from the wife and make a refund to the husband, with adequate documentation regarding that issue.

Finally, you should consider re-screening the wife as an individual, both as to employment, income, and credit. The fact that she has supposedly been paying the rent herself for a length of time may give you some degree of confidence, but you probably have no proof that she’s really making it on her own. Additionally, this provides you with recent additional information about her, some of which might be materially different from what it was 5 years ago and might be useful if she were to later become a problem.

Question

I own a 10-unit building, with each unit being assigned a carport parking space. A month ago a storm caused collapse of portions of the carport structure, seriously damaging cars in two spaces. The owners are claiming that I am responsible for repairs to their damaged vehicles. Am I?

Answers

There are several issues relevant to the problem. Although I will provide some brief discussion regarding the issues, the statutes and court decisions of states can be significantly different regarding some or all of the issues. Accordingly, if the affected tenants push the matter, you should consult competent counsel. If the tenants engage an attorney or attorneys you should yourself hire one. You should almost certainly not represent yourself in court on such a case when a tenant is represented by an attorney.

In many states, such an event will be considered an “act of God” and the landlord would have no liability for damages suffered by the tenant. As for the loss of or damage to a tenant’s personal property if there is a burglary, fire, or leaking roof in his lease unit, it is up to the tenant to obtain a renter insurance policy that covers his losses.  However, there can be circumstances which will result in landlord liability. For example, if there were defects in construction or maintenance of the carports of which the landlord knew about (e.g., one or more tenants have complained about it) or of which he/she should have known about (i.e., anyone of normal intelligence and experience could see the carport was in danger of collapse).

You should do one or two things. First, you should speak with your insurance agent to determine whether or not your landlord policy provides coverage of tenant vehicles parked in the carport. If, by chance it does, you would likely be ahead by taking advantage of the insurance compared to having disgruntled tenants, resulting in extra vacancies upon expirations of their leases.

If not covered by your insurance and the tenants’ damages are not so extensive that it is obviously going to cost a lot to repair, you should consider voluntarily covering the damages rather than facing the potential costs resulting from disgruntled tenants – e.g., the costs of vacancies.

Second, if the tenants’ damages are not covered by your insurance policy and are so extensive that you do not want to consider voluntary compensation, you should consult a competent attorney who is experienced in such an issue and find out exactly what the statutes of your state say and whether or not he is confident he can successfully defend you or negotiate a reasonable settlement. You also need an estimate of legal costs of defending a possible lawsuit (with the chance of losing) compared to the cost of you (without an attorney) negotiating a settlement with the tenants that might be cheaper than litigation and result in less vacancy.

Question:

I am looking for other sources of income besides rent from my14-unit apartment building and am considering charging for parking space, both covered and uncovered. Is there anything I need to worry about in doing this? Can I force tenants to pay for spaces even though they are willing to park on the street?

Answer

There are a number of issues that must be considered regarding what you wish to do.

First, as you probably almost certainly know, you cannot change the terms of a lease agreement during the lease period without the tenant agreeing to do so. Therefore, you can only amend the lease to provide for paid parking upon renewal or extension of the agreement unless the tenant allows a mid-term change, possibly because you offer some kind of financial incentive.

Second, you should probably require tenants to keep the same parking spaces as they currently use for free in order to avoid additional complications.

Third, you will probably not want to allocate additional spaces to one tenant who is willing to spend more on parking because another tenant wants fewer spaces than he would be allocated, whether because he doesn’t need them or prefers to not pay for them (perhaps parking on the street). Doing so may create problems when the tenant with few or no spaces leaves and you have no spaces available for the replacement tenant, possibly making it difficult, maybe impossible to re-lease the vacant unit in the rental market existing at that future time.

Finally, you obviously cannot charge for the space they use when parking on the street if you don’t you own the street. Similarly, you can’t prohibit street parking; only the city can do so. You can probably legally require tenants who are willing to park elsewhere to pay for spaces that they don’t wish to use. However, you would need to disclose this fact to future applicants and I’m certain this will reduce your pool of qualified tenants, as those who are willing to park on the street will consider they are actually being asked to pay a higher rent. If you want to require all tenants to pay for parking, then you should raise everyone’s rent as the law allows
without calling the increase a parking fee.

Lease Agreements – Part 2

We ended part 1 of this series with a brief discussion of the four commonly used types of tenancy. We continue with discussions of several other basic concepts.

Oral or Written Lease Agreement

In general, contracts of almost any kind can be either “oral” or “written” and each can be equally valid and enforceable no matter what the legal purpose or dollar amount involved. Although often done, it is not really correct to refer to an oral lease as a “verbal” lease because the term “verbal” means words and both oral and written leases involve words.

