Legal Question in Real Estate Law in California

Re: Rental Agreement on Home

Well, the law will look at this not so much as an instance of a landlord breaching a lease with a tenant, although arguably that is also happening, as a matter of deciding the rights of parties in a foreclosure.

The tenant's rights are determined by the priority of his lease. Since it is a one-year lease, it is probably junior (in time of creation) to the loan about to be foreclosed, so it will be wiped out by the foreclosure. If by chance the loan was junior to the lease, the tenant's tenancy rights would be unaffected by foreclosure and the tenant would siplly have a new landlord (the bank or other purchaser at the foreclosure auction). This is somewhat unusual.

Also, it should be noted that not all buyers at foreclosure will want to get rid of the current tenants, even if they have the legal right to do so through giving notice and following that up with an unlawful detainer action if the tenants don't move. Some buyers would prefer to have good tenants already in place.

Next issue is whether you diverted tenant rent or deposit money without paying your young mortgage obligations first. Taking rent and not paying your mortgage can be considered "rent skimming," which is a civil wrong and in exaggerated cases can be criminal. You might want to hunt for and read Civil Code sections 890 to 893 on line or at a law library.

There is a possible issue between the tenants and you over a couple other issues. One is that a failure to disclose that the property might go into default and be foreclosed before the lease expired could be alleged as fraudulent, and the temants might seek damages on that ground. The other is that you are likely in breach of the implied (or express, perhaps) covenant of quiet enjoyment which is part of every lease and really means that the landlord warrants that during the lease the tenant's right of possession will not be challenged or put into doubt, and if it is, the landlord must defend, and if unsuccessful, is liable for the tenant's damages.

I would say on the whole the landlord-tenant relationship here presents some uncomfortable additional issues over and above the loss of the property itself, and whether they become serious problems or remain just worries depends upon three or more factors - whether you concealed the shaky ownership situation, whether you took rent and deposit money and used it for something other than rental-unit costs (including the mortgage) in priority to paying the rental-unit expenses first, and whether the new owner boots the tenants out or continues to rent to them.

If your hands are truly clean you are in a much better legal position.

Re: Rental Agreement on Home

In addition to Mr. Whipple's excellent analysis, I would also suggst that you be up-front with your tenants and see if you could work with them to contact the bank to try to get them to stay, if that's what they want. Keep dated notes of your conversations, just in case it ever becomes an issue.