Arizona Landlord Tenant Blog

Can you charge a late fee without a written rental agreement?

Yes and no.  If you go to court, the court will only allow you to assess and collect late fees if there is a written rental agreement AND it includes a late fee provision.  (See ARS Section 33-1368.B and 33-1377.F). If you don't go to court, then you may assess late fees.  If, however, your tenant challenges the late fees (i.e., in court), then you will lose.  Go here to give me your "war stories": Google+

What if a residential tenant is renting a house that is the subject of a short sale?

When a rental property is sold during the term of the lease, the new owner takes the property "subject to" (discussed more below) the existing lease.  This is true of a normal sale and a “short sale” because a short sale is still a sale of the rental property; the only difference is that, in a short sale, the lender has agreed to accept less than the full amount due on the existing loan, which does not affect the tenant in any way.  As stated, the new owner takes the property “subject to” the existing lease, which means the new owner steps into the shoes of the former owner and is bound by the existing lease.  The new owner must allow the tenant to stay until the end of a fixed term lease, but if the lease always was or has converted to a month-to-month lease, then the new owner may terminate tenancy by giving the tenant a 30-Day Notice of Termination.  Of course, there is an exception; if the lease included a provision that the lease would terminate upon sale of the rental property, then the tenancy would terminate as provided in the lease.

Can a residential tenant terminate a lease if the tenant is the victim of a crime?

Maybe.  The Act, Section 33-1318, allows a tenant to terminate a lease -- without any financial penalty whatsoever -- if the tenant is a victim of domestic violence AND the tenant sends a written request to the landlord to be released from the lease within thirty days after the incident.  The tenant must also provide the landlord with evidence of the incident.  There is no other statute or case that allows a tenant to terminate a lease if the tenant is the victim of a crime when the crime IS NOT domestic violence.

Are there any laws that address the issue of a rental property going into foreclosure?

Yes. The Arizona Residential Landlord and Tenant Act was amended in July 2010 and a new statute was added – A.R.S. Section 33-1331. In short, the statute says that if a rental property is already in foreclosure, then the landlord must inform the tenant of this fact before the landlord enters into a new rental agreement with the tenant. Under this new statute, it is clear that the landlord must disclose the foreclosure before entering into a new fixed term lease with a tenant. That would apply to a brand new tenant (whether that tenant is signing a new fixed term lease or a new month-to-month lease) AND to an existing tenant who will be signing a new fixed term lease. What is not clear is whether it applies to a month-to-month agreement that existed before July 2010 (when the statute became effective), which renews automatically each month (until/unless canceled by one of the parties) and that continues to renew automatically after July 2010. Similarly, it is also unclear whether it applies to a fixed term lease that began before July 2010, but has expired (either before or after July 2010) and now continues on a month-to-month basis.

Is there an Arizona law that states how often a landlord must paint and/or replace carpet or that the landlord must do these things after a tenant vacates and before a new tenant moves in?

No. The Act requires: "The landlord shall:... (2) Make all repairs and do whatever is necessary to put and keep the premises in a fit and habitable condition." (See ARS Sec. 33-1324(A)(2)). But the Act does not require the landlord to: (1) paint the walls, (2) replace or clean the carpet, (3) sanitize the kitchen or bathrooms or (4) change the locks, before renting to a new tenant or at specific intervals. Naturally, the landlord may do all or some of those things, but the Act does not require it.

If a tenant rents a house with a spa (or other amenity), and it stops working, does the landlord have to fix it?