States have adopted a legal doctrine called the Statute of Frauds (SOF) and put the doctrine into their statutes. These laws are fairly uniform among the states. Among other things, SOF laws require that contracts related to sale of real estate be in writing. As examples, contracts to list real estate for sale or lease with a broker and agreements to sell/purchase real property must be in writing to be enforceable in Court and oral contracts for those purposes are worthless. This is so even though there might be indisputable non-written evidence as to the contracts, for example, unrelated third party witnesses. Many states specify certain items that must be included in such contracts.

Statute of Frauds laws of most states also require that a lease of real estate for a term of more than one year be in writing. An oral lease for a term of one year or less is binding and will be enforceable regarding most terms normally found in a lease. An oral lease can be amended orally.

As a practical matter, all leases of any duration should be in writing because the written document provides a record of the terms of the landlord-tenant relationship so that its terms and conditions can be easily and clearly discernible by the parties, their heirs, or assignees.

As for any type of oral contract, oral leases regularly cause problems for both landlords and tenants because it is often difficult to determine what the terms of the lease are. This can be the result of a number of factors, including the following:

• Misunderstandings by either party at inception of the agreement,
• Misremembering or forgetting terms later by either party,
• Purposeful distortion of terms by one party or the other, and/or
• Limited or no ways of proving the lease terms.

Often a witness to the oral lease can be of value, but that may require that the witness be impartial or at least not a beneficiary of the lease in any way. Furthermore, the witness usually must be able to appear at a trial, something not always possible perhaps years after being witness to an oral contract.

When an oral lease ends up in Court, the judge can sometimes make a reasonable decision based on circumstantial evidence. For example, if the disagreement between landlord and tenant related to the amount of rent, cancelled checks or receipts would prove what the rent was for those past months. However, it would usually not support or deny any rent increase.

Sometimes a judge makes the decision based on which party can provide the best circumstantial evidence whether or not that evidence is directly relevant to the disputed issue. However, when there is no clear evidence of who might be telling the truth he may end up making a decision based on who was the best liar. If both parties are equally believable or equally unbelievable, the decision is probably most likely to be in favor of the tenant.

Judges sometimes will not enforce certain terms of an oral lease. Non-typical lease terms will likely not be enforced. Even certain typical terms may not be enforced. For example, it is not uncommon that a judge will refuse to enforce a late penalty provision that is not in writing.

A month-to-month oral lease can continue for many years so long as it remains a month-to-month lease or a lease for a term of no longer than one year at a time, with oral renewals.

The bottom line is that oral leases are only as good as the paper they are written on.

Fixed-Term vs. Month-to-Month Lease

Most landlords will want to choose either a periodic tenancy  (month-to-month) or a tenancy for years (fixed term).

To help decide between these two types of leaseholds, the landlord should consider a number of factors, including: (1) advantages or disadvantage under the law of that state, (2) the current condition of the local rental market including vacancy rates, (3) the type of applicants expected for the particular location and property type, (4) whether rental rates in the area are increasing or declining, and (5) the anticipated future local rental market as affected by general economic trends, population growth predictions, and new rental construction coming on line.

A month-to-month tenancy allows the landlord to raise rents or otherwise renegotiate the lease more often and provides more opportunities to terminate tenancy of a less-than-satisfactory tenant. This is advantageous when the rental market is strong. A fixed-term tenancy prevents frequent rental increases, but is more favorable to a property owner in a declining or over-built rental market. Fixed term leases can be either an asset or a liability in the event of a sale or refinance, depending on a buyer’s plans and where rents are relative to market rents.

Residential leases can be written for any term length. Although we assume month-to-month or multi-month fixed-term leases in this lesson, keep in mind that residential leases can be weekly, bi-weekly, semi-monthly or any other rent period or length of tenancy desired, and like commercial leases, can have options for renewal, although not usual.

There are reasons to utilize multi-month fixed-term leases and there are reasons to utilize to month-to-month leases.

Many landlords require a fixed term lease of six months or one year, for the following reasons:

• Turnover is expensive and there is usually less of it with longer lease terms compared to month-to-month. However, long-term leases do not always mean long-term tenancy. In addition to tenants breaking their lease, federal
  law allows military personnel to terminate leases under certain conditions, and some states have laws allowing unilateral termination for other reasons. For example, some states allow termination for a tenant who is moving to a care facility or where domestic violence is involved.
• Tenants tend to be more respectful of the landlord’s property and the rights of other tenants because they expect to be and want to be a tenant for a longer fixed period.

