My Landlord is in Foreclosure, Should I Pay the Rent?

No doubt about it, times are tough, even for landlords.

This is especially true for commercial landlords. Commercial and mixed use properties developed, sold or refinanced at the height of the real estate market are now distressed. If the landlord owes more money to a bank than the property is worth, then the property is “underwater.” 

But unlike homeowners who generally have a 30-year mortgage, commercial property loans usually require a “balloon” payment after 5 or 10 years, requiring that the owner refinance the old loan.  If the property is underwater, that may be impossible.

Over the last few years, commercial property values have gone down while vacancies have increased. Every time a tenant goes out of business, it
puts pressure on the landlord to find a new tenant in a depressed economy to be
able to keep making payments on the mortgage.

With increasing frequency, owners of these properties are throwing in the towel, and the bank begins foreclosure proceedings. As a tenant, you may hear about it through the rumor mill, but you will likely get notice from the landlord or the bank or from a management company.

So how does this affect you as a tenant? Unless you absolutely hate your landlord, it will not be in a good way. Some properties are managed with little
disruption, while others have major issues. A bank will usually have a management company put in place to collect the rent and to address the ongoing needs of the tenants. Over time, the property may seem to slip — the management company is slow to make repairs or perform services like
collecting the trash or cleaning common areas.

Upgrades are of course out of the question, since the bank is losing money on the property, you can expect a bare minimum of investment or resources. Some tenants even resort to not paying the rent for any one of many reasons: they think they are entitled to given the condition of the property, they do not have the money to pay it, or because they don’t believe the bank will risk having another vacancy on the property.

So if you see other tenants not paying the rent, you will have to ask yourself, “Should I pay the rent?”

The answer depends upon how much you fear the consequences. Your lease is a contract, so check the terms of your lease. If it does not allow you to withhold rent for any reason, you can be evicted and you can be sued. Even if the bank or its management company is not aggressive in collecting the rent, once the property is transferred to a new owner, the new owner may immediately try to evict you based upon that conduct. 

Commercial tenancies typically can be terminated much more quickly than residential tenancies, so there is a risk that by letting the rent go for several months, you may need to come up with all of the back rent at once to avoid having to shut your business down and find a new location. This could be particularly disastrous, especially if you have no intention of leaving your current location.

If your landlord goes into foreclosure, you need to be concerned and make your contingency plans immediately. If you are a commercial tenant, you may be listed as a defendant in a foreclosure action. This does not mean you will be thrown out, but it could impact you nevertheless. Even if this does not happen, you should be concerned that the property will go downhill depending upon how long the process drags on, and this may have a negative impact on your business.  

Your rights as a tenant are spelled out in your lease. If you did not read it when you signed it, you will want to now. Even if you did, you should refresh your
memory and read it again before you make any decisions. If you are not sure of what it means, or what your options are, seek legal advice. Before you do something rash like defaulting on a lease, recognize that you may have other options. You may be able to declare a default, terminate the lease and take advantage of other vacancies in a better location.

If you are paying above market rent, the threat of a default may help you negotiate with the management company, the bank or your new landlord once the process is done. Hopefully, at the end of the process, you will be able to navigate the storm better than your landlord.