Skimming...OK for the beach, not for landlords

In the Sunday, June 19, 2011 edition of the New York Times Magazine, “The Ethicist” responded to a California reader’s question about his landlord’s behavior. The reader, a poor student, had rented a room in a house, “with plans to stay for a full year,” but the owner soon told him that he would stop paying the mortgage. A few months later, the house was sold and the new owner gave the student 30 days to move out. The student was irked at the thought that he’d been paying rent while the owner had not been paying his mortgage, and asked if, in this situation, it would have been ethical to withhold his rent.
Citing the student’s statement that “no formal lease was signed,” the Ethicist concluded that the student had “no guarantee of a full year’s stay.” She then addressed what she viewed as the ethical question, concluding that because the renter and owner had no specific understanding that the rent would be due only if the mortgage had been paid, the student “wouldn’t have had much of a case for freeloading. [The owner’s] dereliction could not have justified yours.” Both conclusions are legally wrong, and there’s really no need to even get to the ethics of the matter.


“No formal lease was signed”

Both the Ethicist and the student seemed to be assuming that to be enforceable, a year’s lese has to be “formal” and “signed.” This is not true. The term “formal” has no legal meaning. An oral lease is legal and enforceable for up to one year. If the owner knew of the student’s plans and agreed to them, or remained silent after hearing of the student’s assumption that the deal was for a year, they had a lease, period. True, it may be harder to prove that the parties intended the rental term to run for a year, but difficulty in proving what was agreed to is not the same as saying that the oral understanding, once the judge decides what was agreed to, cannot be enforced.

What good would it have done for the student to be able to prove he had a lease? Read on, the answer is below.

“He doesn’t pay the mortgage, but I pay the rent!?”

Next, the Ethicist concludes that the owner’s failure to pay the mortgage would not excuse the tenant’s obligation to pay rent. This is also not exactly true—if the landlord was “rent skimming,” the student may have been able to recoup that rent after the fact.

Rent skimming means using rent proceeds from residential property during the first year (or more) of owning the property without first applying that revenue to payments due on a mortgage or deed of trust. As you might imagine, the purpose is to protect the interest of the bank and the seller. States vary in the length of time that rent skimming prohibitions apply (in California, surprisingly, it’s only one year following purchase of the property). (Calif. Civil Code § 890 and following.)

When a tenant is injured by a purchasing landlord’s rent skimming, states typically provide for very specific remedies. California tenants who must leave their rentals prematurely due to a foreclosure sale resulting from rent skimming can sue for their actual damages, including their lost security deposit and moving expenses. If the landlord’s behavior was particularly outrageous, judges can award exemplary, or punitive damages, meant to punish such behavior. And they must award punitive damages if the landlord was already two or more months behind in his payments at the time the tenant rented the premises. In addition, multiple acts of rent skimming are criminal offenses.

There are some defenses to rent skimming. For example, depending on state law, a landlord can escape liability if he used the rental revenue to pay health care providers for necessary and unforeseen treatment of himself or his dependents, or if he used it to pay contractors to make the rental premises fit and habitable. California requires that these payments be made within 30 days of receiving the rent, and that the landlord had no other source of funds to make his payments.

About that Lease

Now then, assuming the tenant could have proved that he had a lease, how would that have helped him? It might have come in handy if he had pursued his rent skimming options. As a lease-holding tenant, the student could have argued that he had no alternative but to continue to honor his lease, although he suspected rent skimming. Even if he had been able to prove that the landlord skimmed, he could not have ended his lease on that basis–skimming does not constitute a breach by the landlord, enabling the tenant to walk away.

On the other hand, as a month-to-month tenant, which the Ethicist thought he was, the tenant could have given 30 days’ notice and ended the tenancy. Although staying on doesn’t destroy his right to seek rent skimming damages, it casts a bit of a shadow on his plea. Might he have stayed on in order to eventually sue the landlord? Probably not likely, but it’s always better, when claiming that someone did you wrong, to be able to show that you had no choice but to endure the situation.