Are new owners responsible to return security deposits?


#1

If we bought a tenant-occupied building, and the management company said that they already turned the security deposits to the old owner, are we responsible to return the security deposits to the tenants upon their vacating the premises?


#2

Hi Oliver,
As the new owner you are not responsible for the return of the security deposits. That is between the previous owner and the tenant. The tenant could sue the previous owner in small claims court for return of the deposits.
That said, you have a vested interest in making sure the tenant does not do serious damage to the property when they move out so it may be in your best interest to negotiate something with them.


#3

Thank you Michelle. So even if the tenants are allowed to stay through their contract term, we as the new owners are still not responsible for returning the deposits we did not receive, right?


#4

As I understand it you are not legally responsible for the return of the deposits.


#5

Not so fast… CA law states:

"If the selling landlord fails to either return the tenants’ security deposits to the tenants or transfer them to the new owner, both the new landlord and the selling landlord are legally responsible to the tenants for the security deposits. (Civil Code Section 1950.5(j). Exception: If the new landlord acted in the good faith belief that the old landlord properly complied with the transfer or refund requirement, the new landlord is not jointly liable with the old landlord.)

If the selling landlord and the security deposits can’t be found, the new landlord must refund all security deposits (after any proper deductions) as tenants move out.

The new landlord can’t charge a new security deposit to current tenants simply to make up for security deposits that the new landlord failed to obtain from the selling landlord. But if the security deposits have been returned to the tenants, or if the new landlord has properly accounted to the tenants for proper deductions taken from the security deposits, the new landlord may legally collect new security deposits."

Check your facts better folks…


#6

Hi, This would apply for a tranditional sale but not after a foreclosure. This is part of the reason why the Protecting Tenants in Foreclosure Act was written. This gives tenants 90 days notice or forces the lender/investor to honor the terms of the lease. Keep in mind that most tenants stop paying the rent prior to the foreclosure sale. I have also not heard of one tenant that has paid rent during the 90 notice period. In majority of the cases the security deposit is offset by the missing rent payments. Still, most investors and lenders offer a cash for keys incentive to help occupants move and in most cases the 90 day notice is longer than the notice required in their rental agreement. A new rental agreement with the new owner is a completely different issue. Oftentimes a receiver is appointed to larger residential complexes to sort out these issues prior to the foreclosure.


#7

Thanks for the info Michelle. Interesting discussion. Last year I bought a condo at a trustee sale. The prior owner moved tenants into the condo and was collecting rent for a year without making any mortgage payments. He also collected a 1,900 security deposit from the tenants. My intent was to keep this condo as a cash-flow rental and after meeting the tenants, it was clear that they were polite and responsible. Their lease was up and rather than evict them, I opted to keep them as tenants under a new month-to-month lease and under the circumstances, I waived the security deposit requirement. We soon had a discussion re their security deposit paid to the prior owner. The tenants recognized their deposit was “at risk” given the prior owner’s disposition. I directed my tenants to formally request in writing that the prior owner return their security deposit. The tenants both wrote and called, and no surprise, the prior owner gave them a nasty brush-off. Long story short, after 6 months passed by, the tenants moved out and I gave them their security deposit $. I was advised by an attorney (rightly or wrongly?) that as the new owner, it was my obligation to return the security deposit notwithstanding that I never collected said deposit. I was also advised that I could go to court to get a judgment vs the prior owner for the amount I paid to the tenants. I determined that it would cost me about the same amount to go after the prior owner vs just letting it go. So it was time to move on. Despite the legal advice I received, I suspect I was under no legal obligation to pay back the deposit, but it seemed like the right thing to do under the circumstances.


#8

Hi idannyb, Clearly you did the right thing!! Years ago when I managed properties and took over large apartment buildings in foreclosure we always asked the tenants for copies of leases and rent payments and “honored” their agreements and their security deposits. At the end of the day I wanted tenants that were not going to destroy the property and hopefully stay as paying tenants. Although you and/or the tenants could have taken the prior owner to small court to collect on the security deposits you were able to keep the great tenants and avoid potential eviction costs or cash for keys incentives. Not to mention you did not waste any of your valuable time. A friend and very wise real estate broker always says “can you stand before the man in the black robe and explain your actions?” or taking it one step further, would you go on TV and appear before Judge Judy and defend yourself? I would say that legally and morally you did the right thing. FYI-It would be fun to watch you on Judge Judy with the former owner. :slight_smile: