How to Break a Lease Early

photo by Marcel Oosterwijk

Realtor.com quoted me in How to Break a Lease Early. It reads,

It’s Murphy’s Law, rental edition: You find the perfect apartment, sign the lease, move in, start to get settled in, then something happens. Maybe you get transferred to another state for work, maybe you meet the love of your life and decide to shack up together (congrats!), or perhaps your parents fall ill and you need to move closer to them.

Unfortunately life and rental laws don’t always coincide, all of which might mean you may have to entertain the idea of breaking a lease. What would happen if you do? Answers are ahead, along with some advice on how to handle this sticky scenario.

First things first: Read your lease

If you find yourself needing to break your lease, your first step should be to read it again—carefully. You could get lucky: Some leases have an “opt out” clause, meaning that you can terminate early for an agreed-upon fee. Depending on that financial amount, it might make sense for you to just pay the penalty and make a clean break, says David Reiss, academic program director for the Center for Urban Business Entrepreneurship.

Then again, some leases will say that you’re responsible for the rent due for the remainder of the term of your lease. Still, even in this worse-case scenario, you may have some wiggle room based on how benevolent your landlord is.

Talk to your landlord

If there is no opting out or the fees are too steep for you to financially absorb, it would probably behoove you to speak directly with your landlord or rental company.

“Your landlord may be willing to let you out of the lease early,” says Reiss. “You could also try to negotiate a lower amount for early termination than the lease calls for by forfeiting your security deposit.”

All in all, it never hurts to ask (and pray you catch your landlord in a good mood). It’s possible he may not mind your moving out since this means he could raise the rent sooner.You won’t know until you ask.

Find a new tenant

Another option is to offer to help your landlord find a new tenant for your apartment.

“It generally is not allowed without landlord consent, but you can discuss it with your management to see if they would consent to a sublease and under what terms,” says Reiss. You may also need to check local laws that may be applicable to subleases. If it is allowable, you might try a site like Flip, where renters can post leases they need to break in search of qualified renters who are looking for someplace to live.

Don’t just walk out

The one thing you absolutely cannot do without legal ramifications is just walk out and stop paying your rent. You won’t be trading your apartment for a cell with bars (it’s a civil, not criminal, matter), but Reiss warns you can get in a lot of financial hot water if you handle this incorrectly.

“You cannot be arrested for nonpayment of rent—unless you live in 19th-century London—but you can be sued in court; have a judgment against you; have your wages garnished; and [have] liens placed on your property to satisfy the judgment,” says Reiss.

Did we mention that this will mess up your credit scores? It will mess up your credit scores.

That said, there are a couple of cases where you could break your lease without consequences, but they are extenuating circumstances.

“If the apartment becomes unlivable—for instance, no heat in the winter—you could argue that you have been constructively evicted from the unit,” says Reiss. “Also, some states allow domestic violence survivors to break a lease in order to ensure their safety.”

Tax Liens and Affordable Housing

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NYU’s Furman Center has released a Data Brief, Selling the Debt: Properties Affected by the Sale of New York City Tax Liens. It opens,

When properties in New York City accrue taxes or assessments, those debts become liens against the property. If the debt remains unpaid for long enough, the city is authorized to sell the lien to a third party. In practice, the city retains some liens (because it is legally required to do so in some cases and for strategic reasons in other cases), but it sells many of the liens that are eligible for sale. In this fact brief, we explore the types of properties subject to tax lien sales but exclude Staten Island due to data limitations and exclude condominium units. Between 2010 and 2015, we find that 15,038 individual properties with 43,616 residential units were impacted by the tax lien sale. We answer three questions: (i) what kinds of properties have had a municipal lien sold in recent years? (ii) where are those properties located in the city? (iii) what happens to a property following a lien sale?

We present this information to shine a light on a somewhat obscure process that affects a significant number of properties in the city. Also, the lien sale has a number of policy implications. Tax delinquency can be an indicator of distress; property owners who have not paid their taxes may also cut back on building maintenance and investment. This could have ramifications for owners, tenants, and neighborhoods. The city, social service providers, and practitioners in the community development and housing fields may find this descriptive information helpful as they think about interventions related to the health of housing and neighborhoods.

