My Landlord is in Foreclosure, Should I Pay the Rent?

The foreclosure crisis is all over the news. Even a thriving business can fall victim if their landlord goes into forclosure. What are your options?

No doubt about it, times are tough, even for landlords.

This is especially true for commercial landlords. Commercial and mixed use properties developed, sold or refinanced at the height of the real estate market are now distressed. If the landlord owes more money to a bank than the property is worth, then the property is “underwater.” 

But unlike homeowners who generally have a 30-year mortgage, commercial property loans usually require a “balloon” payment after 5 or 10 years, requiring that the owner refinance the old loan.  If the property is underwater, that may be impossible.

Over the last few years, commercial property values have gone down while vacancies have increased. Every time a tenant goes out of business, it
puts pressure on the landlord to find a new tenant in a depressed economy to be
able to keep making payments on the mortgage.

With increasing frequency, owners of these properties are throwing in the towel, and the bank begins foreclosure proceedings. As a tenant, you may hear about it through the rumor mill, but you will likely get notice from the landlord or the bank or from a management company.

So how does this affect you as a tenant? Unless you absolutely hate your landlord, it will not be in a good way. Some properties are managed with little
disruption, while others have major issues. A bank will usually have a management company put in place to collect the rent and to address the ongoing needs of the tenants. Over time, the property may seem to slip — the management company is slow to make repairs or perform services like
collecting the trash or cleaning common areas.

Upgrades are of course out of the question, since the bank is losing money on the property, you can expect a bare minimum of investment or resources. Some tenants even resort to not paying the rent for any one of many reasons: they think they are entitled to given the condition of the property, they do not have the money to pay it, or because they don’t believe the bank will risk having another vacancy on the property.

So if you see other tenants not paying the rent, you will have to ask yourself, “Should I pay the rent?”

The answer depends upon how much you fear the consequences. Your lease is a contract, so check the terms of your lease. If it does not allow you to withhold rent for any reason, you can be evicted and you can be sued. Even if the bank or its management company is not aggressive in collecting the rent, once the property is transferred to a new owner, the new owner may immediately try to evict you based upon that conduct. 

Commercial tenancies typically can be terminated much more quickly than residential tenancies, so there is a risk that by letting the rent go for several months, you may need to come up with all of the back rent at once to avoid having to shut your business down and find a new location. This could be particularly disastrous, especially if you have no intention of leaving your current location.

If your landlord goes into foreclosure, you need to be concerned and make your contingency plans immediately. If you are a commercial tenant, you may be listed as a defendant in a foreclosure action. This does not mean you will be thrown out, but it could impact you nevertheless. Even if this does not happen, you should be concerned that the property will go downhill depending upon how long the process drags on, and this may have a negative impact on your business.  

Your rights as a tenant are spelled out in your lease. If you did not read it when you signed it, you will want to now. Even if you did, you should refresh your
memory and read it again before you make any decisions. If you are not sure of what it means, or what your options are, seek legal advice. Before you do something rash like defaulting on a lease, recognize that you may have other options. You may be able to declare a default, terminate the lease and take advantage of other vacancies in a better location.

If you are paying above market rent, the threat of a default may help you negotiate with the management company, the bank or your new landlord once the process is done. Hopefully, at the end of the process, you will be able to navigate the storm better than your landlord.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

BW October 01, 2012 at 11:56 AM
On the other topic, out of 46 million collecting food stamp, medicaid housing etc, 50% of them are "anchor babies". Stop giving benefits to illegals, change the citizenship to at least 1 parent must be a citizen for the child to be a citizen, and it will cut the debt obama created way down. The answer is simple, yet everyone in congress is afraid to take that first step for fear they will not be re-elected and loose the golden benefits and perks they get now.
Donna Griffin October 01, 2012 at 11:59 AM
Bob - The next downturn in the economy will be in January exactly when the Bush tax cuts expire (if Obama is re-elected). The more critical downturn (and perhaps the final blow to the economy) will be when the Obama healthcare taxes kick in and our medical delivery system morphs into a very different animal than we have been promised. That, my friend, has already started. Again, taxing ourselves into prosperity will never work. Allowing tax cuts to expire is a tax increase. Watch your home mortgage deduction....that's next. But I guess if they sell it as an "expiration of a deduction" it sounds a whole lot prettier. With the oil company subsidies, I might bite on that one if we also include losing the solar company and auto industry subsidies. The federal government ought not be in the job of picking winners.
Donna Griffin October 01, 2012 at 01:23 PM
George - You need a hug. I choose not to swim in the "victim" pool of which you speak. The world owes me nothing. I am not afraid of hard work and consequence. You may wish to live a paranoid life. I, however, choose not to do so. I'll keep you in my prayers....you need them.
Roman December 05, 2012 at 10:22 PM
Sorry Mike- Perhaps you should have written a different article. Your story about real estate lending is just not as interesting as political banter & socioeconomics. Now I'd like to discuss the Romainia's Women's Gymnastics team - boy do they piss me off.
luc hellson December 31, 2012 at 12:05 PM
DUMB question -- of course you ahve to pay your rent -- escrow it if you must. As the federal government is going bankrupt -- maybe we don't have to pay our taxes?


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