Bought a 4-plex at the commissioner's sale, what about tenant deposits?

Question

As the title says, I just bought a 4-plex at the commissioner's sale today.  I went over and had a chat with the tenant who is the "manager" of the property along with 2 or 3 others that the previous (delinquent) owner has.  All-in-all I think it should be a painless transition, however he told me that the owner has the deposits for the tenants.

I'm wondering if anybody has advice on how I should proceed, assuming the previous owner won't pay up.

I know it is my responsibility to honor existing leases that were made in good faith, however I'm not sure if I'm expected to reimburse a tenant for a deposit that I never received.

I'm already working on contacting the previous owner to see if I can get the deposits or have her return them to the tenants, however I'm just trying to plan ahead in the likely event that she doesn't return them.

Matt Devincenzo · Answer

I seem to remember a recent thread where someone mentioned the ability of the tenant to sign over their right to legal action, or something along those lines. So as Jon said definitely talk to a lawyer first, and then maybe you can work with the tenants and you get all of their right to the deposits turned over to you and make a single suit for the full amount.

That's just a thought to bring up when you talk to your lawyer, it may not be as simple or feasible as that but may be a way to earn some good will with the tenants as well as potentially getting the money due for the deposits.

No legal advice.

Jon Holdman · Answer

Are escrow accounts for deposits required in KY?  Some states they are, some aren't.

The fact the property was foreclosed tells you the former owner has money issues.

The "Protecting Tenants At Foreclosure Act" may be in play here.  Do the tenants have written leases?  If so, their leases are still in effect.  If not, they still have 90 days.

Here's a summary from Idaho of this act:

Protecting Tenants at Foreclosure Act

A key paragraph is:

Unfortunately, its not clear which owner, current or former, the tenants can file suit against.  A little more googling says this is state dependent.  Some state, CA for one, do make the new owner jointly responsible for the deposit.  Might be worthwhile to have a chat with your lawyer about this question.

Michael Seeker · Answer

Thanks @Mike Giudici  - I doubt she actually has them in an escrow.  As I mentioned, I'm fine with her giving them back to the tenants or to me - just not confident that will happen.

If she doesn't then I'll recommend that the tenants take her to small claims court.

Mike Giudici · Answer

She should have them set aside in an escrow account. Her options are as follows:

1. She can transfer the deposits to you and you can deposit them into an interest free escrow account

2. She can return the deposits directly to the Tenant. If this happens, you should be able to request a deposit from the Tenant in the amount of the original deposit as outlined in the lease.

Michael Seeker · Answer

That's kind of what I suspected.  I can work with the tenants and let them know what happened and what to expect.  Unfortunately the owner is probably going to stiff them on the deposits, so I may consider offering to return part of their deposit assuming no additional damage is done.

I hate to get screwed, but I'd rather take care of the people living in my building then have to worry about them destroying it because they know they don't have a deposit coming back to them.  I'll continue working the previous owner angle and hope for the best with that.

Thanks @Wayne Brooks

Wayne Brooks · Answer

My understanding is that you have no liability for the deposits given to the previous owner.  The tenants have a legal claim against the previous owner, but of course we know who's in the middle here.  No really good suggestion, other than trying to get the tenants to understand you're not the bad guy here.