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Managing the Legal Issues of Distressed Properties

Kimball,Tirey & St.John LLP

Managing the Legal Issues of Distressed Properties

Ted Kimball, Esq.

January, 2013

Many of our clients have purchased a single family home through a foreclosure sale. When they
do, they are often required to allow the current tenants, if bona fide, to remain in possession
throughout the remainder of their lease term. A tenant is bona fide if their lease was negotiated
at arms-length and with a fair and reasonable term and rental rate. A tenant who is bona fide
raises a variety of issues and unique challenges not often found in managing multifamily
housing.

This article will highlight some of the issues facing purchasers of distressed properties when
owners are required to keep the tenant in possession and how to resolve them.

Lease Term

If the lease is month-to-month, the new owner cannot serve a 30 or 60-Day Notice to Quit as
they can in conventional rental properties unless the new owner has entered into a new monthto-
month written rental agreement with the occupants. However, a 60-Day Notice can be served
if the new owner can prove that the tenants are not “bona fide”. If they are bona fide and the
lease is month-to-month, a 90-Day Notice is required to be served. After January 1, 2013, the
only option for a bona fide or non-bona fide tenant is a 90-Day Notice. If the lease is a fixed term
and the tenants are bona fide, the new owner must allow the tenant to remain in possession
through the term of the lease unless they are in violation and can be evicted based upon the
breach.

Legal Entry into the Property

Entry into the premises is often times refused by the tenants in possession, especially because
the new landlord is a stranger to them. Informing your new tenants of your rights regarding
entry is something to consider. All residential tenants in California must allow a landlord to enter
the property to show it to prospective purchasers or tenants, to make necessary or agreed
repairs, or in cases of an emergency. These laws are all found in California Civil Code Section
1954 set forth below. It would be a good idea to send the tenants a copy of this legislation.

1954. (a) A landlord may enter the dwelling unit only in the
following cases:

(1) In case of emergency.
(2) To make necessary or agreed repairs, decorations, alterations
or improvements, supply necessary or agreed services, or exhibit the
dwelling unit to prospective or actual purchasers, mortgagees,
tenants, workers, or contractors or to make an inspection pursuant to
subdivision (f) of Section 1950.5.
(3) When the tenant has abandoned or surrendered the premises.
(4) Pursuant to court order.
(b) Except in cases of emergency or when the tenant has abandoned

or surrendered the premises, entry may not be made during other than
normal business hours unless the tenant consents to an entry during
other than normal business hours at the time of entry.

(c) The landlord may not abuse the right of access or use it to
harass the tenant.
(d) (1) Except as provided in subdivision (e), or as provided in
paragraph (2) or (3), the landlord shall give the tenant reasonable
notice in writing of his or her intent to enter and enter only during
normal business hours. The notice shall include the date,
approximate time, and purpose of the entry. The notice may be
personally delivered to the tenant, left with someone of a suitable
age and discretion at the premises, or, left on, near, or under the
usual entry door of the premises in a manner in which a reasonable
person would discover the notice. Twenty-four hours shall be presumed
to be reasonable notice in absence of evidence to the contrary. The
notice may be mailed to the tenant. Mailing of the notice at least
six days prior to an intended entry is presumed reasonable notice in
the absence of evidence to the contrary.
(2) If the purpose of the entry is to exhibit the dwelling unit to
prospective or actual purchasers, the notice may be given orally, in
person or by telephone, if the landlord or his or her agent has
notified the tenant in writing within 120 days of the oral notice
that the property is for sale and that the landlord or agent may
contact the tenant orally for the purpose described above.
Twenty-four hours is presumed reasonable notice in the absence of
evidence to the contrary. The notice shall include the date,
approximate time, and purpose of the entry. At the time of entry, the
landlord or agent shall leave written evidence of the entry inside
the unit.

(3) The tenant and the landlord may agree orally to an entry to
make agreed repairs or supply agreed services. The agreement shall
include the date and approximate time of the entry, which shall be
within one week of the agreement. In this case, the landlord is not
required to provide the tenant a written notice.

(e) No notice of entry is required under this section:

(1) To respond to an emergency.

(2) If the tenant is present and consents to the entry at the time
of entry.