The "correct" answer depends on many variables. If the spa (or whatever) was not working when the tenant took tenancy and the landlord made clear that it would not be fixed, then the answer is clear -- the landlord would not have to fix it. If the spa was working when the tenant took tenancy, but it stopped working because of something the tenant, occupant or a guest did, then the tenant is responsible for repairs. (See ARS Sec. 33-1341). If the spa was working when the tenant took tenancy and the tenant is not responsible under Sec. 33-1341, then we must determine if the landlord's refusal to fix the spa constitutes a "default," which is referred to in the Arizona Residential Landlord and Tenant Act (the "Act") as a "noncompliance." The first place to look is in the rental agreement. If the rental agreement includes language that makes clear the landlord is not obligated to fix the spa, then (again) the answer is clear – the landlord would not have to fix it. If the rental agreement says nothing about the spa, then we turn to the Act. Section 33-1361 of the Act allows the tenant to serve a notice on the landlord of a noncompliance and, if the landlord does not fix the problem, then the tenant may terminate and vacate or may sue for damages. The amount of time the tenant must give the landlord depends on the nature of the noncompliance. A "noncompliance materially affecting health and safety" is subject to a five day notice; absent unusual circumstances, a malfunctioning spa probably does not affect health and safety and probably constitutes (if anything) a "material noncompliance." A "material noncompliance" is subject to a ten days notice. A "material noncompliance" also includes a "material falsification of the written information provided to the tenant." (See ARS Sec. 33-1361(A)). If the tenant rented the subject property because (or at least partly because) of the spa (i.e., therapy for an injury or medical condition), then the landlord’s refusal to fix the spa would probably constitute a material noncompliance. In addition, if the landlord advertised the subject property (i.e., newspaper ad, yard sign, flier, Internet listing, etc.) and one of the features included in the advertisement was the spa, then the landlord’s refusal to fix the spa would probably constitute a material noncompliance. I say "probably" because two judges hearing the same set of facts may reach different conclusion. There is yet another potential argument. Section 33-1363 gives the tenant a "self-help" remedy, allowing the tenant to pay a licensed contractor to make repairs and then deduct the cost of repairs (the Act provides for specific monetary limits) from the next month’s rent, but Section 33-1363 only applies if the inoperative spa constitutes a violation of Section 33-1324. A spa is probably not an "essential service," does not affect health and safety and an inoperable spa does not render the subject property unfit or uninhabitable. (See Section 33-1324). Arguably, the spa constitutes "other facilities" supplied by the landlord (see Section 33-1324(A)(4)), but that is a tenuous argument, at best. So, the best approach is for the tenant to serve a ten day notice of material noncompliance. Whether or not a judge will side with the tenant will depend on: (1) language in the rental agreement, (2) whether the spa was the reason (in whole or in part) the tenant rented that property, and (3) especially if the landlord included the word "spa" in any advertising (i.e., newspaper ad, fliers, sign, etc.).

A tenant “may” stay after a foreclosure, but “MUST” a tenant stay after foreclosure?

Forget foreclosure for a moment.  In a “regular” sale of a rental property by the owner/landlord to a new buyer, the new owner takes the rental property “subject to” the existing lease, which means that both the new owner and the tenant are bound by the terms of the existing lease.  Neither the new owner, nor the tenant may unilaterally cancel or terminate the lease (except in the very rare occassion when the lease contains a provision that terminates the lease upon sale of the rental property).  Prior to 2009, foreclosure of a rental property “foreclosed” (i.e., extinguished) all interests in the rental property that were “junior” in priority to the lien being foreclosed by the lender, which meant that a foreclosure terminated the lease and the tenant had to vacate the rental property no matter how much time was still left on the lease.  The Helping Families Save Their Homes Act of 2009, signed into law by President Obama on May 21, 2009, included a provision entitled Protecting Tenants at Foreclosure Act of 2009.  The latter Act provides that the new owner of the rental property takes the rental property “subject to” the existing lease, which means both the new owner/landlord and the tenant are bound by the existing lease.  Having said that, there are a few exceptions and the Act only applies to a “bona fide” lease.  The full text of both Acts can be found at the following links.

Helping Families Save Their Homes Act of 2009
Protecting Tenants at Foreclosure Act of 2009 (scroll down to Section 701)

Keep in mind, however, that the Arizona Residential Landlord and Tenant Act still applies.  Whether or not there has been a change of ownership of the rental property, the LL/T Act allows a tenant to give notice regarding various property defects and, if the defects are not remedied, the tenant may terminate and vacate the rental property.

What should a tenant look for in a new lease in today's market?

A tenant should look for language in the lease that makes it a breach of contract for the landlord to let the rental property go into foreclosure. If there is a provision in the lease that makes it a breach of contract for the landlord to allow the rental property to go into any type of foreclosure, then the tenant has some recourse. Specifically, if a trustee's sale is commenced on the rental property, then the landlord is in breach and the tenant should then follow the procedure in the Arizona Residential Landlord and Tenant Act (link to download copy is in the right margin of this Blog), send the landlord the proper notice and then vacate if the landlord does not cure the default. The AAR (which stands for Arizona Association of Realtors) February 2008 rental agreement form, is a nine page form; on line 206, it says, "Landlord shall not allow the Premises to become the subject of a trustee's sale." If the tenant’s language has this language, then the landlord is in breach of contract if a trustee’s sale is initiated. Depending on the facts, the tenant may be able to sue the landlord for damages, which may include moving expenses. Tenants should keep in mind, however, that not all lease forms include the foregoing language and that even the AAR 02/2008 form is not all encompassing. For example, a lender could commence a judicial foreclosure of a mortgage, or the lender (beneficiary) under a deed of trust could elect to foreclose a deed of trust as a mortgage, or a vendor in an agreement for sale contract could commence a forfeiture; in all three of those cases, the rental property is not "the subject of a trustee's sale" and the landlord would probably not be found to be in breach of contract.

Must the property manager tell the tenant about foreclosure?

