When to refund a deposit.

We provide here a few questions that have been posted in the Community Forums and our answers to them.

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Q1                                                         

I received a deposit to hold a unit for a new tenant. The tenant then called a few days before scheduled move-in date to tell me he had changed his mind and wanted his deposit back. What are my rights.

A1

That might depend on details not provided in your posting. Although you call the person a tenant, you do not explicitly state that the lease has been fully executed. Also, you are not specific regarding whether the deposit was a security deposit under terms of the lease or was actually a separate “holding deposit” for which there should have some other written agreement.

If you and the person executed a written lease agreement, you can hold him to the terms of the lease. However, if the person chooses to break the lease, you can only hold him responsible for the rent until a new tenant begins paying rent and you must exert reasonable effort toward finding a new tenant. You can probably also hold the person responsible for paying extra expenses related to again having to market the property, including advertising and leasing commissions.

If it is an oral lease and there is no written lease agreement, it would be your word against his as to the exact terms of said agreement unless there were witnesses on one or both sides.

If the deposit was a holding deposit you must abide by the terms of the holding deposit agreement. Again, if there was no such written agreement, it could be difficult to prove the terms of the deal.

For additional discussion of the issues, please provide more details related to the issues mentioned above.

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Q2

I bought a 4-plex three years ago. It operated from the get-go with a significant negative cash flow that was not a problem until last month when I lost my job. Any ideas what I can do to avoid foreclosure? What are the ramifications of being foreclosed?

A2

Unfortunately, there may not be a simple solution. Unless you put a substantial amount down on the property, unlikely considering that you have a significant negative cash flow, you won’t be able to refinance at a lower interest rate even if you still had your job because it would not likely appraise high enough in today’s economy and you might not now qualify for a loan with tougher qualifying criteria than existed a few years ago.

There are many ramifications from suffering a foreclosure. In addition to long-term damage to your credit rating, you may have to pay federal and state income tax on the amount of the loan that is “forgiven” upon foreclosure which the government usually considers to be income. Depending on both the size of the loan and your marginal tax bracket in the year of foreclosure, the tax could be substantial. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence only and does not apply to rentals.

Of further concern is that, unless you live in one of the few states that have anti-deficiency statutes that might apply to this type of  property, if the lender sells the property for less than the loan amount (plus late charges, attorney fees, and other costs) you may be sued for the amount of the lender’s loss.

Your best bet is to find new employment in order to avoid foreclosure and to do so as soon as possible in order to minimize damage to your credit rating and the other potential problems. Another possibility is to see if the lender is willing to reduce the monthly payments, but this would itself be easier if you are employed.

Yet another idea is to see if you can find one or more relatives and/or friends interested in becoming a partner, with the investor(s) putting in capital as needed to keep the property afloat and his share of the property depending on the amount of capital contributed. You do, however, have to be careful not to trigger any alienation clause in your note by transferring an interest without the lender’s permission. I would expect that the lender might be willing to allow you to take on a partner since most lenders currently have more than enough owned properties from foreclosures and will not likely want to own your property if it can be avoided.

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Q3

I have a 27 unit building with a common lobby entrance. A few weeks ago, on a Saturday when the manager was away from the property for much of the day, a tenant’s key became stuck in the lock on that entrance door, apparently rendering the lock inoperative. The tenant removed the lock, but was still unable to remove his key. The tenant then left the lock out because no one would have been able to gain access unless the door was left propped open. Upon return, the manager had a locksmith make a Sunday service call to deal with the problem and he installed a new lock. I sent the tenant a bill for the $258 service call because it was my opinion that my handyman could have repaired the old lock on Monday if given the chance to do so. The tenant claims that inadequate maintenance was the cause of the problem, making it my problem.

A3

Based on my understanding of the matter, there are at least a couple of reasons why the tenant should not be considered liable for the locksmith bill.

First, I think that your manager did the right thing by immediately calling for the locksmith when she was not able to herself fix the lock. Not having a lockable entry door for a couple of days/nights would have left you exposed to serious liability had it resulted in theft of a tenant’s property or injury to a tenant by someone who would not normally have had access to the building.

Second, it was probably not the tenant’s fault that his key could not be removed from the lock. It is likely that the problem was indeed due to the lock being old and worn or not having adequate preventive maintenance. The fact that it cost $258 rather than a few dollars for regular maintenance or less than a hundred dollars for your handyman to have replaced the lock at an earlier date was not the tenant’s fault. I think it likely that a judge would look at it the same way

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Additional Information

Most of the issues discussed in these Q&A’s are covered in considerably more detail in our eCourses and/or in our Mini Training Guides.

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