If I’m buying a short-sale property with a tenant, do I have to honor the existing lease?

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If I’m buying a short-sale property with a tenant, do I have to honor the existing lease?

We’ve put in an offer on a short sale property as a rental investment, and am currently waiting on bank approval. There currently are tenants in the house 6 months into a 1 year lease. The rent is a bit under market, and I was hoping to increase it a bit, but from searching on various websites it appears I’d be on the hook to honor the existing lease to the end. What are a tenants rights during short sale. Also, what are the obligations of the current owner regarding the tenant’s security deposit?

Asked on September 28, 2011 under Real Estate Law, California

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

1) Unlike a foreclosure, a short sale does not extinguish any leases, so if you buy a property that has tenants in it, you are obligated to the tenants' lease(s) for the remainder of the term. In essense, you step into the shoes of the old landlord and just take over as landlord.

2) The tenant has no right to interfere with the short sale--tenant consent is not necessary--but is entitled to continue his or her tenancy as per the terms and conditions of the then-in-force lease.

3) The security deposit should probably be turned over from the old landlord to you. You should discuss this matter with your attorney, and probably should get some money from the sale escrowed to protect you--i.e. an amount of money equal to the security deposit(s) would be held back initially from the purchase price, which amount you would only relesase upon proof that the security deposit has been turned over to you (or alternately: returned to tenant, and tenant provides new deposit to you).


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