This question is more accurately stated as: When a rental property is managed by a real estate agent/broker, does the agent/broker have a duty to inform the tenant when the agent/broker becomes aware that foreclosure proceedings have been started on the rental property?

The agent/broker is an Arizona real estate "licensee." The licensee owes a fiduciary duty to the owner/landlord, but must also deal fairly with all parties to the transaction, including the tenant. Informing the tenant of an impending foreclosure would appear to violate the licensee’s fiduciary duty to the landlord, but the Commissioner of Real Estate in Arizona has promulgated rules that all licensees must follow. One of those rules, A.A.C. R4-28-1101, requires that a licensee disclose to the other party any information that the party the licensee represents cannot or may not be able to perform. See A.A.C. R4-28-1101(B)(1) ("Any information that the seller or lessor is or may be unable to perform."). Clearly, if the property is foreclosed, the landlord may or may not be able to perform (i.e., continue to give the tenant the exclusive use and control of the rental property).

If a lease exists and the termination date is after the scheduled foreclosure (which may be a Trustee's Sale or a Sheriff’s Sale after a judicial foreclosure), then the lessor cannot perform. Even if we assume that the foreclosure sale may be continued to a later date, then there is still a chance that the lessor may not be able to perform. In both of these situations, under Commissioner's Rule R4-28-1101(B)(1), the licensee MUST disclose. I believe under the Lombardo case, it is even more clear that the licensee MUST disclose under these facts. See Lombardo v. Albu, 199 Ariz. 97, 14 P.3d 288 (2000).

If, however, the lease terminates before the scheduled foreclosure, I don't believe the licensee needs to disclose anything. But if that same lease includes an option (for the tenant) to extend the lease for a period of time that would extend past the scheduled foreclosure sale, then I believe the licensee MUST disclose the scheduled Trustee's Sale.

That answers the questions for fixed term leases and lease with an option to extend.

Oddly enough, a month-to-month agreement may be the hardest situation to analyze. At first glance, it would appear that the lessor (or the tenant) can terminate the rental agreement with only 30 days notice and, therefore, it would appear no notice is needed because tenancy may be terminated for any reason or no reason. So it would appear that no notice of the foreclosure sale is needed because the sale is 90 days away and tenancy can be terminated with only 30 days notice. But these time periods are somewhat deceptive and, at some point, the tenancy will progress to the point where notice is required.

An example may illustrate best. Assume today is January 1. Also assume tenancy is mo/mo and renews automatically on the first of each month, as most mo/mo tenancies do. The licensee discovers a foreclosure sale scheduled for March 20. As of January 1, the sale is 80 days away.

A landlord must give at lease 30 days advance notice of termination and tenancy must terminate at the end of a "periodic period." See ARS 33-1375. The "periodic period" in this example is one month. If the landlord gives the tenant 30 days notice of termination on January 1, then tenancy terminates at the end of February -- NOT February 1, which is 30 days after the notice is served and which many people mistakenly believe is the date the tenants must vacate. To terminate at the end of January, the landlord would have had to terminate tenancy sometime in December.

If the landlord serves notice on any date from January 1 to January 29, then tenancy still terminates at the end of February. The reason January 29 is the last day to terminate tenancy in February is because February (normally) only has 28 days and the statute requires 30 days advance notice. In the above example, the landlord or licensee clearly would NOT have to inform the tenant of the impending March 20 foreclosure sale as long as the landlord gave the tenant a 30 day notice of termination on or before January 29.

If the landlord gives the tenant a 30 day notice of termination on any date from January 29 to February 28, then tenancy terminates at the end of March, which will be after the scheduled sale. On these facts, it would appear that the licensee must inform the tenant of the pending March 20 sale because the landlord may not be able to perform. While that is technically true, the new owner (bank or successful bidder) will not be able to compel the tenant to vacate before the end of March. So, arguably, if the landlord gave the tenant a 30 day notice of termination on or before February 28, then the tenant has not sustained any "real" damages.

If the landlord never gives the tenant notice and the tenant did not know about the foreclosure sale until the date of the sale (or even after), then the landlord clearly cannot perform under the lease (i.e., give the tenant exclusive use and control of the rental unit for another month). It would appear in this case that the licensee MUST give the tenant notice of the foreclosure sale, but if this is a "government related loan," then the May 20, 2009 federal legislation gives the tenant under a "bona fide lease" at least 90 days before the tenant must vacate (90 days is the shortest period of time, even if the lease is only mo/mo and the successful bidder intends to owner-occupy the property). So, arguably, no harm comes to the tenants and, therefore, no notice by the licensee is necessary.

