The Landlord Stopped Paying the Mortgage

By
Real Estate Agent with RE/MAX Dallas Suburbs TX Broker 0513551

As usual, I found myself in a lively discussion this morning. Having published, The Field Guide to Short Sales, I get asked some really tough questions from time-to-time.

The Landlord Stopped Paying the Mortgage

Here’s the situation:

A tenant signed a one-year lease using the Texas Association of REALTORS® residential lease. They took possession of the property and have been paying the rent on-time for the last 13 months. The lease was not renewed and is continuing on a month-to-month basis. About a month ago, they started to receive notices in the mail addressed to the landlord from the mortgage company.

Being concerned, they confronted the landlord. He told them he was going to list the property “for sale” with a local broker and that the tenants could stay while he marketed the property. When he secured a buyer, he would give them the 30 days notice required under the lease.

The tenants eventually figured out that the landlord was in default on his mortgage and was trying to Short Sell the property. At that point they quit paying the rent. When confronted, they commented, “If the landlord is not paying the mortgage company, we’re not paying the rent.”

My thoughts:

My initial reaction was that the payment of the mortgage by the landlord and the payment of the rent by the tenant are two separate issues. I reviewed both the Texas Property Code and the Texas Association of REALTORS® residential lease form. There’s nothing that ties the two issues together.

The tenant defaulted on the lease by not paying the rent and is liable for late fees, court costs, and other relief available in the lease.

The landlord has not defaulted on the lease because the property is still available for the tenant’s use.

Epilogue:

This is a growing problem as foreclosures continue to climb.

If you are a tenant in this situation, you should seek legal advice before you simply stop paying the rent. State Laws vary and each lease may contain different clauses.

If you are a landlord, you should seek legal advice as well. If the property goes into foreclosure during the lease, you may be in default and liable.

Tom Branch, Broker, CDPE, SFR

Photo Licensed from iStockPhoto | Source: http://www.thebranchteam.com/wordpress/2010/12/15/the-landlord-stopped-paying-the-mortgage/

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Tom Branch and Gina Branch, The Branch Team with RE/MAX Dallas Suburbs, service the greater North Dallas suburbs including Dallas, Plano, Allen, McKinney, Frisco, Lewisville, and Carrollton.  While Gina concentrates on traditional listings and buyer/tenant representation, Tom specializes in assisting distressed homeowners to avoid foreclosure.  Tom and Gina have published two books (Achieving Rock Star Status and The Field Guide to Short Sales) and are available for speaking engagements in the greater Dallas - Fort Worth Metroplex. Subscribe to The Branch Team Blog.

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Re-Blogged 3 times:

Re-Blogged By Re-Blogged At
  1. Victor Zuniga 12/15/2010 08:57 AM
  2. Jeremy Gryvatz 12/15/2010 11:26 AM
  3. Eva Aliaga 12/16/2010 05:03 AM
Topic:
ActiveRain Community
Location:
Texas Collin County Plano
Groups:
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Short Sales Specialists
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Rainer
124,370
Michael Myers
King-Rhodes & Associates - Cherokee Village, AR

Tom, I agree with everything you wrote in this post. IMHO, the tenant needs to pay his rent as in agreement with his lease. It has nothing to do with the landlord's mortgage problem.

Dec 15, 2010 01:26 PM #32
Ambassador
1,726,566
Richard Weisser
Richard Weisser Realty - Newnan, GA
Richard Weisser Retired Real Estate Professional

Tom...

In most cases, a tenant loses all fights when they breach their contract ... but should always talk to a lawyer before stopping to pay the rent.

Dec 15, 2010 01:34 PM #33
Rainer
89,742
Angelina Clarke
Builder Services Realty, LLC - Tampa Palms, FL

This is a HUGE problem in Florida.  There are thousands of landlords, who purchased 20 plus homes, and have never paid a payment since day 1.  They pocket all of the rent from each of the houses...tax free...and when a tenant refuses to pay, they evict them and get a new victim.  NOW there is a BLUE OCEAN STRATEGY that will land you in JAIL for tax evasion

Dec 15, 2010 02:06 PM #34
Rainer
41,354
Albert Hakim
City Management Group - Detroit, MI
TEAM DETROIT

This is becoming a problem more and more especially in the detroit area and now the tenants believe they can have all control its sad but true

Dec 15, 2010 02:16 PM #35
Rainmaker
429,801
Rodney Mason
Guaranteed Rate NMLS# 2611 - Atlanta, GA
VP of Mortgage Lending - AL, FL, GA, SC, & TN

They definitely are two separate matters.  It's a growing problem everywhere.

Dec 15, 2010 02:36 PM #36
Rainmaker
415,762
Tni LeBlanc, Realtor®, J.D.
Mint Properties, Lic. #01871795 - Santa Maria, CA
Tenacious Tni (805) 878-9879

Yes, this happens all the time out here now. That landlord does not sound like he breached but the reaction of the tenant breeds the reaction of the other type of landlord in foreclosure.  Say nothing to the tenant, no sign on the property and make all offers subject to inspection once bank approval rolls in -- which I do not believe is fair at all. I tell people you need to be fair and upfront.  It is a difficult thing to get people to abide by these days. 

Dec 15, 2010 02:50 PM #37
Rainmaker
1,402,703
Vickie Nagy
Coldwell Banker Residential Real Estate - Palm Springs, CA
Vickie Jean the Palm Springs Condo Queen

This sounds like a 'no-win' situation for everyone involved. Tenants are obligated to pay ... as are borrowers.

