Tenants Caught in Foreclosure: Who Gets the Rent?
by Attorney Janet Portman
Learn to whom tenants should pay rent when landlords fall into foreclosure.
Tenants who learn that their landlords are in default on the mortgage (or already in foreclosure) are often confused about who is entitled to the rent money. Residents are likely to hear demands from many quarters -- the desperate owner, a management company, or a bank. It’s important to know who is -- and who isn’t -- entitled to the rent check and who is obligated to maintain the rental during this period of time.
Before the Foreclosure: Who Gets the Rent After a Default?
Lending banks (the mortgage holders) typically attach a rider, or special agreement, to the mortgage or deed of trust documents when a buyer intends to use the building as a rental. This rider, called a 1-4 Family Rider (Assignment of Rents), is used by lenders in every state for properties that have one to four rental units. Its main purpose is to give the lender the right to receive the rent when the buyer has defaulted on the mortgage. (You can get a copy of the 1-4 Family Rider from the Freddic Mac website, at www.freddiemac.com. Search for “1-4 Family Rider.”)
To understand how the rider works, think like a banker for a minute. The property is generating income and the buyer is falling behind on his mortgage. In order to cut its losses as quickly and as thoroughly as possible, the lender wants to get its hands on the rent.
Once the lender gives the owner a written notice of default, the lender has the right (except in Michigan) to receive the rent directly from the tenants. Lenders have to give written notice to the tenants, and they typically do so by letter, posted notice on the property, or in person.
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Repairs and Maintenance While Paying the Bank
Even though the bank is receiving the rent payments, all other rights and responsibilities that the owner/landlord has with respect to the tenants remain in place. Until the bank actually forecloses, the owner is still the owner. This leads to problems if the tenants need maintenance or repairs done on the rental unit.
Landlords are often unwilling to make repairs. Without a source of income from the rental property, most owners will be unable (or unwilling) to maintain it. For the tenant, however, the owner’s disillusionment is beside the point when it comes to safe and secure rental housing, because in every state but Colorado and Arkansas, landlords must maintain fit and habitable rental housing. How does a tenant enforce this right against a demoralized (and possibly broke) owner?
The lender is not obligated to help. According to the Family Rider, the lender must apply the rent money to property management costs, including maintenance, before it applies the money to the unpaid mortgage. But the Rider explicitly does not obligate the lender to assume the maintenance duties of the owner. Unless there’s a specific local or state law to the contrary, the lender’s right to receive rent money doesn’t turn that lender into the landlord for purposes of maintaining the property.
If conditions seriously deteriorate to the point where the home is not fit to live in, tenants may find themselves stuck between an owner who has no ability to take care of business, and a lender who has no obligation to do so.
Self-help remedies are tricky. Tenants may need to avail themselves of a tenant’s “self-help” remedy, such as rent withholding and repair-and-deduct (not all states give these remedies to tenants). (To learn more about self-help remedies, see Nolo’s Renter’s Rights: Repairs, Privacy & Safety area.)
If my building is sold, what happens to me? |
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But here is where things can get truly tricky: Rent withholding and repair-and-deduct work because they pressure owners to take care of repairs so that they can receive the rent. But banks are not familiar with property management and maintenance, and they have no legal obligation to maintain the property (the owner retains that duty). Not paying the bank is not likely to result in prompt attention to that leaking roof or broken water heater -- it’s more likely to result in a notice to vacate or, particularly in situations where tenants survive the foreclosure, continued inattention until conditions deteriorate further.
Help From the Government
In many cities, housing and health departments are charged with responding to unsafe and unsanitary conditions in rental housing. They typically have powers that range from ordering the owners to take care of business (under threat of contempt of court), to taking over the property altogether and running it until they’ve fixed the problems (and charging the owner for the privilege).
Although these government agencies can, and should, still do their jobs, their intervention may be ineffective. The agencies will be dealing with an owner who has no resources to contribute (and who may even be impossible to locate), and a bank who has no legal duty to step up. Results will differ when the government takes over because the efficiency of local and state agencies varies tremendously.
If you need to notify the landlord and bank of needed repairs in your rental, be as specific as possible. Nolo’s eForm, Tenant’s Notice of Needed Repairs, provides the format and instructions to make sure your demand is correct.
What to do if you are roommates?
Renting With Others
Learn to avoid disputes among roommates or with the landlord.
When two or more people sign the same rental agreement or lease -- or enter into the same oral rental agreement -- they are cotenants and share the same legal rights and responsibilities. However, there's a special twist. One cotenant's negative behavior -- not paying the rent, for example -- can affect everyone's tenancy.
When One Roommate Doesn't Pay Rent
Cotenants may decide to split the rent equally or unequally, depending on their personal wishes. However, such agreements don't affect the landlord. Each cotenant is independently liable to the landlord for all of the rent. Landlords often remind cotenants of this obligation by inserting into the lease a chunk of legalese that says that the tenants are "jointly and severally" liable for paying rent and adhering to terms of the agreement. If one tenant can't pay a share of the rent in a particular month, or simply moves out, the other tenant(s) must still pay the full rent.