In addition, the Notice of Trustee's Sale is recorded and a judicial foreclosure is filed in the office of the Clerk of the Superior Court. Recorded documents and, arguably, court filed documents, give constructive notice to everyone, including the tenants. Both the landlord and the licensee can make the argument that they are not required to notify the tenant of documents that are of public record. Moreover, the statute for Trustee's Sales and foreclosures requires that the lender notify the occupants of the subject property, so it would appear that notice from the licensee to the tenants would be redundant and, therefore, unnecessary.

The foregoing reveals how complicated this seemingly simple example can become. The short answer to this question (i.e., must the property manager tell the tenant about an upcoming foreclosure sale) is definitely in some cases and maybe in other cases.

May a landlord discriminate against certain people when evaluating whether or not to accept an applicant as a tenant?

Yes.  Surprised?  Read this entire post to make sure you clearly understand.  Landlords, banks and others who base their approval (or disapproval) on someone's ability to make payments on a loan or some other financial obligation may lawfully discriminate based on income, credit, current obligations and other factors.  Make no mistake about it -- this is a type of discrimination, but it is lawful discrimination.  What a landlord (or others) cannot do is unlawfully discriminate.  It is unlawful to discriminate against a tenant applicant based on race, color, religion, national origin, sex, handicap or familial status (i.e., because the applicant has children), but a landlord may discriminate against an applicant on any other basis. For example, a landlord may reject a tenant application because s/he has insufficient income, drives a motorcycle and/or because s/he is a lawyer.

What if a residential rental property goes into foreclosure during the lease?

 

What are the landlord’s rights/obligations?

What are the tenant’s rights/obligations?

These are the questions that many tenants and landlords are facing today. As in all cases, the answers depend on the facts and your point of view.

From the tenant’s perspective, they have signed a lease¹ and are current on the rent. So what happens if the property goes into foreclosure? The answer to that question is easy: a judicial foreclosure and a non-judicial foreclosure will both "foreclose" (i.e., wipe out) all liens and interests in the rental property that are subordinate to the lien being foreclosed, which in almost all cases, includes a residential rental agreement or lease.  (But see the "Update," below).

When the landlord purchased the Property, s/he obtained a loan. When s/he obtained the loan, s/he signed a promissory note, which created the debt that is owed to the lender.

The landlord also signed either a "deed of trust" or a "mortgage." Almost everyone refers to a house as having a "mortgage," but the fact is that almost all loans in Arizona are secured by a deed of trust, rather than a mortgage.

Under a deed of trust, if he borrower commits a "default," such as not making the payments, the lender may initiate a Trustee’s Sale, which is a non-judicial foreclosure of the Property. A non-judicial foreclosure means exactly that – the foreclosure may be conducted without going to court and/or getting a judgment. To initiate a non-judicial foreclosure (i.e., a Trustee’s Sale), the beneficiary (the lender) must instruct the trustee to record a Notice of Trustee’s sale with the county recorder and, after posting a notice on the property and sending the borrower various notices (whether actually received or not), the trustee may conduct a Trustee’s Sale of the Property.

Under a mortgage, if the borrower commits a default, the lender may commence foreclosure by filing a lawsuit in superior court and serving the borrower and all other parties with an interest in the property with a Summons & Complaint. If the lender prevails at trial, the judge will issue a judgment of foreclosure and order that the sheriff seize the Property and sell it at auction.

A Trustee’s Sale, pursuant to a non-judicial foreclosure under a deed of trust, may be conducted ninety days after the Notice of Trustee’s Sale is recorded with the county recorder. A judicial foreclosure under a mortgage, proceeds as any regular civil lawsuit. If none of the defendants oppose the foreclosure, the lender may receive a judgment by default in about the same time as conducting a Trustee’s Sale (i.e., ninety days). If, however, one or more defendants opposes the foreclosure action, it may take from four to twelve months to obtain a final judgment and the Sheriff’s sale of the property will occur sometime thereafter.

The reason that a deed of trust is more common than a mortgage is thus revealed. In almost all cases, the property can be sold at a foreclosure sale much sooner under a deed of trust than under a mortgage. In addition, a deed of trust can be foreclosed as a mortgage (i.e., the borrower can elect to file a lawsuit in court rather than conducting a non-judicial sale), but a mortgage cannot be foreclosed as a deed of trust (i.e., a lender holding a mortgage must file a lawsuit and pursue a judicial foreclosure). For these reasons, almost all lenders prefer to use a deed of trust to secure real property.

The shortest time, then, from initial default until the foreclosure auction (either a Trustee’s Sale or a Sheriff’s Sale) is ninety days. But that presumes that the foreclosure process is commenced immediately upon the first default (i.e., failure to make a payment). Many lenders do not even begin foreclosure until a borrower is three or more payments behind. In today’s market, some lenders are waiting even longer (i.e., they already have enough foreclosures on their hands; no need to hurry to the next one). Sorry for the diversion, but an understanding of the process in is important in order to understand the answers to our questions.

