In Arizona, a month-to-month rental agreement is binding. A month-to-month rental agreement can be oral or written; both are enforceable. In either case, both the landlord and tenant must give thirty days advance written notice to terminate tenancy. The applicable statute provides: “The landlord or the tenant may terminate a month-to-month tenancy by a written notice given to the other at least thirty days prior to the periodic rental date specified in the notice.” (See ARS Section 33-1375.B). The phrase “the periodic rental date specified in the notice” means the beginning of the next rental term. If tenancy renews on the first day of each month and rent is due on the first day of the month, then the “periodic rental date” is the first of the month, which would then mean that a thirty day notice would have to be given at lease thirty days prior to the first day of the month. For example, if today is the fifteenth day of the month (any month) and I give a thirty day notice to terminate a month-to-month tenancy today, then tenancy would terminate at the end of the next month, not at the end of this month and not on the fifteenth of next month. The same is true if I gave a notice on the sixteenth day of the month, the last day of the month, or any day in between – tenancy would still terminate at the end of next month. You also have to take into consideration the number of days in the month and the method of service. If you serve the written notice in person, don’t count the day of service; if you send notice via certified mail, you will need to add up to five additional days to the thirty day notice (see ARS Section 33-1313 regarding notice).
Yes, with one exception. The LL/T Act applies "to the rental of dwelling units." Your house is a dwelling unit and, therefore, the Act applies to you and your house, which means that all the requirements of the LL/T apply to any tenant renting a room. In the case of a person renting a room and having access to common areas (i.e., kitchen, bathroom, living room, etc.), the LL/T Act refers to that tenant as a "roomer" (see ARS Sec. 33-1310(13): " 'Roomer' means a person occupying a dwelling unit that lacks a major bathroom or kitchen facility, in a structure where one or more major facilities are used in common by occupants of the dwelling unit and other dwelling units. Major facility in the case of a bathroom means toilet, or either a bath or shower, and in the case of a kitchen means refrigerator, stove or sink." The only distinction in the Act between a roomer and a tenant appears in ARS Sec. 33-1314(D): "Unless the rental agreement fixes a definite term, the tenancy shall be week-to-week in case of a roomer who pays weekly rent, and in all other cases month-to-month." There are no other distinctions. Therefore, you must treat the roomer as you would any other tenant, with the sole exception being that if the roomer pays rent weekly and you wish to terminate the roomer’s week-to-week tenancy, then you only have to give ten days notice (see ARS Section 33-1375(A)), rather than thirty days notice (see ARS Section 33-1375(B)).
A 5-Day Notice to Pay or Quit (referred to herein as a "5-Day Notice") can be served upon a tenant as soon as rent is delinquent. If rent is due on the first day of the month and is not paid on the first day of the month, then the landlord may (but is not required) to serve the tenant with a 5-Day Notice on the second day of the month.
What if there is a late fee provision? No difference. A late fee provision specifies when late fees will be assessed and the amount thereof. A lease is not required to have a late fee provision and many lease forms do not include a late fee provision. If the late fee provision had any impact on when the 5-Day Notice could be served, then rent would never be delinquent in a lease with no late fee provision.
A Notice of Abandonment can be served on the tenant if the tenant is absent from the dwelling unit without notice to the landlord: (1) for seven days, if rent is delinquent for ten days, and there is personal property belonging to the tenant inside the dwelling unit or (2) for five days, if rent is delinquent for five days, and there is no personal property belonging to the tenant inside the dwelling unit.
A landlord may serve a 5-Day Notice or a Notice of Abandonment if the foregoing requirements are met. Sometimes both will apply. For example, if rent is delinquent five days, the tenant has been absent from the dwelling unit without notice to the landlord for five days, and there is no personal property inside the dwelling unit. Measured against the foregoing criteria, both seem to apply. So what should the landlord do? Which is the better choice?
My recommendation is to do both. If you just do the Notice of Abandonment and the tenant shows up three days later, you cannot proceed with the abandonment and you have lost three days because you did not serve a 5-Day Notice at the same time as the Notice of Abandonment. If you serve both notices at the same time, you can defer the decision on which course of action to pursue until five days later.
A word on "service" of these notices.
a. The 5-Day Notice can be serve via certified mail and hand-delivery. When served by hand-delivery, you begin counting five business days, beginning the day after hand-delivery to the tenant. When served via certified mail, you begin counting five business days, beginning the day after the tenant signs for the certified letter or five business days after the Notice of Abandonment was sent via certified mail to the tenant, whichever occurs first.
b. The Notice of Abandonment must be posted on the front door (or other conspicuous entry point) of the rental property and sent on the same day via certified mail. Counting of the days is the same as above.
If the landlord proceeds with the abandonment, then the landlord can get possession of the rental unit in about two weeks, but the landlord loses the opportunity to get a money judgment against the tenant. The landlord can still sue the tenant in a regular civil action later and get a judgment for rent, late fees, damages, etc., but a regular civil action takes several months, rather than just a couple weeks.