Landlords often insist on receiving one rent check for the entire rent -- they don't want to be bothered with multiple checks from contenants, even if each contenant pays on time and the checks add up to the full rent. As long as you have been advised of this policy in the rental agreement or lease, it's legal for your landlord to impose it.
When One Roommate Violates the Lease or Rental Agreement
A landlord can legally hold all contenants responsible for the negative actions of just one, and terminate everyone's tenancy with the appropriate notice. For example, two contenants can be evicted even if only one of them seriously damaged the property or otherwise violated the lease or rental agreement.
In practice, however, landlords sometimes ignore the legal rule that all tenants are equally liable for lease violations, and don't penalize a blameless one. If the non-offending roommates pay the rent on time, do not damage the landlord's property, and can differentiate themselves from the bad apple in the landlord's eyes, the landlord may want to keep them.
Disagreements Among Roommates
For all sorts of reasons, roommate arrangements regularly go awry. If you have shared an apartment or house, you know about roommates who play the stereo too loud, never wash a dish, pay their share of the rent late, have too many overnight guests, leave their gym clothes on the kitchen table, or otherwise drive you nuts. If the situation gets bad enough, you'll likely end up arguing with your roommates about who should leave.
Can my roommate evict me? |
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However, as a general rule, you can't terminate your roommate's tenancy by filing an eviction action. Only if you have sublet a portion of your rental -- so that you become your roommate's (sublessee's) landlord -- can you control that roommate's tenancy.
Another exception involves rentals governed by rent control laws that allow a landlord to designate a "master tenant" -- usually a long-term tenant who was there first -- to perform many of the functions of a landlord (this is the rule in San Francisco). Master tenants have the right to choose -- as well as to evict -- tenants. If your municipality is subject to rent control, find out whether the scheme includes a provision for a master tenant.
Roommate Agreements
Roommates can make lots of informal agreements about splitting rent, occupying bedrooms, and sharing chores. Your landlord isn't bound by these agreements, and has no power to enforce them, but making an agreement can force you and your housemates to take your cotenancy responsibilities seriously.
Before you move in, sit down with your roommates and discuss major issues, such as:
- Rent. What is everyone's share? Who will write the rent check if the landlord will accept only one check?
- Space. Who will occupy which bedrooms?
- Household chores. Who's responsible for cleaning, and on what schedule?
- Food sharing. Will food, shopping, and cooking responsibilities be shared? How will you split the costs and work?
- Noise. When should stereos or TVs be turned off or down low?
- Overnight guests. Is it okay for boyfriends/girlfriends to stay over every night?
- Moving out. If one of you decides to move, how much notice must be given? Must the departing tenant find an acceptable substitute?
The more you can anticipate possible problems from the start, the better prepared you'll be to handle disputes that do arise. Be as specific as possible, especially on issues that are important to you. If dirty dishes in the sink drive you up the wall, write it down. If occasional guests are no problem, but you can't stand the thought of your roommate's non-rent-paying boyfriend hogging the bathroom every morning, make sure your agreement is clear on guests.
It's best to put your understandings in writing. (See the sample roommate agreement below.) Oral agreements are too easily forgotten or misinterpreted. Most of the agreement won't be legally binding -- that is, a judge won't order a tenant to clean the bathroom. Judges will, however, enforce financial agreements, such as how you’ve agreed to share rent.
To underline the roommates' commitment, it's wise to include a clause requiring cotenants to participate in mediation before one of you breaks the agreement by moving out or running off to court. Our sample roommate agreement, below, includes such a clause. (For more on mediation, read the Go to Court or Mediate section of Nolo's website.)
Sample Roommate Agreement | ||||||
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Alex Andrews, Brian Bates, and Charles Chew are cotenants at Apartment, 360 Capitol Avenue, Oakdale, Kentucky, under a year-long lease that expires on February 1, 200X. They have all signed a lease with the landlord, Reuben Shaw, and have each paid $300 towards the security deposit of $900. Alex, Brian, and Charles all agree as follows:
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When a Roommate Leaves
What to do if a roommate moves out before a lease ends.
A co-tenant in a month-to-month tenancy who wants to leave is legally responsible for giving the landlord proper written notice and paying rent through the end of the notice period. If there's a lease, the tenant should either get permission from the landlord to leave early or, if this is impossible, find a new tenant who is acceptable to the landlord. If a co-tenant simply leaves without the landlord's okay or without an acceptable substitute, the fallout can be serious.
What to Do If You Want to Stay
The unauthorized departure of a co-tenant gives the landlord the option of evicting the rest of you, even if you are able to pay the full rent. The landlord has this option because breaking the lease or rental agreement by even one tenant is a violation of a key lease term (the length of stay), for which all tenants are liable.
