Landlord in Foreclosure: What are the Foreclosure Consequences for a Renter?

It used to be that renting an apartment or an office was much less risky than buying because you were only required to commit to a one year lease.  However, that is no longer the case here in Ohio where landlords may go into bank foreclosure at any time.  Since a tenant does not know the financial circumstances of their landlord, this can come as a complete surprise to the renter.

One of the issues is what happens to the security deposit that most landlords require from tenants.  A security deposit is usually at least one month’s rent on the apartment or office.

In the case of foreclosed property, when property changes hands, owners are legally required to either return the security deposit or transfer it to the new owner, and this rule applies whether the new owner is a foreclosing bank or someone who buys the house in a regular sale.  But often, in foreclosure situations, the defaulting owner seldom returns the deposit or gives it to the bank.

The new owner in this foreclosure is held responsible as a matter of law for returning the security deposit, however, many banks have not aggressively collected this money from the former landlords.  Renters do not always know that the owner is legally required to return the money to them, so they do not pursue it.

Oregon is introducing a bill in the Senate to help the dilemma faced by a tenant whose security deposit will never be returned. Legislators are considering a bill (Senate Bill 293) that would allow tenants, upon learning that their rental is in foreclosure, to serve notice to their landlord that their deposit is to be used as rent.

This will give tenants two or more months in which they at least need not keep paying rent to a defaulting owner. It also means that if the foreclosure goes through, there will be no deposit to cover any damage or otherwise unpaid rent. However, foreclosing banks have been lenient in these situations.

The Oregon bill provides that a landlord who rescues his property from foreclosure is entitled to require the deposit to be replenished. Tenants in this situation would have two months to return the money.

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