If the landlord proceeds with the 5-Day Notice, then the landlord can file an eviction action and get a money judgment against the tenant (assuming, of course, that the landlord is the prevailing party at the eviction hearing) for rent, late fees, attorneys fees, and court costs. Typically, you cannot get cleaning expenses or property damages because the landlord does not yet have possession and has no way of knowing the extent of the cleaning and/or property damage at the time of the eviction hearing. The landlord can file a regular civil action for additional rent (if the tenant vacated before the end of the lease term), cleaning expenses, property damages, etc., if the security deposit does not cover all of the landlord’s money damages.
So which one is "better"?
- If you want a money judgment, and you want it as soon as possible, then you want to serve a 5-Day Notice and then file an eviction action if the tenant does not pay the amount due within the five days. This choice will get you a judgment.
- If you want possession of the rental property as soon as possible and you do not care about getting a judgment against the tenant (either because you intend to file a regular civil action later or because you don’t believe you will ever be able to collect anything from this tenant), then follow the abandonment procedure. This choice will get you possession sooner than if you file an eviction action.
Yes. The Arizona Residential Landlord and Tenant Act was amended in July 2010 and a new statute was added – A.R.S. Section 33-1331. In short, the statute says that if a rental property is already in foreclosure, then the landlord must inform the tenant of this fact before the landlord enters into a new rental agreement with the tenant. Under this new statute, it is clear that the landlord must disclose the foreclosure before entering into a new fixed term lease with a tenant. That would apply to a brand new tenant (whether that tenant is signing a new fixed term lease or a new month-to-month lease) AND to an existing tenant who will be signing a new fixed term lease. What is not clear is whether it applies to a month-to-month agreement that existed before July 2010 (when the statute became effective), which renews automatically each month (until/unless canceled by one of the parties) and that continues to renew automatically after July 2010. Similarly, it is also unclear whether it applies to a fixed term lease that began before July 2010, but has expired (either before or after July 2010) and now continues on a month-to-month basis.
No. The Act requires: "The landlord shall:... (2) Make all repairs and do whatever is necessary to put and keep the premises in a fit and habitable condition." (See ARS Sec. 33-1324(A)(2)). But the Act does not require the landlord to: (1) paint the walls, (2) replace or clean the carpet, (3) sanitize the kitchen or bathrooms or (4) change the locks, before renting to a new tenant or at specific intervals. Naturally, the landlord may do all or some of those things, but the Act does not require it.
The "correct" answer depends on many variables. If the spa (or whatever) was not working when the tenant took tenancy and the landlord made clear that it would not be fixed, then the answer is clear -- the landlord would not have to fix it. If the spa was working when the tenant took tenancy, but it stopped working because of something the tenant, occupant or a guest did, then the tenant is responsible for repairs. (See ARS Sec. 33-1341). If the spa was working when the tenant took tenancy and the tenant is not responsible under Sec. 33-1341, then we must determine if the landlord's refusal to fix the spa constitutes a "default," which is referred to in the Arizona Residential Landlord and Tenant Act (the "Act") as a "noncompliance." The first place to look is in the rental agreement. If the rental agreement includes language that makes clear the landlord is not obligated to fix the spa, then (again) the answer is clear – the landlord would not have to fix it. If the rental agreement says nothing about the spa, then we turn to the Act. Section 33-1361 of the Act allows the tenant to serve a notice on the landlord of a noncompliance and, if the landlord does not fix the problem, then the tenant may terminate and vacate or may sue for damages. The amount of time the tenant must give the landlord depends on the nature of the noncompliance. A "noncompliance materially affecting health and safety" is subject to a five day notice; absent unusual circumstances, a malfunctioning spa probably does not affect health and safety and probably constitutes (if anything) a "material noncompliance." A "material noncompliance" is subject to a ten days notice. A "material noncompliance" also includes a "material falsification of the written information provided to the tenant." (See ARS Sec. 33-1361(A)). If the tenant rented the subject property because (or at least partly because) of the spa (i.e., therapy for an injury or medical condition), then the landlord’s refusal to fix the spa would probably constitute a material noncompliance. In addition, if the landlord advertised the subject property (i.e., newspaper ad, yard sign, flier, Internet listing, etc.) and one of the features included in the advertisement was the spa, then the landlord’s refusal to fix the spa would probably constitute a material noncompliance. I say "probably" because two judges hearing the same set of facts may reach different conclusion. There is yet another potential argument. Section 33-1363 gives the tenant a "self-help" remedy, allowing the tenant to pay a licensed contractor to make repairs and then deduct the cost of repairs (the Act provides for specific monetary limits) from the next month’s rent, but Section 33-1363 only applies if the inoperative spa constitutes a violation of Section 33-1324. A spa is probably not an "essential service," does not affect health and safety and an inoperable spa does not render the subject property unfit or uninhabitable. (See Section 33-1324). Arguably, the spa constitutes "other facilities" supplied by the landlord (see Section 33-1324(A)(4)), but that is a tenuous argument, at best. So, the best approach is for the tenant to serve a ten day notice of material noncompliance. Whether or not a judge will side with the tenant will depend on: (1) language in the rental agreement, (2) whether the spa was the reason (in whole or in part) the tenant rented that property, and (3) especially if the landlord included the word "spa" in any advertising (i.e., newspaper ad, fliers, sign, etc.).