Back to the tenant. When is the lease going to end?  If the lease is month-to-month, then there is no breach by the landlord. Either the landlord or the tenant may terminate a month-to-month tenancy for any reason (or no reason) by simply sending out a thirty-day notice of termination. (See A.R.S. § 33-1375(B)). To avoid liability (discussed below), the landlord may simply send a notice of termination at the appropriate time before the foreclosure sale.

If the lease will terminate in less than ninety days, there is no possible way that the tenant will lose possession of the rental property before their lease expires. Again, there is no breach by the landlord. Whether or not a foreclosure is pending, a landlord has no obligation to renew or extend any lease, unless the lease expressly gives the tenant an option to extend or renew the lease, which is not common in residential leases.

If the lease termination date is somewhere between ninety days and six months away, then "potentially" there is a problem. And if the lease termination date is more than six months away and/or the lease gives the tenant the option to extend or renew the lease, then the landlord will be in breach of contract if the foreclosure sale occurs.

When a landlord and tenant sign a lease, the tenant agrees (among other things) to pay a specified amount of rent each month (or some other specified period) and to stay for a certain length of time (i.e., six months, one-year, three-years, etc.). In return, the landlord agrees to rent the subject property to the tenant at that specified rent (i.e., no rent increases during the term of the lease) and for a certain length of time. The landlord’s failure to make the loan payments on the rental property is not a breach of contract, at least not to the tenant; it is a breach of contract under the promissory note and deed of trust or mortgage that the landlord signed with the lender. Rarely, if ever, is there a provision in the lease that requires the landlord to keep the loan payments on the rental property current during the term of the lease. If there was, then the landlord would be in breach of contract as soon as the landlord failed to make a required payment. Likewise, there is no statute that requires the landlord to keep loan payments current on the rental property during the lease term. If there was, then the landlord would be in violation of the law as soon as the landlord failed to make a payment. Consequently, the landlord will only be in breach of contract if the rental property is foreclosed during the rental term and the tenant is forced to move out before the end of the lease term. In that instance, then the landlord has failed to provide the tenant with the subject property for the agreed upon period. This, by definition, is a breach of contract by the landlord. The tenant may then sue the landlord for all damages that result from the breach of contract, which may also include the tenant’s moving expenses.

If, however, the lender begins the foreclosure process on the subject property, but the landlord makes up the back payments and averts the foreclosure, then there has been no breach of contract by the landlord. Likewise, if the landlord’s solution to avert the foreclosure is to sell the property to someone else, as long as the foreclosure is averted for any reason (i.e., the sale paid off the foreclosing lender, the new buyer assumed the existing loan and brought it current, the lender extended the foreclosure sale date, etc.), then the landlord has not breached the lease contract. Keep in mind, however, that when someone buys real property that is subject to an existing lease, the buyer takes the property subject to the existing lease, which means that the new buyer is bound by the terms of the existing lease and must allow the tenant to remain in the property until the end of the lease term.

But we are not done yet. What if the landlord "knew" the property was going into foreclosure when he signed the lease? What if it is his intent to keep all the money that the tenants pay to him and not make any loan payments to the lender until the lender forecloses on the property? Again, the specific facts will determine the answer. The extremes will be easy, so let’s start there. If the lease is month-to-month and the landlord provides adequate advance notice to the tenant before the foreclosure sale, then there is no breach by the landlord. On the other hand, if the landlord signed a ten-year lease, then it would be clear that the landlord intended to defraud the tenant. In that case, the tenant would be able to sue the landlord for breach of contract and fraud. The gray area in the middle is less clear. If the landlord signed a six-month, one-year, or other specified length lease with a tenant, knowing that he never intended to make a payment during the term of the lease, but with the expectation that the lender would not foreclose before the end of the lease term, then answer is less clear. Intent is not an element in a breach of contract claim. Therefore, if the tenant is forced to move before the end of the lease term, then the landlord is in breach of contract. Whether the landlord is also liable for fraud will turn on whether his expectation that the lender would not foreclose before the end of the lease term was "reasonable."

