If you are purchasing an existing property with tenants, there are several things that need to be looked at. The future landlord must find out if the property can be legally used as a rental. All rental units should conform to the local and state law. In addition to the usual things that need to be addressed during closing, the future landlord must know:
- the amount of security deposit for every unit
- institution in which the security deposit is held
This is very important. New Jersey law imposes an obligation on the new buyer to be responsible for any security deposit posted. A buyer should have their attorney require, as part of the contract, that the seller provides a letter signed by each tenant indicating they are aware of where their security deposit is and the amount of the security deposit. Just imagine the situation when the seller says there was no security deposit posted.
There is no guarantee that the tenant will not sue for the security deposit the landlord did not receive. That’s why the new landlord needs a statement signed by every tenant at the time of closing. The signed statement will serve as security deposit receipt. It will also show where it was held at the time of closing.
If the tenant later chooses to sue for damages based on the landlord’s failure to properly handle the security deposit, the landlord will have an undeniable proof as to what the security deposit was and where it was being held. It makes the lawsuit piece of cake for the landlord to prevail.
This is particularly important in a long term tenancy. If the security deposit is not properly placed under New Jersey landlord-tenant law, the new landlord is still liable for:
- amount of the security deposit
- 7% interest per year on the deposit compounded from the beginning of the tenancy
- attorney’s fee to recover it
How a Tenant Wanted to Sue a Landlord for $23,000.00 and
This is a real case from my practice. A tenant claimed that he posted security with the prior landlord. As the matter developed, the tenant claimed about eight versions of how the security deposit was posted. He said that:
- he posted $800 in cash
- he posted $1200 in cash
- he had done work in the amount of $800 or $1200
- a charitable organization had posted the security deposit
- a government agency posted the security
In short, he had a variety of eight different stories. The tenant retained counsel and attempted to claim $23,000.00 in damages because of the 7% compounding over 18 years.
The Buyer must inform the tenants of many things:
- who the new landlord is
- if anyone is acting as an agent
- where the rent is to be paid
- where and how notices regarding the rental are to be sent
- where the security is being held
The building buyer needs to register the property. In the case of a single family home or an owner occupied two unit building, it must be registered with the municipality. If there are three or more units, it must be registered with the State Department of Community Affairs. A copy of the registration statement must be provided to each tenant. The failure to provide the registration statement can cause problems later on. In the event of an eviction, the landlord needs to produce a filed copy. If the landlord fails to do that, eviction may be dismissed because the landlord-tenant court does not have jurisdiction to go ahead with the eviction.