Forget foreclosure for a moment. In a “regular” sale of a rental property by the owner/landlord to a new buyer, the new owner takes the rental property “subject to” the existing lease, which means that both the new owner and the tenant are bound by the terms of the existing lease. Neither the new owner, nor the tenant may unilaterally cancel or terminate the lease (except in the very rare occassion when the lease contains a provision that terminates the lease upon sale of the rental property). Prior to 2009, foreclosure of a rental property “foreclosed” (i.e., extinguished) all interests in the rental property that were “junior” in priority to the lien being foreclosed by the lender, which meant that a foreclosure terminated the lease and the tenant had to vacate the rental property no matter how much time was still left on the lease. The Helping Families Save Their Homes Act of 2009, signed into law by President Obama on May 21, 2009, included a provision entitled Protecting Tenants at Foreclosure Act of 2009. The latter Act provides that the new owner of the rental property takes the rental property “subject to” the existing lease, which means both the new owner/landlord and the tenant are bound by the existing lease. Having said that, there are a few exceptions and the Act only applies to a “bona fide” lease. The full text of both Acts can be found at the following links.
Helping Families Save Their Homes Act of 2009
Protecting Tenants at Foreclosure Act of 2009 (scroll down to Section 701)
Keep in mind, however, that the Arizona Residential Landlord and Tenant Act still applies. Whether or not there has been a change of ownership of the rental property, the LL/T Act allows a tenant to give notice regarding various property defects and, if the defects are not remedied, the tenant may terminate and vacate the rental property.
A tenant should look for language in the lease that makes it a breach of contract for the landlord to let the rental property go into foreclosure. If there is a provision in the lease that makes it a breach of contract for the landlord to allow the rental property to go into any type of foreclosure, then the tenant has some recourse. Specifically, if a trustee's sale is commenced on the rental property, then the landlord is in breach and the tenant should then follow the procedure in the Arizona Residential Landlord and Tenant Act (link to download copy is in the right margin of this Blog), send the landlord the proper notice and then vacate if the landlord does not cure the default. The AAR (which stands for Arizona Association of Realtors) February 2008 rental agreement form, is a nine page form; on line 206, it says, "Landlord shall not allow the Premises to become the subject of a trustee's sale." If the tenant’s language has this language, then the landlord is in breach of contract if a trustee’s sale is initiated. Depending on the facts, the tenant may be able to sue the landlord for damages, which may include moving expenses. Tenants should keep in mind, however, that not all lease forms include the foregoing language and that even the AAR 02/2008 form is not all encompassing. For example, a lender could commence a judicial foreclosure of a mortgage, or the lender (beneficiary) under a deed of trust could elect to foreclose a deed of trust as a mortgage, or a vendor in an agreement for sale contract could commence a forfeiture; in all three of those cases, the rental property is not "the subject of a trustee's sale" and the landlord would probably not be found to be in breach of contract.
The first thing a tenant should do is to call the landlord and discuss the issue. Don’t be confrontational, just ask what the landlord intends to do. The landlord may be doing a loan modification or may tell you straight out that they are going to let the property be foreclosed. Then you need to decide whether you want to stay or if you want to vacate. If you want to vacate, ask the landlord if you can vacate early; the landlord may say yes. If the landlord won’t agree to let you vacate early, then read your lease to see if it is a breach for the landlord to let the rental property go into foreclosure. If there is such a provision, then follow the Arizona Residential Landlord and Tenant Act (link in the right margin of this blog), send the landlord the proper notice and then vacate if the landlord does not cure the default. If you (tenant) want to stay, federal legislation was passed in May 2009 that allows some tenants to finish out the term of their lease even after the foreclosure; for mo/mo tenants, they must be given at least 90 days advance notice of termination, but in both cases, that is only if the federal law applies to the tenant’s specific facts. Consequently, you (tenant) should either talk to your own attorney or Google “U.S. Senate Bill 896 – Helping Families Save Their Homes Act of 2009," and read it to see if you fall under that Act.
Cross-reference: See this blog post – Can a residential tenant terminate a lease: (1) within 3, 5, 10 or some other number of days after signing the lease, (2) if the tenant loses his/her job, (3) gets a job transfer, (4) if there is crime in the area or (5) if they are the victim of a crime?
Without regard to whether the tenant needs to break the lease or merely wants to break the lease, this post discusses the duties of both the landlord and the tenant when a tenant breaks the lease.