Can I stop making the rent payments? That is a question I hear frequently. Many lawyers are telling tenants to stop making the rent payments when a property goes into foreclosure. I believe that to be bad advice. Yes, I recognize that the tenant may argue that the landlord’s failure to make the payments and the impending foreclosure is an "anticipatory breach of contract" by the landlord. But I also know that every landlord will argue that they are experiencing some "financial difficulties," which are now being compounded by the tenant’s actual breach (not anticipatory breach) of failing to pay the rent. My opinion is that most judges will find the "actual breach" to be more compelling than the "anticipatory breach." Which means that the tenant will be in breach of contract, will be evicted and may be liable for rent until the end of the lease term. And this may be true even if the rental property is actually foreclosed because the landlord will claim that the tenant’s failure to pay the rent was the reason the landlord could not pull the rental property out of foreclosure. Bottom line for the tenants is you are better off paying rent. If the foreclosure sale actually takes place, then the landlord is in breach of contract if you are forced to leave the rental property before the end of your lease term. You can sue the landlord for breach of contract and, under appropriate facts, for fraud, but keep in mind that if the landlord lost the property to foreclosure, s/he may have other financial problems and may be on the verge of bankruptcy.

Tenants should also know that there is a process that follows any foreclosure sale. Whether by Trustee’s Sale or by Sheriff’s Sale, the successful bidder (or the bank, if no one bids) is not immediately entitled to possession. The new owner must first serve the occupant(s) with a five day demand for possession. If the occupant does not move, then the new owner must file a forcible detainer action (i.e., an eviction action) to remove the occupants. The hearing will be set approximately five days after the lawsuit is filed. If the occupants do not appear at the hearing (and even if they do), the court will enter a judgment in favor of the new owner and a "writ of restitution" can be issued five days later. That is the date that the Sheriff or constable will show up at the door and escort all occupants out of the property and deliver possession of the property to the new owner. So, from the foreclosure sale to the date the Sheriff shows up is about fifteen days. Not a lot of time, but certainly "some" amount of time to find substitute housing.

UPDATE:This post was originally posted on September 4, 2008.  On May 20, 2009, the President of the United States signed a new federal law -- "Helping Families Save Their Homes Act of 2009."  Part of the new law enacts protection for tenants with leases at the time of the foreclosure, provided the loan that is being foreclosed is a "federally related" home loan.  The law protects "bona-fide tenants," which is defined in the new legislation as: (1) the lease had to be signed before the notice of foreclosure was issued, (2) the defaulting borrower cannot be the tenant under the lease, (3) the lease must be an "arm's length" transaction, and (4) the rent must be "fair market value rent."

If the foreclosed is a "federally related" home loan and the tenant is a "bona-fide tenant," then the purchaser at the foreclosure auction takes the property "subject to" the existing lease, which means the new owner must honor the terms of the existing lease.  If the new owner intends to owner occupy the property, then the lease can be terminated, but the new owner must provide at least ninety (90) days notice of termination.  And that is true (i.e., 90 days notice) even if the existing lease is only a month-to-month tenancy.  In short, prior law provided that a foreclosure foreclosed a lease and the tenant had only a couple weeks after the foreclosure sale to vacate, but the new (federal) law now provides that the minimum notice to be given is ninety days and the tenant may be able to stay until the end of the lease term, provided: (1) the loan being foreclosed is "federally related" and (2) the tenant is a "bona-fide" tenant.

UPDATE: The Protecting Tenants at Foreclosure Act expired on December 31, 2014.  As of January 1, 2015, this Act no longer protects tenants and the law as it existed before the Act became effective now controls.  Some states have enacted similar laws, but Arizona is not one of them.  In Arizona, that means the purchaser (or the lender, if it acquires title via a credit bid) may immediately begin the eviction process if the foreclosed property is occupied by a tenant.  It does not matter if the tenant is month-to-month or on a fixed term lease, the tenancy is “foreclosed” (i.e., terminated) by the foreclosure sale.

Can a residential tenant terminate a lease: (1) within 3, 5, 10 or some other number of days after signing the lease, (2) if the tenant loses his/her job, (3) gets a job transfer, (4) if there is crime in the area or (5) if they are the victim of a crime?

I get these questions a lot.  So much, in fact, that a blog post on these specific issues is warranted.

1.  Can a residential tenant terminate a lease within 3, 5, 10 or some other number of days after signing the lease?

No.  That one is simple enough.  There is no statute and no case that gives tenants this right.  Nevertheless, there is an exception.  If the written agreement specifically gives the tenant that right (i.e., "Tenant may cancel this agreement within three days" or "Subject to review and approval by Tenant's attorney within the next three days" or some similar language), then the tenant can cancel the lease.

2.  Can a residential tenant terminate a lease if the tenant loses his/her job?

No.  The only exception is (as above) when the written agreement specifically gives the tenant that right.

3.  Can a residential tenant terminate a lease if the tenant loses his/her job?

No.  Starting to see a pattern here?  Unless the written agreement specifically gives the tenant that right, once the tenant signs the agreement, the tenant is bound by the agreement.