In practice, however, your landlord will probably let you stay if you can keep a steady stream of rent money coming in and keep the place occupied by stable, nondestructive tenants. So if you want to stay after a co-tenant has broken the lease and left, the landlord will probably not evict you and other tenants unless:
- you are a troublesome tenant, and this is a golden opportunity to be rid of you, or
- your income doesn't appear sufficient to cover the rent in the future. In this case, if you can assure the landlord that you can promptly bring in a good, law- and lease-abiding new co-tenant, you might be able to salvage your tenancy. In the meantime, you may need to ask permission to pay the rent late or in installments.
Always get your landlord's approval before moving in a new roommate. If a co-tenant takes off and leaves you facing the entire rent, you may be tempted to simply move in another roommate, bypassing the landlord's application process. Don't! Your lease or rental agreement probably prohibits unauthorized sublets. If it does, bringing in a new tenant -- even a great one -- without your landlord's okay violates your agreement and gives your landlord a watertight reason to evict you. Instead, keep your relationship on an honest footing and get your landlord's approval for a replacement tenant. (For more information, see Adding a Roommate to the Lease or Rental Agreement.)
How to Deal With a Departing Roommate
Remaining roommates need to cover their legal flanks with respect to the departed tenant as well as the landlord. If your housemate has left during the middle of a lease or without proper notice in a month-to-month tenancy, leaving you responsible for all the rent, your personal relations will be rocky at best. Probably the last thing you want is to have your errant roommate reappear expecting to move back in.
To avoid such surprises, try to get your former roommate to sign an agreement, making it clear that the departing tenant:
- Will pay a stated amount of rent and utilities. If you rent under a written rental agreement, this will normally be rent and utilities for 30 days from the date the departing tenant gave written notice (or left without notice), unless a new roommate comes in earlier and covers these costs. If you rent under a lease, the amount owed will depend on when a new co-tenant, acceptable to the landlord, is ready to take over. If, despite your best efforts, you cannot find an acceptable replacement, the departing tenant will be liable for the rent for the balance of the lease.
- Will pay for any damage she caused to the rental unit.
- Will pay for rent and damage no later than a stated date.
- Has moved out for good and gives up any claim to be a tenant.
But what if you and the departing roommate can't work things out, and the departed co-tenant shows no signs of paying? If your roommate is long gone or out-of-state, you may want to grit your teeth, pay his share and forget it, since trying to find him, sue him, and then collect the judgment is likely to be more trouble than it's worth.
On the other hand, if your ex-roommate is still in town and has a source of income, consider taking the time to sue him in small claims court for unpaid rent, damage to the rental unit, unpaid utilities, and your costs to find a replacement co-tenant, such as advertising. Then, if your ex-roommate still doesn't pay up, you can collect what you won in court from his bank account or wages. For more information, see the Small Claims Court section of Nolo's website.
What to Do If You Want to Move Out, Too
If your co-tenant skips out, leaving you in the lurch, you may decide that it's not worth the hassle of trying to stay and rustle up another roommate.
To ease your departure and forestall the landlord from keeping your security deposit to make up for unpaid rent, or listing you as a deadbeat at the credit bureau, follow these steps:
- If you are a month-to-month tenant, give the required amount of written notice (usually 30 days) immediately. Don't wait until you can't pay the next month's rent and receive a termination notice.
- If you have a lease, let the landlord know in writing that you plan to move because you cannot afford the rent without your co-tenant. Before you move, be extra accommodating when it comes to showing the unit to prospective renters. Facilitating a quick re-rental is not just a courtesy to your landlord, but to your advantage as well, since the sooner a new tenant takes over, the sooner your liability for the balance of the rent due under the lease ends. In addition, do your best to find an acceptable replacement tenant yourself.
Adding a Roommate to the Lease or Rental Agreement
Get your landlord's approval before a new person moves in.
Whether it's time to live with the one you love or you just need to replace a departing roommate, check with your landlord before letting a new person move in. Most landlords will insist that the new roommate become a co-tenant, having the same rights and responsibilities as you do.
Getting the Landlord's Approval
Obviously, you want to be sure that your new roommate is financially stable and compatible with you.
But even if you are satisfied with your intended co-tenant's stellar qualifications, it doesn't mean the landlord will take your word for it. To increase your chances of getting an official okay, consider these questions before approaching the landlord:
- Will adding a roommate exceed the occupancy limit? Landlords are entitled to set reasonable limits on the number of occupants per rental unit. As a general rule, that's two persons per bedroom plus one more, though some localities (such as New York City) allow more.
- Will the new roommate meet your landlord's good-tenant criteria? Many landlords subject prospective tenants to a thorough screening process, checking credit, employment, rental history, and references. Ask your prospective roommates to request a credit report on themselves. If the credit report is good, you'll want to hand it to the landlord with your proposed new tenant's application. Since the landlord will almost surely do this as well, doing it first gives you the opportunity to develop a plausible explanation for any negative information -- for example, a prior eviction or bankruptcy.
Unless you are on fairly close personal terms with your landlord, it's usually a good idea to write your landlord a note about your desire to add a roommate. This gives the landlord an unpressured opportunity to think about it. It is also your chance to sell your proposal by pointing out that your rental is big enough for another tenant and, assuming you already have someone lined up, that your new roommate will be a great tenant.

AS 34.03