Both the landlord and the tenant have a duty to “mitigate” (i.e., reduce and/or limit) damages. Some examples include: (1) the tenant leaving the rental property clean and “rent ready” when the tenant vacates, (2) allowing the landlord to post a “for rent” sign in the yard and/or window and allowing the landlord to show it to prospective tenants, and (3) finding a replacement tenant. Leaving the property clean and undamaged will reduce or eliminate the amount of time the rental unit is not available to be rented. Allowing the landlord to show the property may reduce or eliminate the amount of time the property is not rented. Remember, the tenant is obligated to pay rent until the end of the lease term, which includes the time it takes to clean, repair and re-rent the property. The tenant is also responsible for all the landlord’s expenses as a result of the breach of lease, such as advertising expense, real estate commissions, etc. On the other hand, the landlord also has a duty to mitigate damages. If the landlord is given advance notice that the tenant is vacating the property, the landlord must take “reasonable steps” to re-rent the property. Much litigation involves determining what is “reasonable,” but if the landlord takes no action (i.e., no sign, no advertising, no effort to clean and prepare the property for a new tenant), then the landlord has failed to mitigate damages and a court can (and should) deny the landlord rent for the period of time that the landlord took no action. Similarly, if the tenant can find a replacement tenant (i.e., via advertising, word-of-mouth, etc.) and the replacement tenant meets the landlord’s minimum requirements, then the landlord must either accept the replacement tenant or risk the chance that a judge will find that the landlord “unreasonably” withheld consent and, therefore, failed to mitigate damages. Both the landlord and the tenant should document efforts to mitigate damages. The landlord should keep a list of the steps taken to re-rent the property (i.e., ad in paper, sign in yard, list with broker, etc.), along with the cost thereof. The tenant should have the name and address of any potential tenants that the landlord “unreasonably” rejected. The tenant should take photographs and video of the property when the property is vacant and the tenant is leaving the property for the very last time; this is to rebut allegations by the landlord that the place required a lot of cleaning and/or repairs before it could be rented. And the tenant should either check, or have someone else check, to see if the landlord puts up a “for rent” sign after the tenant vacates (if hasn’t already been put up before the tenant vacates). If the tenant can document that the landlord did not put up a “for rent” sign (which is the absolute minimum that most judges will require), then the tenant has an excellent argument that the landlord failed to mitigate damages, which will reduce or eliminate the landlord’s damages.
A landlord cannot collect a security deposit equal to more than one and one-half month’s rent. For example, if the monthly rent is $1,000.00, then the maximum security deposit a landlord may legally collect is $1,500.00. For more information about "maximum amount of deposit," see this blog post.
For now, just understand that any amount you collect that is refundable, without regard to what you call it (i.e., pet deposit, cleaning deposit, key deposit, etc.) is "security" under the ACT and is subject to the one and one-half month's rent limitation. If, however, you collect a pet fee, cleaning fee, rekeying fee, or any other fee or charge that the tenant will never get back no matter what the tenant does or does not do, then that money is not "security" under the ACT, is not subject to the one and one-half month's rent limitation, and does not have to be refunded to the tenant -- ever! Consequently, in the same example above, the landlord may collect a $1,500 security deposit, a $250 nonrefundable cleaning fee, a $250 nonrefundable redecoration fee, and a $25 nonrefundable application fee, but that same landlord COULD NOT collect a $1,500 security deposit and a $1 key deposit, because then the amount of deposits the landlord would be holding exceeds one and one-half month’s rent.
Here is a similar example, but demonstrates why the landlord should only collect one "deposit" -- the security deposit -- and no other "deposits." Same example as above but the landlord collects a $1,000 security deposit and a $500 refundable cleaning deposit. So far, the landlord is okay (i.e., the total "security" collected is less than or equal to one and one-half month's rent). The tenant leaves at the end of the lease term and owes $2,000 in past due rent. There is no property damage and the property is left cleaner than when the tenant moved in. The landlord will want to apply all $1,500 to the past due rent, but he can’t. Under the Act, "‘security’ means money or property given to assure payment or performance under a rental agreement." (See A.R.S. § 33-1310(14)). The tenant left the property clean and, therefore, the tenant is legally entitled to return of ALL of the $500 cleaning deposit. Why? Because the $500 "cleaning deposit" is "security" under the ACT because it is refundable. The rental agreement may or may not explain the conditions upon which the tenant will receive a full refund of the $500 cleaning deposit, but any judge who hears this case will (rightfully) conclude that the purpose of a "cleaning deposit" is to assure the landlord that the property will be clean when the tenant moves out; if not, then the landlord is entitled to deduct cleaning expenses from the $500 cleaning deposit. In our example, the tenants vacated owing rent, but left the rental unit spotless. It was the landlord -- not the tenant -- who decided to collect $500 and to label it a "cleaning deposit." The "cleaning deposit" can only be used for cleaning expenses, not unpaid rent, property damage or anything else. If the landlord holds onto that $500 deposit, then the landlord has "wrongfully withheld" part of the tenant’s refundable deposits and the tenant can sue the landlord for the $500 deposit, plus statutory damages equal to twice the amount wrongfully withheld (i.e., $1,000), plus attorney’s fees and court costs. A really bad result for the landlord.
