Articles of Interest

  • Protect deposit from distressed landlord

    Janet Portman

    Q: We rent a single-family home from an individual who collected two months' rent -- $9,000 -- as a deposit. We've gotten several letters for her from a bank, and last week a representative from the bank arrived with some legal papers for the owner and asked us to sign for them.

    We got suspicious, confronted the owner, and learned that she's behind on her mortgage and in danger of foreclosure. Worried about our deposit, we asked if she had it and learned that she has spent it! She claims she's going to sell the house and will have the money at the end of the lease. But with two months left on our lease, we want to tell her to apply our deposit to the rent -- we have no faith that we will ever get it back.

    She's now pulling rank on us (she sells real estate for a living), and is telling us that we're breaking our contract and she wants us out. What should we do? --Doug P.

    A: Your landlord had no business using your deposit for her own purposes. Security deposits in many states may not even be combined (kept in the same bank account) with the landlord's other funds; and in every state, they must be available at all times, not just at the end of the lease.

    For example, if the landlord were to break the lease halfway through the term (by failing to keep the rental habitable, for example), the tenant would be justified in moving out early, which would trigger the landlord's duty to account for and return the deposit. The landlord cannot say, "I'll have it for you when the lease should have ended."

    Your landlord's candor is surprising, and no doubt she regrets it now. She's asking you to have faith in her after learning that she had no qualms about illegally using your money once already. It's no wonder that you're hesitant. If the house sells for less than what the owner owes the bank, there will be no funds from which to pay you, period.

    Even if there is money left over from the sale, it's unlikely that sale will happen by the time your lease ends in a couple of months. Even in the best of markets, having escrow close within two months of putting the home on the market would be remarkable -- and the house isn't even on the market yet.

    Technically speaking, tenants should not do what you're proposing (most leases prohibit it). And in a few states, laws explicitly prohibit tenants from forcing the landlord to use the deposit for the last month or months' rent; if they do, the deposit itself will be forfeited.

    Those are the rules -- now let's get practical. If you withhold rent for the next two months, your landlord is unlikely to file an eviction lawsuit against you, for the simple reason that she probably does not have the money to hire a lawyer to handle it.

    Even if she could persuade one to take the case (perhaps you have a "fees and costs" clause in the lease, providing that the loser pays the winner's expenses in a lawsuit over the lease), most savvy lawyers will evaluate the case and say, "No, thanks." They know a loser when they see it, and -- especially if they won't be paid unless they win -- they'll turn the case away.

    You may be wondering why the landlord's eviction case is "a loser" if you're not legally entitled to make the landlord use the deposit in place of rent. Good question -- and the answer is a variation of Earl Warren's Judge's Rule No. 1: "You just can't do that" (Rule No. 2 was, "Nothing's too good for the kiddies").

    Most judges, if they believe you when you testify that you were told your deposit had been illegally used, will find a way to keep the landlord from further taking advantage of you by setting you up to lose a large deposit.

    To protect yourself, however, consider writing to the landlord and offering to pay your rent for the next two months, into an escrow account that will be set up with your lawyer or a bank. The bank or lawyer should be instructed to release the rent to the landlord as soon as the landlord deposits your security deposit into the same account.

    That way, no one can accuse you of scheming to get out of paying your rent. At the end of the lease, if the landlord has not placed your entire $9,000 into the account, the rent you've placed there ($9,000) goes back to you.

    Though it would be irrational (your landlord has more important ways to spend her time and energies, like trying to sell houses), it is possible that your landlord will terminate your lease for nonpayment of rent and attempt to evict you (perhaps by filing the papers herself).

    That would result in an eviction filing on your rental history, regardless of how the case turns out, which could be a problem for you when renting in the future. Only you can weigh the chances that she would take this step.

    Incidentally, your landlord is not only playing fast and loose with your deposit, she may be imperiling her real estate license, too. Why do you suppose that mail and visits from the bank (but from no one else) came to your address, not hers? It's not a simple mix-up.

    Most likely, she stated on her mortgage papers that the home you're living in would be her primary residence. Had she declared that the property would be rented out, the bank would have included a provision or a "rider" (available in most states) allowing it to demand the rent directly from the tenant if the owner fails to make her mortgage payments.

    By fraudulently describing her intended use of the property, she's set herself up for some legal problems, including the disapproval of her state licensing agency if it learns of her dishonesty. There's just no telling what's going to emerge when you begin turning over rocks.

    Q: I own and manage a large apartment complex. One of my tenants is a Boy Scouts leader and asked me to use the meeting room for free (normally, we charge a small fee for exclusive use of the room).

    I agreed, because I want to encourage participation in the Scouts. But another resident, who opposes the Scouts' stance on homosexuality and atheism, has challenged me, saying that by giving the Scouts a break, I'm practicing illegal discrimination. Is this correct? --Janice G.

    A: If you extended free use of the meeting room to a resident's Christian group, say, but not a Muslim one, the Muslim group would have a classic claim of discrimination on the basis of religion. And if you allowed church groups to meet for free, but not an atheist group, you'd be in similar hot water (as odd as it may seem, when it comes to discrimination on the basis of religion, atheists get as much protection as believers).

    But that's not exactly what your tenant is complaining about. It appears that he simply does not like it that a group whose positions he disagrees with gets to use the facilities for free.

    So the question becomes: Does he have a legal right to relief from his discomfort?

    Sometimes, the law does allow people who have not been victimized directly to sue for discrimination. For example, if you openly practiced a discriminatory policy of refusing to rent to members of a certain ethnicity, not only those prospects, but current tenants as well, could bring you to task in court.

    The law protects not only the interests of the persons directly discriminated against, but those who indirectly feel the effects. Because a discriminatory policy robs residents of the ability to live among all ethnicities, the law considers them harmed, and lets current tenants sue you for discrimination that's primarily directed at other people.

    Your tenant's complaint is not too different from this situation. For example, if the Boy Scouts get to use the room for free, but the group planning the complex's float for the gay pride parade has to pay, and state law includes sexual orientation as a protected category, he might have a claim.

    And this might be so even if he were not a part of that gay pride group, for the same reason that a current tenant may complain about a landlord's discriminatory treatment of a potential tenant. The basis is the same: Discriminatory policies by the landlord have an indirect effect on all tenants, not just those who might be directly affected by them.

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