July 11, 2013 by SDSSR

We negotiate quite a few short sales on investment properties. Recently we’ve encountered several instances where one of our sellers has received a Notice of Default and subsequently rented the property. This is permissible in California with one caveat: The owner of a rental property that’s in foreclosure must provide the tenant with a written disclosure regarding the foreclosure status of the property.

This law went into effect on January 1, 2013 and is found in Section 2924.85 of the California Civil Code. The statute, in pertinent part, says: “Every landlord who offers for rent … and who has received a notice of default … shall disclose the notice of default in writing to any prospective tenant …”

As seller/landlords, it’s important to know that under this statute, if the disclosure is not made, you are legally exposed. The tenant has two possible remedies:  1) The tenant can void the lease, vacate the unit, receive one month’s rent or twice the actual damages—whichever is greater, plus a refund of any prepaid rent and any other remedy the law may provide; or, 2) The tenant can elect to continue in the lease and receive one month’s free rent. The landlord’s exposure may be broader than it appears at first blush. Notice the clause that says “and any other remedy the law may provide.”

The disclosure must be in English with verbiage substantially the same as below:

“The foreclosure process has begun on this property, and this property may be sold at foreclosure. If you rent this property, and a foreclosure sale occurs, the sale may affect your right to continue to live in this property in the future. Your tenancy may continue after the sale. The new owner must honor the lease unless the new owner will occupy the property as a primary residence, or in other limited circumstances. Also, in some cases and in some cities with a ‘just cause for eviction’ law, you may not have to move at all. In order for the new owner to evict you, the new owner must provide you with at least 90 days’ written eviction notice in most cases.”

So remember, if you’ve received a Notice of Default on a property you intend to rent, YOU MUST INFORM THE PROSPECTIVE TENANT!

DISCLAIMER: The writer is not an attorney. This is simply a layman’s understanding of the statute and is offered as general information only. Please confer with an attorney before offering to lease a property that’s in foreclosure.



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