Fortunately, the solution is simple. The landlord should collect only one deposit – a security deposit. I always recommend that my clients collect only a security deposit (not to exceed one and one-half month’s rent) because the ACT permits the landlord to apply the security deposit to any amounts owed by the tenant: rent, property damage, cleaning, whatever.
This question is more accurately stated as: When a rental property is managed by a real estate agent/broker, does the agent/broker have a duty to inform the tenant when the agent/broker becomes aware that foreclosure proceedings have been started on the rental property?
The agent/broker is an Arizona real estate "licensee." The licensee owes a fiduciary duty to the owner/landlord, but must also deal fairly with all parties to the transaction, including the tenant. Informing the tenant of an impending foreclosure would appear to violate the licensee’s fiduciary duty to the landlord, but the Commissioner of Real Estate in Arizona has promulgated rules that all licensees must follow. One of those rules, A.A.C. R4-28-1101, requires that a licensee disclose to the other party any information that the party the licensee represents cannot or may not be able to perform. See A.A.C. R4-28-1101(B)(1) ("Any information that the seller or lessor is or may be unable to perform."). Clearly, if the property is foreclosed, the landlord may or may not be able to perform (i.e., continue to give the tenant the exclusive use and control of the rental property).
If a lease exists and the termination date is after the scheduled foreclosure (which may be a Trustee's Sale or a Sheriff’s Sale after a judicial foreclosure), then the lessor cannot perform. Even if we assume that the foreclosure sale may be continued to a later date, then there is still a chance that the lessor may not be able to perform. In both of these situations, under Commissioner's Rule R4-28-1101(B)(1), the licensee MUST disclose. I believe under the Lombardo case, it is even more clear that the licensee MUST disclose under these facts. See Lombardo v. Albu, 199 Ariz. 97, 14 P.3d 288 (2000).
If, however, the lease terminates before the scheduled foreclosure, I don't believe the licensee needs to disclose anything. But if that same lease includes an option (for the tenant) to extend the lease for a period of time that would extend past the scheduled foreclosure sale, then I believe the licensee MUST disclose the scheduled Trustee's Sale.
That answers the questions for fixed term leases and lease with an option to extend.
Oddly enough, a month-to-month agreement may be the hardest situation to analyze. At first glance, it would appear that the lessor (or the tenant) can terminate the rental agreement with only 30 days notice and, therefore, it would appear no notice is needed because tenancy may be terminated for any reason or no reason. So it would appear that no notice of the foreclosure sale is needed because the sale is 90 days away and tenancy can be terminated with only 30 days notice. But these time periods are somewhat deceptive and, at some point, the tenancy will progress to the point where notice is required.
An example may illustrate best. Assume today is January 1. Also assume tenancy is mo/mo and renews automatically on the first of each month, as most mo/mo tenancies do. The licensee discovers a foreclosure sale scheduled for March 20. As of January 1, the sale is 80 days away.
A landlord must give at lease 30 days advance notice of termination and tenancy must terminate at the end of a "periodic period." See ARS 33-1375. The "periodic period" in this example is one month. If the landlord gives the tenant 30 days notice of termination on January 1, then tenancy terminates at the end of February -- NOT February 1, which is 30 days after the notice is served and which many people mistakenly believe is the date the tenants must vacate. To terminate at the end of January, the landlord would have had to terminate tenancy sometime in December.
If the landlord serves notice on any date from January 1 to January 29, then tenancy still terminates at the end of February. The reason January 29 is the last day to terminate tenancy in February is because February (normally) only has 28 days and the statute requires 30 days advance notice. In the above example, the landlord or licensee clearly would NOT have to inform the tenant of the impending March 20 foreclosure sale as long as the landlord gave the tenant a 30 day notice of termination on or before January 29.
If the landlord gives the tenant a 30 day notice of termination on any date from January 29 to February 28, then tenancy terminates at the end of March, which will be after the scheduled sale. On these facts, it would appear that the licensee must inform the tenant of the pending March 20 sale because the landlord may not be able to perform. While that is technically true, the new owner (bank or successful bidder) will not be able to compel the tenant to vacate before the end of March. So, arguably, if the landlord gave the tenant a 30 day notice of termination on or before February 28, then the tenant has not sustained any "real" damages.
If the landlord never gives the tenant notice and the tenant did not know about the foreclosure sale until the date of the sale (or even after), then the landlord clearly cannot perform under the lease (i.e., give the tenant exclusive use and control of the rental unit for another month). It would appear in this case that the licensee MUST give the tenant notice of the foreclosure sale, but if this is a "government related loan," then the May 20, 2009 federal legislation gives the tenant under a "bona fide lease" at least 90 days before the tenant must vacate (90 days is the shortest period of time, even if the lease is only mo/mo and the successful bidder intends to owner-occupy the property). So, arguably, no harm comes to the tenants and, therefore, no notice by the licensee is necessary.