Dec 15, 2010 04:17 PM #38
Rainer
84,428
Fathom Realty Group Inc.
Fathom Realty Group Inc - Orange, CA
Get Paid what your WORTH!

Tom this just happened to me.  Of course I refrained from giving advice.  I recently met a lady that serves on the court chair evictions and she indicated in 2014 the laws will change o benefit the Landlords.  Thanks for the article this really hits home and I have heard both sides of the story.

Dec 15, 2010 06:46 PM #39
Rainmaker
314,749
Sylvia Barry
Coldwell Banker Previews International (#1 Marin_Sonoma_San Francisco_North_Bay) - San Rafael, CA
Marin and Sonoma Real Estate Leading Expert

Totally.  Here is another side to the story - I had a client who was buying a house short sale, and a tenant lives in the property.  My client refused to buy after waiting for a while because she worried that the landlord is not going to get rid of the tenant until the lats minute and she had to evict the tenant to move in.  The short sale fell apart! 

Dec 15, 2010 07:45 PM #40
Rainmaker
908,388
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

In California they are two separate issues, also.  This situation can get complicated in accomplishing a short sale.

Dec 15, 2010 09:21 PM #41
Rainmaker
403,926
Claudette Millette
The Buyers' Counsel - Ashland, MA
Buyer, Broker - Metrowest Mass

Tom:

This is becoming such a problem that someone who is considering renting anything should do a thorough check to see if the owner is in any sort of trouble.  However, I think once you are in a rental situation you probably owe the rent, no matter what.

 

Dec 15, 2010 11:20 PM #42
Ambassador
920,701
Missy Caulk
Missy Caulk TEAM - Ann Arbor, MI
Savvy Realtor - Ann Arbor Real Estate

Tom, the same thing happened to one of our tenants the first month in.

She contacted the landlord who tried to deny it, she stopped paying rent. He finally owned up to it.

She is putting her rent in an escrow account in the event she has to pay, he told her she didn't. But, you never know. She rented for 2 years, 2 small kids and fixed up lots of things when she moved in.

 

Dec 16, 2010 01:51 AM #43
Rainmaker
705,843
Richard Bazinet /MBA, CRS, ABR
West USA Realty - Scottsdale, AZ
Phoenix Scottsdale. Sellers, Buyers & Relocations

Hi Tom - they passed a law in Arizona which became effective Aug 01/10 about this sort of situation. The tenants rights are now protected under the law against landlords that default on their mortgage, they can even sue the landlord for fraud, and against a bank foreclosing on a property during the term of the lease. Texas should review the AZ law and your state association should lobby for your legislature to follow suit.

Dec 16, 2010 01:58 AM #44
Rainer
137,014
Brent & Deb Wells
LivingWell Properties - Prosper, TX
Prosper TX

Tom,

Very well stated, they are two separate issues and the tenants have made a poor decision to simply stop paying the rent. It amazes me some of the logic that we see in this business. 

-Brent

Dec 16, 2010 02:15 AM #45
Rainer
35,804
Manuel Monserrate
Raleigh, NC

If I was a tenant, I would ALWAYS pay the rent and consider my options while I'm still living in that place.  If you think something 'fishy' is going on, then find another place and move... but DON'T stop paying the rent.

Dec 16, 2010 02:30 AM #46
Rainmaker
488,666
Eva Aliaga
Partnership Realty Inc - Boca Raton, FL
Boca Raton & Delray Beach: SE Florida Real Estate

Hi Tom, I can see the frustration of the renter, but like you stated they are two different contacts. Just because the owner has defaulted with the bank does not make it OK for you too to default the landlord. I see this scenario a lot in So. Florida. If the lease is still valid, current the tenant has rights.

Dec 16, 2010 04:53 AM #47
Rainer
6,599
Matt Johnson
Home87 - Bellevue, WA

I think a lot of tenants just see it as free lunch, knowing that the landlord is almost down to their knees and they just decide to take advantage of it. 

Not to say that a lot of landlords havn't done the same to the banks but yes they do not have any correlation between each other. 

 

Dec 16, 2010 08:34 AM #48
Rainmaker
427,439
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

Had to do this for almost a year with a tenant who tried first tried to negotiate a lower payment when the property went to short sale and then stopped paying all together. While the owner/seller's attorney felt that  the rental agreement (unsigned) was separate from the short sale, in this case the City of Chicago has landlord-tenant law that appears to lean in favor of the tenant. BofA's short sale and DIL departments gave conflicting advice.

Renters and agents have easy access to LP filing info and should stay on top of the status of a property.

Good post Tom.

Dec 16, 2010 01:20 PM #49
Ambassador
525,700
Tom Branch
RE/MAX Dallas Suburbs - Plano, TX
Broker, CDPE, SFR, ACRE, Plano TX Ambassador

Wow. I got busy and have not had a chance to respond to any of your comments. My apologies. 

I have mixed emotions on the subject.  On one hand, I see it as two separate contracts and each party should perform. On the other hand, I've seen landlords let the property go into foreclosure and then disappear with the deposit.

It will likely get worse before it gets better.

Tom

Dec 16, 2010 05:38 PM #50
Rainer
33,544
Kate Reilly Lund
RE/MAX Diamond, Realtors - Edison, NJ

So many problems evolve from the problem of mortgage default. I'm not sure though why a tenant feels justified in living in a property for free because a landlord is in financial difficulty? There is something wrong with that picture, or that morality.

Dec 30, 2010 03:03 AM #51
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