More and more common has become the issue of the defaulting landlord. There are several angles to this issue. Lets start with the simple premise that a tenant makes their rent payment on time every month. The landlord has the right to choose how to use those funds. The landlord also has a mortgage obligation. Landlord decides rent funds will be used for other needs and landlord is not going to make mortgage payments, as they have learned it is now taking 18 months or so to actually have to vacate a home with a mortgage that is in default.
Generally speaking, the tenant is unlikely to discover that the landlord is not paying the mortgage unless a Notice of Default is actually delivered or posted at the home. As a tenant that would set off the alarm bells. I have had discussions with tenants who have seen a posted Notice of Default and they now think they are no longer obligated to make rent payments. I almost understand this line of thinking…but as a manager we have to bring the tenant back to the lease and the separate contracted obligation they have with the defaulting landlord. Technically, the tenant must make payments per the term of the lease for the entire length of the lease.
The issue for the owner is under the large umbrella of ethical behavior. Is it ethical to collect the rent and not make the mortgage payment? While there is not a law prohibiting this situation, outside of the obvious contract violation occuring with the owner’s mortgage, this issue turns on ethics. It seems to me that the ethical landlord will do what we all are required to practice in real estate..disclosure. If the tenant is made aware of the situation, and the tenant understands the risks involved (primarily that at some point they will likely have to vacate the home on somebody else’s terms) then there is no ethical violation. Asking a tenant to remain under these circumstances probably requires a reduced rent payment…but that can be a decision for the owner. The interesting twist is the ethics of this arrangement toward the lender. Since this is a property management blog, I will not branch into that discussion, but it is something to consider.
A few years ago, as this issue became more common, with the help of our attorney, we added language to our Management Agreement to address this situation. Here is what our Agreement with our owners states:
DUTY TO AVOID FORECLOSURE: OWNER acknowledges that it is a fundamental
obligation of a Landlord to provide their Tenant Quiet Enjoyment of the
rented premises. Anything that jeopardizes Tenant’s right to occupancy, such as
failure to service mortgage or discharge any lien, places that right in
jeopardy. Therefore, to continue to collect rent and /or fail to notify Tenant
of impending foreclosure would be a breach of that duty.
MANAGER, as part of operating as a licensed real estate Broker in the states of
Indiana and Florida, are required to follow all real estate laws. The laws require MANAGER to treat all parties
to a transaction fairly, and to notify any party to a transaction that the
other party may not be able to fulfill their duties. MANAGER therefore has an
independent duty to notify Tenant of any impending foreclosure or failure to
service mortgage debt.
OWNER shall inform MANAGER of any failure to service debt, to remove liens, or
other event that would prevent Tenant’s quiet enjoyment. If MANAGER discovers
any such breach, MANAGER shall give notice to OWNER (notice by email shall be
sufficient under the terms of this paragraph). If breach is not cured within
three (3) calendar days (failure to respond will create an irrefutable
presumption of failure to cure), of transmission of notice, MANAGER at its sole
discretion may do any of the following:
a. Agree with Tenant to terminate the Lease immediately and return to Tenant
all monies held by MANAGER;
b. Enter into a new Lease with Tenant for another property managed by MANAGER;
c. Represent Tenant in purchase of another property;
d. Refer Tenant to another real estate professional for assistance;
e. Advise Tenant to seek legal counsel;
f. Anything else to treat Tenant fairly.
Our owners are forced to consider that collecting the rent while not making the mortgage payments and not disclosing such, is also a violation of their Management Agreement. It is one of the few real tenant protections in our agreement that is not directly derived from statute. It is based on seeing far too many tenants have their home totally turned upside down by the aggressive bank that has foreclosed on a home and given the tenant 15 days to move. We now have Tenants Rights that prohibit these bank actions. The clause was created prior to the 2009 law. We are leaving the clause in our agreement because it puts an owner on notice that disclosure is the best course.
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Tags: Indianapolis Property Management, Indianapolis Property Manager, Owner Mortgage Default, Property Manager, tenant issues, tenant rights, Wilmoth