In addition, the Notice of Trustee's Sale is recorded and a judicial foreclosure is filed in the office of the Clerk of the Superior Court. Recorded documents and, arguably, court filed documents, give constructive notice to everyone, including the tenants. Both the landlord and the licensee can make the argument that they are not required to notify the tenant of documents that are of public record. Moreover, the statute for Trustee's Sales and foreclosures requires that the lender notify the occupants of the subject property, so it would appear that notice from the licensee to the tenants would be redundant and, therefore, unnecessary.
The foregoing reveals how complicated this seemingly simple example can become. The short answer to this question (i.e., must the property manager tell the tenant about an upcoming foreclosure sale) is definitely in some cases and maybe in other cases.
Yes. Surprised? Read this entire post to make sure you clearly understand. Landlords, banks and others who base their approval (or disapproval) on someone's ability to make payments on a loan or some other financial obligation may lawfully discriminate based on income, credit, current obligations and other factors. Make no mistake about it -- this is a type of discrimination, but it is lawful discrimination. What a landlord (or others) cannot do is unlawfully discriminate. It is unlawful to discriminate against a tenant applicant based on race, color, religion, national origin, sex, handicap or familial status (i.e., because the applicant has children), but a landlord may discriminate against an applicant on any other basis. For example, a landlord may reject a tenant application because s/he has insufficient income, drives a motorcycle and/or because s/he is a lawyer.
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What are the landlord’s rights/obligations?
What are the tenant’s rights/obligations?
These are the questions that many tenants and landlords are facing today. As in all cases, the answers depend on the facts and your point of view.
From the tenant’s perspective, they have signed a lease1 and are current on the rent. So what happens if the property goes into foreclosure? The answer to that question is easy: a judicial foreclosure and a non-judicial foreclosure will both "foreclose" (i.e., wipe out) all liens and interests in the rental property that are subordinate to the lien being foreclosed, which in almost all cases, includes a residential rental agreement or lease. (But see the "Update," below).
When the landlord purchased the Property, s/he obtained a loan. When s/he obtained the loan, s/he signed a promissory note, which created the debt that is owed to the lender.
The landlord also signed either a "deed of trust" or a "mortgage." Almost everyone refers to a house as having a "mortgage," but the fact is that almost all loans in Arizona are secured by a deed of trust, rather than a mortgage.
Under a deed of trust, if he borrower commits a "default," such as not making the payments, the lender may initiate a Trustee’s Sale, which is a non-judicial foreclosure of the Property. A non-judicial foreclosure means exactly that – the foreclosure may be conducted without going to court and/or getting a judgment. To initiate a non-judicial foreclosure (i.e., a Trustee’s Sale), the beneficiary (the lender) must instruct the trustee to record a Notice of Trustee’s sale with the county recorder and, after posting a notice on the property and sending the borrower various notices (whether actually received or not), the trustee may conduct a Trustee’s Sale of the Property.
Under a mortgage, if the borrower commits a default, the lender may commence foreclosure by filing a lawsuit in superior court and serving the borrower and all other parties with an interest in the property with a Summons & Complaint. If the lender prevails at trial, the judge will issue a judgment of foreclosure and order that the sheriff seize the Property and sell it at auction.
A Trustee’s Sale, pursuant to a non-judicial foreclosure under a deed of trust, may be conducted ninety days after the Notice of Trustee’s Sale is recorded with the county recorder. A judicial foreclosure under a mortgage, proceeds as any regular civil lawsuit. If none of the defendants oppose the foreclosure, the lender may receive a judgment by default in about the same time as conducting a Trustee’s Sale (i.e., ninety days). If, however, one or more defendants opposes the foreclosure action, it may take from four to twelve months to obtain a final judgment and the Sheriff’s sale of the property will occur sometime thereafter.
The reason that a deed of trust is more common than a mortgage is thus revealed. In almost all cases, the property can be sold at a foreclosure sale much sooner under a deed of trust than under a mortgage. In addition, a deed of trust can be foreclosed as a mortgage (i.e., the borrower can elect to file a lawsuit in court rather than conducting a non-judicial sale), but a mortgage cannot be foreclosed as a deed of trust (i.e., a lender holding a mortgage must file a lawsuit and pursue a judicial foreclosure). For these reasons, almost all lenders prefer to use a deed of trust to secure real property.
The shortest time, then, from initial default until the foreclosure auction (either a Trustee’s Sale or a Sheriff’s Sale) is ninety days. But that presumes that the foreclosure process is commenced immediately upon the first default (i.e., failure to make a payment). Many lenders do not even begin foreclosure until a borrower is three or more payments behind. In today’s market, some lenders are waiting even longer (i.e., they already have enough foreclosures on their hands; no need to hurry to the next one). Sorry for the diversion, but an understanding of the process in is important in order to understand the answers to our questions.