Other landlords favor month-to-month leases for the following reasons:

• Rent can be raised with the proper notice, usually 30 days in most states although a few states require a longer notice period, some only in certain circumstances. This is particularly desirable in tight urban rental markets where rents can regularly be raised and vacancies easily filled.
• Allows the landlord to modify other lease terms to deal with new problems that have surfaced.
• Troublesome tenants can be terminated with the proper notice, usually 30 days in most states, even though they have not violated a significant lease clause, although an eviction may still be necessary.

There is no reason why a landlord must fill every vacancy or renew every lease for the same period of time. Landlords are free to change periods because of market conditions or for other business reasons. However, as with every other landlord issue, landlords must take care that the reasons do not hint at discrimination – that is, a different period is used for particular protected classes and not for others.

Types of Leases

The subject of Leases must be divided into the categories of Residential and Commercial because the two types are significantly different in many respects. Commercial can be further divided into several sub-categories including office, retail, industrial, and warehouse, with significant differences among each of them. Some of these sub-categories are often further subdivided, for example, general office and medical office.

Size of the Document

Lease agreements vary widely in size, from a single page to dozens of pages in small print. The number of pages will depend on the type of property involved as well as whether printed on legal or letter size paper and the font size used. Many feel that residential lease agreements should be short because tenants don’t want to have to read a long lease agreement prior to signing. However, we feel that the more detail in the agreement, the less the landlord-tenant relationship is subject to misunderstandings.

Section 8 Basics – Part 1

The Housing Choice Voucher Program (HCVP) or as more commonly known, Section 8, is funded by the U.S. Department of Housing and Urban Development (HUD) and serves as the federal government’s largest low-income housing assistance program. Section 8 refers to the section of the U.S. Housing Act that authorized rental housing assistance.

Section 8 is a tenant based rental assistance program for low income families, the elderly, and the disabled to choose and lease safe, sanitary, decent, affordable housing in the private rental market. Section 8 housing vouchers issued to “approved families” help pay the cost of rental housing on the open market.

The housing voucher program seeks to (1) provide better living conditions at affordable rent payments for low-income families, (2) provide freedom of choice in selecting rental units from the open market, and (3) provide incentives to landlords and property owners to rent to voucher approved families.

The HCVP program is administered at the federal level by HUD. At the local level, the program is administered by numerous state, regional, and local housing agencies, known collectively as Public Housing Agencies (PHAs). While many of these public housing agencies are independent public authorities, other agencies are under the direction of elected city, county or state governmental officials.

Landlords and low income families must choose to participate in the Section 8 program and follow program guidelines and requirements. Rental units must meet HUD quality standards of health and safety. If the selected rental unit is approved, the housing subsidy is paid directly to the landlord by the local PHA who administers Section 8 funding on behalf of the participating family. The family is responsible to pay any difference between the actual rent charged by the landlord and the amount subsidized by the Section 8 program. HCVP families normally pay no more than 30% of their monthly-adjusted income towards the rent and utilities.

Once family eligibility has been established, the family is placed on a waiting list of approved families and will be notified if a voucher becomes available. Once a housing voucher has been issued, the family usually has sixty days to use the
voucher to locate and select a qualified rental unit.

Applications to the housing program may be denied by the local agency for various reasons. Families receive written notification of denial and have an opportunity to present their objections to the eligibility decision. A formal review process determines the final eligibility status.

Eligibility and approval do not guarantee funding assistance. There is no automatic entitlement benefit. Program funding limitations govern the number of available housing vouchers. Waiting lists for housing assistance are usually long with no certain date for issuance. In some areas, because of the size of the waiting list, the list has been closed to new applicants. The number of eligible families that eventually receive housing vouchers varies by region but in general, one out of four families may be served by housing assistance.

There are several key checkpoints in the voucher process. Approved families must

1. Receive the voucher,
2. Conduct a housing search,
3. Have the selected rental unit pass HUD quality standards,
4. Have the rental amount meet the rent reasonableness determination,
5. Have the participating landlord sign a contract with the local housing agency,
6. Sign a lease agreement with the participating landlord, and
7. Comply with all PHA requirements to allow the housing assistance payments to begin.

The participating family is responsible for their share of the rent per the lease agreement and for the security deposit as required by the landlord.

Once the rental unit has been selected by the participating family and the owner/landlord has agreed to rent the unit in accordance to Section 8 rules and regulation, a document, known as the “Request For Tenancy Approval” (RFTA) must
be completed by the landlord and submitted by the participant family to the local public housing agency for processing. The RFTA information will help determine the eligibility of the family for the selected unit.

Upon receipt of the RFTA, a Housing Quality Standards (HQS) inspection is conducted on the rental unit by the local PHA to ensure the unit meets HUD quality standards of decent, safe, and sanitary housing and whether the monthly rent
amount is reasonable and consistent with market rents for similar units in the area.

