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Real Estate Today

Deposits Don't Transfer in Apartment Sales Involving Foreclosure

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02-Nov-1997 Sunday
(Page H-7 )

Robert Griswold | Steven R. Kellman | Ted Smith
This column on issues confronting renters and landlords is written by Certified Property Manager Robert Griswold, host of KSDO Radio's "Real Estate Today!" (Saturdays, 2-3 p.m., AM 1130) and by attorneys Steven R. Kellman, director of the Tenants' Legal Center, and Ted Smith, principal in a law firm representing landlords.

Q: I work for a public, nonprofit organization that recently purchased an apartment complex that had been in receivership for a year until the lender foreclosed and sold the property to us.

We were waiting for the receiver to finish the court-required final accounting in order to get the security deposits transferred to us. Now the receiver tells us that the tenant security deposits were used to pay operating expenses.

I thought that the tenant security deposits belong to the tenants and since we have assumed the tenants and their leases, the security deposits must be transferred to us as the new owners. Is this correct?

If not, who oversees the receiver and prevents the receiver from disbursing the tenant security deposits?

A: Smith: This is a thorny problem, and another one of those landlord/tenant issues that is not completely settled in California.

In a voluntary sale of the rental property, the seller either returns accumulated deposits to the tenants or transfers them to the buyer, with notice to the tenants.

The buyer then assumes responsibility for the return of the deposits, subject to normal deductions.

Here, however, the receiver was ordered by the court to take control of the rental property pending a foreclosure by the bank. In effect, the receiver steps into the shoes of the prior owner and becomes the landlord.

While it's true that security-deposit money can be held in the owner's general account with other funds, there is a legal duty to return it upon termination of the tenancy.

The receiver must account to the court for rents, deposits and disbursements.

Your case is different because it was not a voluntary sale. Instead, you bought the property at a foreclosure sale.

The law states that the foreclosure sale wiped out the tenant leases, and the buyer generally takes the property free and clear from all junior leases. Further, you as the buyer at the foreclosure sale never actually received transfer of the deposits from either the defaulting former owner or the receiver.

I think most courts would agree that a buyer at a foreclosure sale, unlike in a voluntary sale, does not have to recognize the former leases and is not responsible for return of the security deposits he or she never received from either the former owner or receiver.

Q: In an earlier column, Mr. Kellman indicated that if a landlord charges "pet rent" that it may be more difficult for the landlord to deduct pet damages upon vacating from the security deposit. He also indicated that a pet deposit is illegal if pet rent is charged. We moved into an apartment where we were charged a non-refundable pet deposit and we pay monthly pet rent.

Based upon your column we believe that our landlord is breaking the law.

Can you confirm that we are correct so that we can bring this to the landlord's attention?

A: Smith: Sometimes the answers to legal questions are not clear. This applies to landlord/tenant law. With all due respect to Mr. Kellman's earlier answer, I disagree with his interpretation of the law regarding pet rent.

First, as to the non-refundable pet deposit, most experts would agree that it probably should be designated as refundable, subject to normal deductions for pet-related cleanup.

The issue of pet rent has not been cleared up by the courts. Mr. Kellman is wrong when he categorically says the landlord cannot collect pet rent.

I believe it is legal to charge higher rent for those tenants with pets, given the wear and tear on the apartment.

This sometimes leads to problems and claims of discrimination. Most property managers instead charge the higher security deposit and not higher rent.

Although the pet rent charged by your landlord is what is usually done, still, with deference to Mr. Kellman, your landlord is not "breaking" the law.

Kellman: Despite what Mr. Smith says, a security deposit cannot be deemed as non-refundable, period.

You may cite California Civil Code section 1950.5 as proof of this.

Regarding the pet rent, I said in that past column that "If `pet rent' is charged, it may be more difficult for a landlord to deduct pet damages from your security" deposit. This is not to say that it is "breaking the law," but I believe that claiming deductions from a deposit for pet damages may be improper when there is additional rent charged to cover the wear and tear of a pet.

In such a case, the landlord would be double charging (extra rent plus extra deposit) for the same possible damages. Since there is no law exactly covering this point, we must apply existing law to this situation including general rules of reasonableness and fairness.

I believe a judge would agree that if additional rent is charged to cover pet wear and tear, it would be fundamentally unfair to claim deductions from the deposit to pay for the same wear and tear paid for by the additional rent.

If you're a tenant or landlord, the authors stand ready to answer your questions in this column, although letters cannot be answered individually. Write them at: Rental Roundtable, Homes Section, San Diego Union-Tribune, P.O. Box 191, San Diego, CA 92112. Or you may e-mail them at rgriswold@retodayradio.com

Copyright Union-Tribune Publishing Co.

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Robert Griswold and the Real Estate Today! radio show strongly support the intent and the letter of all federal and state fair housing laws.  As a reminder to all owners and managers of real estate, note that all real estate advertised is subject to the Federal Fair Housing Act, which makes it illegal to advertise "any preference, limitation, discrimination because of race, color, national origin or ancestry, religion, sex, physical disability, or familial status, or  intention to make any such preference, limitation or discrimination." Additional state and/or local fair housing laws may also apply.  Be sure to inform all persons that all dwellings offered or advertised are on an equal opportunity basis.

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Revised and Updated - Wednesday, April 26, 2006

Robert S. Griswold, CRE, CPM, CCIM, PCAM, GRI, ARM
Griswold Corporate Center
Griswold Real Estate Management, Inc.
5703 Oberlin Drive, Suite 300
San Diego, CA 92121-1743
Phone: (858) 597-6100
Fax: (858) 597-6161

Email: rgriswold.ret@retodayradio.com

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