Q: I am a new rental property owner and was recently cited for a code violation. Apparently, a previous owner did some work on the property following a fire, for which he obtained the correct permits. But he never scheduled the final inspection. Like us, the seller from whom we bought the property had no knowledge of the problem. Are we responsible for the fine and for doing any work required to pass inspection? –Nel N.
A: I’m afraid you’ll have to comply with the city’s demand that you schedule an inspection and do whatever is needed to satisfy their standards. The city is not going to give your property a pass just because you didn’t know that a prior owner hadn’t followed the right procedures. From the city’s perspective, the permitting process insures structurally safe buildings, and when they discover that a building hasn’t been properly built or inspected, they’re concerned with getting the problem fixed, not with who was originally responsible for creating it.
You may have a legal claim against your seller for the fine or any other expenses you have to pay in order to pass the inspection and bring the property up to code. Your seller was supposed to tell you, in the "disclosures" portion of the contract, about any problems of which he was aware. He can’t be faulted for not telling you what he didn’t know, however. Unless you can point to some representation by the seller that all previous work was done according to the permit process, you’ll have a hard time pinning the cost of compliance on the seller. Before buying the property, you could have checked with the permitting office yourself, a job that careful brokers advise their buyers to do.
Q: I am a renter and have recently started my own small business. I rented a space in a strip mall, and at first, all went well with the landlord. Then I discovered that the roof leaks badly and the hot water heater can deliver only lukewarm water. I don’t have a lease — I rented this place on a handshake — but it seems to me that it hardly passes the "fit and habitable" rule that my residential landlord has to play by. Can I expect my commercial landlord to deliver the same kind of basic necessities as my apartment landlord? –Carl K.
A: Landlords in all states but two (Arkansas and Colorado) must offer and maintain residential rentals that are fit for occupancy, which means that the structure must be sound and safe, and services (such as hot water delivery) must be adequate. Whether landlords know it or not, when they place a unit on the market, they are warranting that the dwelling is fit and habitable — that’s the "warranty of habitability" that renters can depend on and, if necessary, take legal steps to enforce.
Most states don’t hold commercial landlords to the same standard. Even in tenant-friendly California and New Jersey, it’s not clear whether commercial tenants can insist on fitness as a matter of law in every situation. Judges and legislators have decided that, when two businesspersons negotiate a lease, they are more or less of equal power and should be left alone to craft their own terms. By contrast, many renters are unsophisticated and have few choices when it comes to securing a basic living necessity such as shelter. Of course, exceptions abound — some commercial tenants are clueless and have few choices among available spaces; and some residential tenants are extremely well-versed in the law and have the good luck to be in a soft market with lots of choice.
Because the law is so hands-off when it comes to commercial leases, thoughtful landlords and tenants discuss beforehand how they’ll handle repairs. Renting on a handshake doesn’t mean you can’t have this conversation, but it will make it difficult for either one of you to enforce the oral understanding.
If the two of you didn’t discuss repairs, it’s not too late to go back to your landlord and ask to renegotiate the lease. Mall owners typically take care of the structure and its roof, if only because most owners don’t want a bunch of ill-equipped tenants performing quick fixes on their property. The water heater is another matter, however, since it probably serves only your space and can be fixed or replaced without involving the building. Your landlord may tell you to handle it.
Q: I’m renting a single-family home and just got a letter from a bank telling me that I should begin sending my rent checks to the bank instead of the landlord. I asked my landlord about this, and he confirmed that he’s in default on his mortgage, but told me that because he still owns the property I should continue paying the rent to him. I’m confused, and I’m afraid that because the owner is about to lose the place, he’ll have no incentive to maintain it (he’s already refused to repair the roof). Any advice? –Bill T.
A: Take another look at that letter from the bank or give them a call. Chances are, you’ll learn that the bank is actually the mortgage holder for the property, and that their demand for the rent is based on a rider to your landlord’s mortgage, called a "1-4 Family Rider (Assignment of Rents)." This rider is used by lenders in every state, for properties that have one to four rental units.
To understand how the rider works, think like a banker for a minute — what’s unique about a residential investment property, particularly one with more than one rental unit, that you wouldn’t find in a home purchased for occupancy by the buyer? One obvious difference comes to mind: The property is actually generating income. Now imagine that the buyer is falling behind on his mortgage. The lender will want to cut its losses as quickly and as thoroughly as possible — which means getting its hands on the rent. Once the lender gives the owner a written notice of default, the lender has the right (except in Michigan) to receive the rent directly from the tenants. Lenders have to give written notice to the tenants, and that’s probably what you received in the mail.
Your concern over how your rental will be maintained, now that the bank is receiving your rent checks, is well founded. In every state but Colorado and Arkansas, landlords must maintain fit and habitable rental housing. But knowing that he’s about to lose the property, and without a rent stream to support his efforts, your landlord may have little ability (and even less inclination) to spend money on the building. What about the bank? According to the rider, the lender must apply the rent money to property management costs, including maintenance, before it applies the money to the unpaid mortgage. But the rider explicitly does not obligate the lender to assume the maintenance duties of the owner (Fannie Mae/Freddie Mac wrote the rider, after all). Unless there’s a specific local or state law to the contrary, the lender’s right to receive rent money doesn’t turn that lender into your landlord for purposes of maintaining the property.
If conditions seriously deteriorate to the point where the home is not fit to live in, you may find yourself stuck between an owner who has no ability to take care of business and a lender who has no obligation to do so. You may need to avail yourself of a tenant’s "self-help" remedies, such as rent withholding and repair and deduct (not all states give these remedies to tenants). Be sure to follow the correct procedures, and alert both the owner and the bank to what you’re doing.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord’s Legal Guide" and "Every Tenant’s Legal Guide." She can be reached at janet@sandbox.inman.com.
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