Deep Impact

Foreclosures affect more than just homes. If you lease office space and your landlord gets in trouble, you could be too.

With the economy the way it is, we are seeing more and more mortgage-holders unable to make their payments, often for properties that are now worth far less than the loans they secure. This is bad enough when you are such a property owner, but it is even worse when you are the tenant of a landlord facing foreclosure. At the very least, you face the disruption of your business—at the worst, its complete loss—for issues that have nothing to do with you or your business. This is a position that more and more small businesses face and to survive it, you need to be prepared.

The best way to survive a foreclosure action against your landlord is to not get involved in one in the first place. That may sound a bit glib, but there are steps you can take to minimize the chances of being caught up like that. Still, what happens if you are stuck in your landlord’s foreclosure? Suddenly, your landlord’s problems are your problems and if that is the case, you need to have a good understanding of your rights as a tenant and the things you can do to protect yourself and your business. They won’t be much, but broadly speaking you can at some level mitigate the damage done.

Bear in mind that the precise rules—and your rights as a tenant—vary from state to state. If you are facing this kind of situation, you need to consult with your attorney at once. He will be able to guide you and make sure that your interests are protected.

Avoiding Landlord Foreclosure Troubles

Avoiding problems means having the information you need before the crisis hits and using that information to either plan for the coming crisis or avoid it altogether. If possible, the latter is always preferable. Here are some tips:

Examine public records. You may not be able to run a credit check on your landlord—they would actually have to give you written permission—but there is no reason not to check out court and other public records. The ugly truth is that there are landlords—not all of them, but enough—who, knowing full-well that they will soon face foreclosure, go ahead and rent to unsuspecting tenants, hoping to collect rent right up to the moment they lose the building at a foreclosure sale, never paying the mortgage since they have no plans to keep the building anyway. Since you don’t know the game that the landlord is playing, you end up the victim because when the foreclosure finally does happen, your lease will most likely evaporate and you will find yourself being evicted.

However, by doing a little research before signing that lease, you can save yourself a serious headache. By looking into any and all public records related to your landlord, you can tell ahead of time if this particular landlord has a history of trouble or is likely to have trouble coming up.

Examine the property records. Here is another area where public records come in handy. What you are looking for is anything that would make you think the property might be in jeopardy, especially a Notice of Default. The specifics vary by state, but generally speaking, once that is issued the owner of the property has a certain period of time to cure the default before the property is sold. If you find one of these, don’t sign a lease because the chances of an eviction are very high. If you are already in the property, start looking for a place to move your business. You want to be prepared in case the landlord fails to cure the default.

You can see that the research involved in avoiding landlord foreclosure issues takes time and money, but just consider it due diligence on your part before you sign a lease. Your business is too valuable to risk on someone else’s financial problems.

When the Landlord’s Problem

Becomes Your Problem

The owner never cured their default and now the property has been foreclosed. Don’t panic. The time for that has long passed. Now is the time to act, taking rational steps to minimize any potential damage the foreclosure might have done, or will do, to your business.

Who is the new owner and what do they want? That is the first thing you need to ask. Is it the bank? Is it an investor or a real estate company? Who now controls the building and what do they expect from you? Assuming that they have no intention of selling the property to you, they will want to evict you and will generally give you thirty days notice to vacate the property. The exception here may be a long-term commercial lease that was entered into prior to the owner taking out the mortgage. It is important here that the lender had constructive notice of this lease. If the new owner does proceed against you, it is called an unlawful detainer. If you find unlawful detainer papers on the property—even if you were not personally served—get specialized legal help at once. You may not have a lot of time. A competent attorney should be able to help you through this and keep the eviction from marring your credit record.

Cash for keys. An alternative to a forcible eviction is something called “Cash for Keys.” It is a monetary offer on the part of the new owner to get you to move out without resorting to an eviction. You are paid and there are no legal proceedings against you. That is the upside. The downside is that these deals often don’t give you enough time to find a new place and move. Have any such offer reviewed by your attorney. You need to ensure that your rights will be upheld and your credit record protected.

Legal remedies against your old landlord. The old landlord may not own the building any longer, but you are not finished with him. You are going to want your security deposit back, less any rent still owed up until the premature end of the lease. That should conclude the lease business with him, but depending on your jurisdiction, you may have a case against him for breach of lease as well as a claim for damages based on fraud. You need to consult your attorney regarding this, but it may help you recoup some of the losses you will suffer as a result of the foreclosure.

The threat of eviction is a heavy one, especially when based on your landlord’s foreclosure. There is nothing you can do about that, but if you plan ahead, do your research and follow the advice of your attorney, your position with your old landlord, the new one and in court will be stronger and the harm done to your business will be minimized. —Charles Cooper

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