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New Landlord Disclosure Requirements

Imagine this scenario: your client is a prospective tenant and is looking to rent a residential dwelling of between 1 to 4 units.  Your client completes the rental application, provides the landlord with a security deposit and begins his tenancy.  Within a month or two of moving in, your client receives notice to vacate from someone claiming to be the new owner.  Upon investigation, you discover that the landlord with whom your client entered the lease agreement failed to inform you or your client that as the rental application was being completed, he had already received a Notice of Default (“NOD”) and was facing a foreclosure sale.  Now the successful bidder at the foreclosure sale wants to move in and your clients are forced to leave.  Ouch.

In response to this predicament, the California Legislature recently enacted Civil Code Section 2924.85 which provides that landlords must provide prospective tenants with a specific notice if that landlord has received an NOD.  Beginning January 1, 2013 and continuing for the next five years, every landlord who offers to rent a single-family dwelling, or a multifamily dwelling not exceeding four units, and who receives an NOD on a mortgage or trust deed secured by that property, must disclose in writing the existence of the NOD to any prospective tenant.

A landlord who fails to so inform the prospective tenant may be forced to pay the greater of one month’s rent or twice the actual damages to the tenant.  Further, the tenant shall be able to recover all prepaid rent and will have the election to void the lease.

Tenants typically face several risks associated with leasing a property where the foreclosure process has begun: (1) Tenants often experience decreased services from landlords facing financial difficulties such as non-payment of utilities and/or not making repairs; (2) If there is a foreclosure, tenants face a great amount of uncertainty, and they may be unaware of the protections guaranteed them under state and federal law; (3) Even with protections, the lease may be invalidated, for example, by the new owner wanting to move in; and (4) It can be very difficult for a tenant to recover a security deposit after a foreclosure.

As with any new legislation, there are some exceptions in the new law.  For example, the notice requirement does not apply to existing tenants and does not require disclosure by landlords of multi-unit apartment complexes which feature 5 or more units.

Another change affecting landlords and tenants is found in Civil Code Section 2924.8.  Existing law provides that a tenant of a property posted with a Notice of Sale (NOS) is to be given a notice that the new owner after the foreclosure sale may enter into a new lease or rental agreement or must give a tenant a minimum 60-day notice to terminate.  Beginning on March 1, 2013, the new owner will now be required to give a tenant in a foreclosed property a minimum 90-day notice after the sale to terminate.  This change in the notice requirement is set to remain in effect until December 31, 2019.

This code section would also require the new owner must honor the lease unless the new owner will occupy the property as a primary residence or in other limited circumstances.

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