The landlord and the participant family receive move-in approval once the rental unit has successfully passed inspection. Should the selected rental unit fail to meet HQS, the landlord is notified in writing, is given a timeframe for completion of needed repairs, and is allowed an opportunity to correct the deficiencies and have the rental unit re-inspected The unit is re-inspected and approval given if the unit passes inspection. If the unit fails inspection for the second time, the family will be asked to locate a different rental unit.

If the unit meets these housing quality conditions, the local housing agency enters into a one year contract with the participating landlord for direct payment of the monthly housing subsidy. The participating family and the participating landlord enter into a written lease agreement for one year for the family’s rental of the selected unit.

HUD Housing Quality Standard inspection items include:

• There cannot be any chipping or peeling paint anywhere on the inside of the unit.
• There cannot be any chipping or peeling paint located five feet and under on the exterior of the unit.
• Cooking stove must be clean and in working order. (Either the tenant or the owner must provide).
• Refrigerator must be clean and in working condition. (Either the tenant or the owner must provide).
• There must be an installed heating system that works.
• There must be hot and cold running water in the bathroom.
• There must be hot and cold running water in the kitchen.
• There must be a shower or bathtub that works.
• There must be a flush toilet that works and does not leak.
• Bathrooms must have either a window to the outside OR an exhaust fan.
• There must not be any plumbing leaks.
• There must not be any plugged drains. (Check for slow drains).
• All ground floor windows must have attached locks and exterior doors must have locks including working deadbolts.
• All electrical outlets must have cover plates and be in good condition.
• There must not be any missing, broken, or cracked windows.
• The roof must not leak. (Check the ceiling for stains).
• The hot water heater tank MUST have a temperature pressure relief valve with a downward discharge pipe made of galvanized steel or copper tubing that is 3 feet long (NO PVC).
• An earthquake strap is required for all hot water heaters.
• There must be GFI outlets around all sinks.
• The floor covering cannot be torn or have holes that can cause someone to trip.
• If there are stairs and railings, they must be secure.
• Working smoke detectors are required in every unit and on every level.
• The contract rent must be reasonable, based on the rent of comparable units in the neighborhood.

The lease/rental agreement and HAP contract are effective the day the unit passes inspection and the family takes possession of the rental unit.

Additional discussion will be provided in “Section 8 Basics – Part 2.”

Question:

I have a tenant that signed a lead disclosure statement, but did not tell me she was pregnant prior to moving in. Do I have to have to have the apartment inspected and if there is lead do I have to remove the lead? I feel this is only one bedroom and they are not going to stay long.

Answer:

Since you are concerned about the issue, I assume that the rental unit of interest was constructed prior to 1978.  The federal “Residential Lead-Based Paint Hazard Reduction Act” was enacted in 1992 to reduce the danger from lead paint. Commonly referred to as “Title X”, compliance for all landlords became mandatory as of 12/6/1996.

For compliance with Title X, landlords of housing built before 1978 must inform tenants before they sign a lease of any information the landlord has about lead hazards on the rental property. If a landlord has had the property tested by a state certified lead inspector, a copy of the inspection report or its written summary must be disclosed to the tenants. Most states and some cities have lead hazard reduction laws similar to the federal law, with some of them being significantly more stringent than federal law.

Every lease agreement must include a lead hazard disclosure, either within the agreement itself or as a separate document, even if the property has not been tested. Most landlords will use the disclosure form provided by the EPA “Disclosure of Information on Lead-Based Paint and/or Lead Based Paint Hazards.” Disclosure also requires that tenants be given the EPA lead hazard information booklet, “Protect Your Family From Lead in Your Home.”

I assume that you have no certain knowledge regarding existence of lead. However, lack of certain knowledge would not be an excuse in some jurisdictions. For example, while federal law requires disclosure of what the landlord knows, DC law requires not only disclosing “what is known by the landlord,” but also “what is reasonable for the landlord to know.” Some jurisdictions may require remediation when lead-based paint is known to be an issue.

Finally, what you should do might depend on when the tenant knew of her pregnancy. If knowledge was prior to signing the disclosure you might be safe, as she knowingly acknowledged agreed to rent the unit after knowing of her pregnancy. If knowledge came after signing the disclosure, you may want to consider giving the tenant a chance to terminate the lease, without penalty. Otherwise, she could claim she forgot about the lead issue after finding that she was pregnant and injury resulted.  If she decides to remain, you should utilize a signed written document showing that she agreed to remain in spite of gaining knowledge after learning of her pregnancy.

Although it appears that you followed the law regarding disclosure, you are confronting an unusual situation that might expose you to some legal risk. I am not an attorney and so cannot provide legal advice. Accordingly, whatever the timeline, I recommend that you consult a competent attorney who is knowledgeable about lead law issues at federal, state, and local levels where your rental property is located.