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Collecting Rent and Not Paying the Mortgage

Written by on Monday, 18 July 2011 7:00 pm

Not long ago (June 11) Ariel Kaminer, "The Ethicist" at the New York Times, responded to a query from a tenant whose landlord was not making his mortgage payments. The letter writer wondered if it would be unethical for him, the tenant, to withhold his rent.

What the landlord was doing is commonly called "rent skimming." It is a practice that more than a few people consider to be immoral, and many would agree with the tenant's inclination: that the landlord's unethical behavior would absolve the tenant of any ethical obligation to make rental payments to him.

The situation can be framed as a legal question or as a question of ethics. Treated as a legal issue, the matter is pretty straightforward. In California at least. (Imagine: something being straightforward in California!) California law (Civil Code 890) defines rent skimming in two ways: (1) It is the act of collecting rent(s) and failing to make mortgage payments, during the first year of ownership; or (2) it is the act of collecting rents under the guise of authority (e.g. pretending to be the owner or property manager) and then not turning the money over to the rightful owner.

Assuming, in the case at hand, that the landlord had owned the property for more than one year, his action would not have been rent skimming under the law, and it would not be illegal. Moreover, the tenant would still have the legal obligation to make payments per the terms of the rental agreement. His failure to do so could result in an eviction, and the landlord's mortgage default would have no bearing on its outcome.

Other state laws may differ, to be sure, but I know of none that make it simply illegal to collect rent(s) while not making mortgage payments.

But, what about the ethical question? Has the landlord acted unethically? Would it, ethically speaking, be OK for the tenant to stop paying the landlord? The Ethicist wrote, "Unless you agreed in advance that he would forward your check directly onto the bank, I'm afraid you wouldn't have had much of a case for freeloading. His dereliction could not have justified yours." Unaccustomed as I am to agreeing with the New York Times, I still have to go along with their writer here, though perhaps with some provisos.

We don't, after all, have the kind of indignation that the letter writer had when we think of a range of other transactions. Suppose I buy a beer at a Los Angeles Dodgers game, and it turns out - as might well be the case - that the Dodgers haven't been making their payments to the beer distributor. Sure, I might have choked on the $12 price tag for the beer; but it would not occur to me that I should get it for free, just because the ball club wasn't paying the supplier.

How many of us have bought tickets on airlines that were in BK and not paying their bills? It happens all the time.

The thing about rent payments is that they are so personal. Even when a tenancy is month-to-month, occupants tend to have a great deal of emotional and social investment in the place where they live. Having to move can be a major disruption and is almost always a certified hassle. Having an auction notice posted on the door, or an agent showing up to do an appraisal for the bank, can spoil a tenant's day.

Is rent skimming (in the generic, not legal, sense) unethical as between the landlord and the tenant? The answer, I believe, depends on the expectations that have been set. It is, as are so many things in real estate, a question of disclosure. Collecting rent while letting a mortgage slide into serious delinquency, without informing the tenants, is not illegal. But it seems plainly wrong.

On the other hand, if the tenant is informed and understands the possibilities, how is he or she wronged? I'm not the only real estate agent who knows of situations where tenants have been more than willing to rent a property - usually at below market rates - where mortgage payments aren't being made. It is a calculated risk. No harm, no foul.

Of course, whether the lender is being wronged is another question. One for another day.

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  About the author, Bob Hunt

Individual news stories are based upon the opinions of the writer and does not reflect the opinion of Realty Times.