4.  Can a residential tenant terminate a lease if there is crime in the area?

No.  Crime is everywhere; there is no statute or case that allows a tenant to terminate a lease because of crime in the area.  HOWEVER, if the landlord marketed the property as being in a "crime free" area or made some other representations about the complete absence of crime in that area, complex, etc., AND it turns out that the area had a high crime rate, then the tenant would likely be able to terminate the lease -- NOT because there was crime in the area, but because the landlord had "misrepresented" the premises to the tenant.  (See A.R.S. Section 33-1361).  Similarly, if the landlord misrepresented some other "material information," then the tenant may be able to terminate the lease based upon that misrepresentation.  (See A.R.S. Section 33-1361).

5.  Can a residential tenant terminate a lease if the tenant is the victim of a crime?

Maybe.  The Act, Section 33-1318 (which became effective August 2007), allows a tenant to terminate a lease -- without any financial penalty whatsoever -- if the tenant is a victim of domestic violence and the tenant sends a written request to the landlord to be released from the lease within thirty days after the incident.  The tenant must also provide the landlord with evidence of the incident.  There is no other statute or case that allows a tenant to terminate a lease if the tenant is the victim of a crime when the crime IS NOT domestic violence.

Can a commercial landlord include provisions in the lease that take away most/all of the tenant's rights away?

Yes.  Generally, the law permits people to enter into contracts, including commercial leases, upon whatever terms the landlord and tenant agree. Therefore, if you sign a commercial lease for a store in a shopping center, for example, that is written to favor only the landlord, then, yes, you have effectively forfeited all rights not expressly granted to the you, the tenant, by the lease agreement.

The Arizona Residential Landlord and Tenant Act (the "ACT"), A.R.S. §§ 33-1301 to 33-1381, gives tenants many rights, but these statutes do not apply to "commercial" leases (i.e., rental of real property other than dwelling units). The Landlord and Tenant statutes that apply to commercial leases, A.R.S. §§ 33-301 to 33-381, give the tenant practically no rights. Presumably, the Arizona legislature felt that persons who rent dwelling units (i.e., apartments, homes, etc.) need more protection from landlords than persons who have the financial wherewithal to rent commercial real estate.

An example will best illustrate the drastic distinction between residential leases and commercial leases. The ACT requires that the landlord give a delinquent tenant a Five-Day Notice to Pay or Quit before initiating an eviction action. A.R.S. § 33-1368(B). Further, a residential tenant has an absolute right to pay the total amount owed (i.e., past due rent, late fees, court costs and attorneys' fees) and force the landlord to accept reinstatement of the lease. A.R.S. § 33-1368(B). A commercial landlord, however, when rent is in arrears for five days, may, at the landlord's option, either re-enter and take possession (i.e., lock the tenant out) or "without formal demand" commence an eviction action. A.R.S. § 33-361(A). Further, once the commercial landlord has terminated the lease, the tenant cannot (unless the landlord consents) reinstate the lease, even if s/he pays all amounts due (i.e., past due rent, late fees, court costs, attorneys' fees). As you can see, the rights afforded to residential tenants by the ACT greatly exceed the rights afforded commercial tenants by the statutes. Moreover, one of the statutes in the ACT prohibits landlords from attempting to take away any of the tenant’s rights that are granted by the ACT; meaning, a residential landlord cannot even put provisions in the residential rental agreement (even if signed by both parties) that take away any of the tenant’s rights under the ACT. The only way, then, for the commercial tenant to obtain more rights is to have these rights written into the lease agreement (i.e., the landlord cannot re-take possession for any type of default without five-days prior written notice).

Returning to the answer to the question: the solution to your problem is simple in theory, but sometimes difficult in practice. Read the "proposed" lease agreement very carefully and/or have your attorney review it. Note any changes that you would like made to the terms "offered" (remember, at this point, the terms contained in the lease agreement are merely the terms offered by the landlord). Ask the landlord to modify the lease to include the terms that you wish changed. The landlord may change all, some or none of the terms you desire. You will either ultimately come to an agreement with the landlord or not. If the vacancy factor for the type of property you are looking for is high, your chances of convincing the landlord to modify his/her offered terms is greater than when the occupancy factor is low. If the landlord simply will not budge, then look elsewhere for a location and terms that are acceptable. Again, your chances of finding alternate commercial space on terms you find acceptable are greater when the vacancy factor for the type of property you are looking for is high.

Some specific concerns that you will have as a new store owner in a shopping center are: (1) does your lease include a non-compete clause, so that the landlord cannot rent space in the same shopping center to a tenant with a similar business, (2) does the lease obligate you to remain for the entire term of the lease even if the anchor tenant terminates or vacates (an anchor tenant is normally the largest tenant in the shopping center and typically draws most customers to the shopping center; for example Home Depot or a grocery store), and (3) are you required to be open for business certain hours of the day and certain days? Naturally, there may also be many other concerns specific to the type of business you are running and/or the type of property that you are leasing.