Back to the tenant. When is the lease going to end? If the lease is month-to-month, then there is no breach by the landlord. Either the landlord or the tenant may terminate a month-to-month tenancy for any reason (or no reason) by simply sending out a thirty-day notice of termination. (See A.R.S. § 33-1375(B)). To avoid liability (discussed below), the landlord may simply send a notice of termination at the appropriate time before the foreclosure sale.
If the lease will terminate in less than ninety days, there is no possible way that the tenant will lose possession of the rental property before their lease expires. Again, there is no breach by the landlord. Whether or not a foreclosure is pending, a landlord has no obligation to renew or extend any lease, unless the lease expressly gives the tenant an option to extend or renew the lease, which is not common in residential leases.
If the lease termination date is somewhere between ninety days and six months away, then "potentially" there is a problem. And if the lease termination date is more than six months away and/or the lease gives the tenant the option to extend or renew the lease, then the landlord will be in breach of contract if the foreclosure sale occurs.
When a landlord and tenant sign a lease, the tenant agrees (among other things) to pay a specified amount of rent each month (or some other specified period) and to stay for a certain length of time (i.e., six months, one-year, three-years, etc.). In return, the landlord agrees to rent the subject property to the tenant at that specified rent (i.e., no rent increases during the term of the lease) and for a certain length of time. The landlord’s failure to make the loan payments on the rental property is not a breach of contract, at least not to the tenant; it is a breach of contract under the promissory note and deed of trust or mortgage that the landlord signed with the lender. Rarely, if ever, is there a provision in the lease that requires the landlord to keep the loan payments on the rental property current during the term of the lease. If there was, then the landlord would be in breach of contract as soon as the landlord failed to make a required payment. Likewise, there is no statute that requires the landlord to keep loan payments current on the rental property during the lease term. If there was, then the landlord would be in violation of the law as soon as the landlord failed to make a payment. Consequently, the landlord will only be in breach of contract if the rental property is foreclosed during the rental term and the tenant is forced to move out before the end of the lease term. In that instance, then the landlord has failed to provide the tenant with the subject property for the agreed upon period. This, by definition, is a breach of contract by the landlord. The tenant may then sue the landlord for all damages that result from the breach of contract, which may also include the tenant’s moving expenses.
If, however, the lender begins the foreclosure process on the subject property, but the landlord makes up the back payments and averts the foreclosure, then there has been no breach of contract by the landlord. Likewise, if the landlord’s solution to avert the foreclosure is to sell the property to someone else, as long as the foreclosure is averted for any reason (i.e., the sale paid off the foreclosing lender, the new buyer assumed the existing loan and brought it current, the lender extended the foreclosure sale date, etc.), then the landlord has not breached the lease contract. Keep in mind, however, that when someone buys real property that is subject to an existing lease, the buyer takes the property subject to the existing lease, which means that the new buyer is bound by the terms of the existing lease and must allow the tenant to remain in the property until the end of the lease term.
But we are not done yet. What if the landlord "knew" the property was going into foreclosure when he signed the lease? What if it is his intent to keep all the money that the tenants pay to him and not make any loan payments to the lender until the lender forecloses on the property? Again, the specific facts will determine the answer. The extremes will be easy, so let’s start there. If the lease is month-to-month and the landlord provides adequate advance notice to the tenant before the foreclosure sale, then there is no breach by the landlord. On the other hand, if the landlord signed a ten-year lease, then it would be clear that the landlord intended to defraud the tenant. In that case, the tenant would be able to sue the landlord for breach of contract and fraud. The gray area in the middle is less clear. If the landlord signed a six-month, one-year, or other specified length lease with a tenant, knowing that he never intended to make a payment during the term of the lease, but with the expectation that the lender would not foreclose before the end of the lease term, then answer is less clear. Intent is not an element in a breach of contract claim. Therefore, if the tenant is forced to move before the end of the lease term, then the landlord is in breach of contract. Whether the landlord is also liable for fraud will turn on whether his expectation that the lender would not foreclose before the end of the lease term was "reasonable."
Can I stop making the rent payments? That is a question I hear frequently. Many lawyers are telling tenants to stop making the rent payments when a property goes into foreclosure. I believe that to be bad advice. Yes, I recognize that the tenant may argue that the landlord’s failure to make the payments and the impending foreclosure is an "anticipatory breach of contract" by the landlord. But I also know that every landlord will argue that they are experiencing some "financial difficulties," which are now being compounded by the tenant’s actual breach (not anticipatory breach) of failing to pay the rent. My opinion is that most judges will find the "actual breach" to be more compelling than the "anticipatory breach." Which means that the tenant will be in breach of contract, will be evicted and may be liable for rent until the end of the lease term. And this may be true even if the rental property is actually foreclosed because the landlord will claim that the tenant’s failure to pay the rent was the reason the landlord could not pull the rental property out of foreclosure. Bottom line for the tenants is you are better off paying rent. If the foreclosure sale actually takes place, then the landlord is in breach of contract if you are forced to leave the rental property before the end of your lease term. You can sue the landlord for breach of contract and, under appropriate facts, for fraud, but keep in mind that if the landlord lost the property to foreclosure, s/he may have other financial problems and may be on the verge of bankruptcy.