(3) After the tenant has abandoned or surrendered the unit.
Habitability issues

Chances are the former landlord did not maintain the property as they should and there may be
habitability issues. If the premises are partially uninhabitable, the tenant has two remedies:
1) withhold a reasonable amount of rent based upon the condition of the premises, or 2) vacate
without liability for the remainder of the lease. They could also attempt to sue for retroactive rent
abatement claiming they paid full rent during the time the premises were rendered
uninhabitable. If the landlord can prove the tenant created the uninhabitability issue, the defense
can be successfully rebutted. However, without the prior landlord as a witness, it may be difficult
to rebut the claims of the tenant. If the tenant decides to withhold rent, the proper response
would be to first take care of the alleged habitability issue. Then, reason with the tenant to hopefully arrive at a mutually agreed upon reduced amount the tenant would owe based upon
the condition of the premises. If this fails, serve the tenant a 3-Day Notice to Pay Rent or Quit
for the reduced amount. If they fail to comply, an unlawful detainer action could be filed.

Lack of lease documentation/ledgers

The lack of lease documentation is often an issue after the foreclosed property is purchased.
Uncertainty in the amount or rent or type of lease is problematic. A reasonable attempt should
be made to ask for the tenant’s documentation. If they refuse, make your best estimate of the
rent owed since the foreclosure sale took place and serve a 3-Day Notice to Pay Rent or Quit.
If the rent is current, an appropriate Notice of Termination can be served as the law presumes a
month-to-month rental agreement if there is no written agreement to the contrary. Another
strategy is to serve a 3-Day Notice to Quit based upon the former owner or his dependents
being in possession. Once served, many tenants produce the documentation at that time to
avoid being subject to the unlawful detainer. If the documentation is still not provided, an
unlawful detainer action can be filed allowing you to subpoena the documentation from the
occupants. However, if it turns out that the incorrect notice was served based upon the
documentation provided, the case would have to be dismissed and the proper notice served.

Disposal of personal property left behind

Once the foreclosed property is purchased, it is often found vacant, with personal possessions
left behind. To protect yourself from a successful claim of wrongfully disposing of the personal
property, the abandonment of personal property process should be implemented. This process
requires that you mail to the former resident an Abandonment of Personal Property Notice
allowing the former tenant 18 days from the date of mailing to claim the property. In the
meantime, it must be kept in a reasonably safe place. If the tenant claims the property within the
18 day period, reasonable storage costs can be charged from the date the new owner gained
possession of the rental unit as a condition of returning the property. If the value of the personal
property left behind is more than $700 (as of 1/1/13 due to recent legislation), then the property
must be sold through a public auction house. If the value is less than $700 (as of 1/1/13), the
property can be disposed of as the landlord sees fit.

Rent control/Section 8

Local rent control laws and Section 8 regulations must be checked as they both have special
regulations regarding the purchase of foreclosed property that are tenant occupied.

Unauthorized occupants

Many times the names of all of the occupants are not ascertained by the new owner of
foreclosed property. If there is a written lease agreement, any of the occupants not named in the
lease may give rise to an action for unlawful detainer. However, the tenants may try to defend
the unlawful detainer action by claiming a waiver of the breach by the former owner. Without
testimony to the contrary, this defense may be difficult to rebut. On the other hand, if the lease
contains a “no waiver” provision, the landlord should be able to successfully argue that the prior
waivers did not affect their ability to enforce the lease at this time.

Security deposits

It is common to not have documentation as to the amount of the tenant’s security deposit in
foreclosed upon rental property, although most leases contain the amount and the requirement
of a security deposit. If the deposit has not transferred to the new owner, the law does not allow
the new owner to require the tenant to pay another deposit. The new owner and the former
owner are jointly and individually responsible for the return of any unused portions of the
tenants’ security deposit so long as the tenant can prove the existence of the deposit. This could
be proved by the lease itself, or by a cancelled check or bank statement.

Change of Ownership/Identity of New Owner

California law requires all residential landlords to identify themselves as the owner of the
property, and state their name, physical address and telephone number. However, the name,
address and telephone number of the new owner is not required if the property is being
managed by a third party. In that event, the name, address and telephone number of the
management company is required so long as the management company is empowered by the
owner to accept service of process of a lawsuit filed by the tenant. As of January 1, 2013, if the
new owner failed to provide the tenant with the new owner’s information within 15 days from the
date of the sale, they cannot demand rent for that month.

As you can see, purchasing foreclosed property occupied by a tenant of the former owner brings its own unique legal challenges to the new owner.

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