Once you have signed the lease agreement, however, onerous or not, you are bound by the terms of the written lease agreement; there is no statutory recision period (i.e., you do not have a few days to "think about it" and cancel the deal without penalty). Only in the most exceptional circumstances will a court of law intervene and rule that a particular term is "unconscionable" (i.e., unenforceable) under the law.

What is the maximum security deposit a landlord may collect?

A landlord cannot collect a security deposit equal to more than one and one-half month’s rent. For example, if the monthly rent is $1,000.00, then the maximum security deposit a landlord may legally collect is $1,500.00. Sounds simple, but it’s not.

A security deposit does not include nonrefundable cleaning or redecorating fees, but DOES include refundable cleaning, redecorating and/or any other type of refundable deposit (i.e., refundable pet deposit, refundable key deposit, etc.). Incidently, security deposits are ALWAYS refundable deposits; there is no such thing as a "nonrefundable security deposit."

Consequently, a landlord MAY: In the same example above, the landlord may collect a $1,500 security deposit, a $250 nonrefundable cleaning fee, a $250 nonrefundable redecoration fee, and a $25 nonrefundable application fee. But that same landlord COULD NOT collect a $1,500 security deposit and a $1 key deposit, because then the amount of deposits the landlord would be holding exceeds one and one-half month’s rent.

Hang on, we’re not done. Same example, but the landlord collects a $1,000 security deposit and a $500 refundable cleaning deposit. So far, the landlord is okay. But the tenant leaves at the end of the lease term and owes $2,000 in past due rent. There is no property damage and the property is left cleaner than when the tenant moved in. The landlord will want to apply all $1,500 to the past due rent, but he can’t. Under the Act, "‘security’ means money or property given to assure payment or performance under a rental agreement." (See A.R.S. § 33-1310(14)). The tenant left the property clean – the tenant is legally entitled to return of the $500 cleaning deposit. If the landlord holds onto that deposit, then the landlord has "wrongfully withheld" part of the tenant’s refundable deposits and the tenant can sue the landlord for the $500 deposit, plus statutory damages equal to twice the amount wrongfully withheld (i.e., $1,000), plus attorney’s fees and court costs. A really bad result for the landlord.

The solution is simple. The landlord should collect only one deposit – a security deposit. I always recommend that my clients collect only a security deposit (not to exceed one and one-half month’s rent) because the landlord may apply the security deposit to any amounts owed by the tenant: rent, property damage, cleaning, whatever. Under the Act, and as stated above, the landlord can also collect fees and charges (i.e., nonrefundable) for cleaning, redecorating, etc. The only restrictions on fees and charges are: (1) they must be "reasonable" (whatever that means) and (2) the purpose of the nonrefundable fee/charge must be stated in writing (i.e., in the rental agreement or some other written document).

Must an out-of-state owner/landlord have a local property manager?

No, out-of-state owners/landlords are not required to have a local property manager, but out-of-state owners/landlords must have an in-state statutory agent, which is different.  A property manager manages the property, collects rent, etc., whereas a statutory agent merely receives notices and legal service of process on behalf of the owner. If an out-of-state owner/landlord fails to have a statutory agent, the owner/landlord is subject to substantial statutory fines and this is also legal grounds for a tenant to terminate an existing lease.  An out-of-state owner must have an in-state statutory agent. And, as a practical matter, it makes sense to have a local property manager because s/he can be more responsive to complaints, etc.  Also, if there is an eviction, the local manager can provide testimony about the relevant facts, otherwise the out-of-state owner will need to personally appear to give testimony.

Can a tenant make repairs and deduct the cost from the rent?

Residential.  Under certain circumstances, a tenant may legally make repairs to the rental unit and then deduct the cost of those repairs from the next month's rent.  The precise steps that a tenant must follow are found in A.R.S. Section 33-1363.  In short, these are the steps: (1) the item to be repaired must constitute a noncompliance with A.R.S. Section 33-1324 by the landlord, (2) the tenant must then provide the landlord with a written notice that specifies the need repairs, gives the landlord the statutory time to make repairs, and must also notify the landlord of the tenant's intent to effect such repairs if the landlord fails to make the repairs, (3) the repairs must be done by a licensed contractor, the tenant must pay the contractor for the cost of repairs and the contractor must provide the landlord with a lien release for the repairs performed, and (4) the amount of the deduction may not exceed the greater of $300 or one-half month’s rent (Example 1: if rent is $500, the maximum amount of repairs is $300; Example 2: if rent is $1,000, the maximum amount of repairs is $500).

Commercial.  The commercial landlord/tenant statutes do not give a commercial tenant a "self-help" remedy.  Moreover, almost all commercial leases prohibit a commercial tenant from deducting any amounts for any purpose from the rent.