Tenants should also know that there is a process that follows any foreclosure sale. Whether by Trustee’s Sale or by Sheriff’s Sale, the successful bidder (or the bank, if no one bids) is not immediately entitled to possession. The new owner must first serve the occupant(s) with a five day demand for possession. If the occupant does not move, then the new owner must file a forcible detainer action (i.e., an eviction action) to remove the occupants. The hearing will be set approximately five days after the lawsuit is filed. If the occupants do not appear at the hearing (and even if they do), the court will enter a judgment in favor of the new owner and a "writ of restitution" can be issued five days later. That is the date that the Sheriff or constable will show up at the door and escort all occupants out of the property and deliver possession of the property to the new owner. So, from the foreclosure sale to the date the Sheriff shows up is about fifteen days. Not a lot of time, but certainly "some" amount of time to find substitute housing.
UPDATE:This post was originally posted on September 4, 2008. On May 20, 2009, the President of the United States signed a new federal law -- "Helping Families Save Their Homes Act of 2009." Part of the new law enacts protection for tenants with leases at the time of the foreclosure, provided the loan that is being foreclosed is a "federally related" home loan. The law protects "bona-fide tenants," which is defined in the new legislation as: (1) the lease had to be signed before the notice of foreclosure was issued, (2) the defaulting borrower cannot be the tenant under the lease, (3) the lease must be an "arm's length" transaction, and (4) the rent must be "fair market value rent."
If the foreclosed is a "federally related" home loan and the tenant is a "bona-fide tenant," then the purchaser at the foreclosure auction takes the property "subject to" the existing lease, which means the new owner must honor the terms of the existing lease. If the new owner intends to owner occupy the property, then the lease can be terminated, but the new owner must provide at least ninety (90) days notice of termination. And that is true (i.e., 90 days notice) even if the existing lease is only a month-to-month tenancy. In short, prior law provided that a foreclosure foreclosed a lease and the tenant had only a couple weeks after the foreclosure sale to vacate, but the new (federal) law now provides that the minimum notice to be given is ninety days and the tenant may be able to stay until the end of the lease term, provided: (1) the loan being foreclosed is "federally related" and (2) the tenant is a "bona-fide" tenant.
Arizona Landlord & Tenant Blog on August 11, 2009 in Landlord and Tenant - General, Landlord's remedies against a tenant, Leases and Rental Agreements, Notices - to/from tenant, Tenant's remedies against landlord | Permalink | Comments (15) | TrackBack (0)
I get these questions a lot. So much, in fact, that a blog post on these specific issues is warranted.
1. Can a residential tenant terminate a lease within 3, 5, 10 or some other number of days after signing the lease?
No. That one is simple enough. There is no statute and no case that gives tenants this right. Nevertheless, there is an exception. If the written agreement specifically gives the tenant that right (i.e., "Tenant may cancel this agreement within three days" or "Subject to review and approval by Tenant's attorney within the next three days" or some similar language), then the tenant can cancel the lease.
2. Can a residential tenant terminate a lease if the tenant loses his/her job?
No. The only exception is (as above) when the written agreement specifically gives the tenant that right.
3. Can a residential tenant terminate a lease if the tenant loses his/her job?
No. Starting to see a pattern here? Unless the written agreement specifically gives the tenant that right, once the tenant signs the agreement, the tenant is bound by the agreement.
4. Can a residential tenant terminate a lease if there is crime in the area?
No. Crime is everywhere; there is no statute or case that allows a tenant to terminate a lease because of crime in the area. HOWEVER, if the landlord marketed the property as being in a "crime free" area or made some other representations about the complete absence of crime in that area, complex, etc., AND it turns out that the area had a high crime rate, then the tenant would likely be able to terminate the lease -- NOT because there was crime in the area, but because the landlord had "misrepresented" the premises to the tenant. (See A.R.S. Section 33-1361). Similarly, if the landlord misrepresented some other "material information," then the tenant may be able to terminate the lease based upon that misrepresentation. (See A.R.S. Section 33-1361).
5. Can a residential tenant terminate a lease if the tenant is the victim of a crime?
Maybe. The Act, Section 33-1318 (which became effective August 2007), allows a tenant to terminate a lease -- without any financial penalty whatsoever -- if the tenant is a victim of domestic violence and the tenant sends a written request to the landlord to be released from the lease within thirty days after the incident. The tenant must also provide the landlord with evidence of the incident. There is no other statute or case that allows a tenant to terminate a lease if the tenant is the victim of a crime when the crime IS NOT domestic violence.
Arizona Landlord & Tenant Blog on June 18, 2009 in Landlord and Tenant - General, Landlord's remedies against a tenant, Leases and Rental Agreements, Tenant's remedies against landlord | Permalink | Comments (8) | TrackBack (0)