In addition, the choice of whether to retain a tax lien or to sell the lien also presents a policy choice for the city—selling the lien allows the city to collect needed revenue it is owed; but, with the sale, the city gives up the leverage that it holds over delinquent property owners, which can be used in some cases to move properties into affordable housing programs or meet other strategic goals. The city could retain that leverage by selling fewer liens; but, then it would not only lose the revenue generated by the sale, it would also incur the cost of foreclosing or alternative interventions. The lien sale is part of the city’s municipal debt collection program, and the city must be careful that policy changes do not undermine the city’s debt collection efforts.

With this fact brief, we aim to shed some light on the real world consequences and opportunities triggered by the city’s current treatment of municipal liens. (1-2, footnotes omitted)

New York City has sure come a long way from the 1970s when the City was authorized to foreclose on properties with tax liens. The issue then was that the owners of thousands of buildings did not think it was worth it to pay their taxes. Their preferred strategy was to stop paying their bills and collect rents until the City took their properties away from them. After the City took possession of these buildings, it repurposed many of them into affordable housing projects owned by a range of not-for-profit and for-profit entities.

The Furman brief does not report on why building owners are failing to pay their taxes today. It is reasonable to think that, at least as to multifamily buildings, it is because of operational issues more than because of fundamental problems relating to the profitability of real estate investments in New York City. This is supported by the fact that, when it comes to tax liens, “many if not most debts would be repaid before foreclosure.” (11) Thus, while this brief sheds light on this shadowy corner of the NYC real estate market, it does not seem (as the authors agree) that tax liens will open a path to increasing the stock of affordable housing in the City as it had in the 1980s and 1990s.

Why Doctors Buy Bigger Homes Than Lawyers

 

photo by Ben Jacobson

Realtor.com quoted me in Why Doctors Buy Bigger Homes Than Lawyers (and What It Means to You). It reads, in part,

Take that, Alan Dershowitz: Although both doctors and lawyers can typically afford better-than-decent-sized homes, a new working paper from the National Bureau of Economic Research found that in states with a certain legal provision, physicians’ houses are bigger. Often much bigger.

So what’s the deal? It seems to come down to two factors: First, the skyrocketing costs of financially devastating medical malpractice suits; second, a once-obscure provision called “homestead exception” which can protect the assets of doctors in some states from being wiped out by those suits when they invest their cash in their homes.

“We have been interested in understanding how does that pervasive aspect of a physician’s career influence the decisions they make … whether it means they invest more in houses to protect themselves against liability,” Anupam Jena, an associate professor of health care policy at Harvard Medical School and a co-author of the paper, tells the Washington Post.

Here’s how homestead exception works: If creditors are hounding you for unsecured debts—as opposed to secure ones, like your mortgage—they can’t take your home as collateral, as long as you declare bankruptcy. In fact, they can’t even place a lien on the property to collect when you sell. These exemptions vary by state: Some, such as New Jersey, have no such safeguard; in California, individuals’ homes are protected up to $75,000 (which generally won’t get you past the front porch).

Yet a handful of states—Arkansas, Florida, Iowa, Kansas, Oklahoma, and Texas, as well as the District of Columbia—have unlimited homestead exemption. Doctors in those states bought homes that were 13% more expensive than the homes of doctors elsewhere. The homes of medical doctors (and dentists, who are essentially in the same medical malpractice boat) were markedly more expensive than the homes of professionals making similar salaries—even lawyers, who know a thing or two about malpractice suits. The authors drew from U.S. Census Bureau data on 3 million households about profession, household income, and home value.

So why should you care? Because homestead exemptions apply to you, too—even if the closest you come to the medical profession is annual checkups and late night reruns of “ER.”

*     *     *

But don’t get the wrong idea: The homestead exemption isn’t a bulletproof way to ward off foreclosure. Remember, it applies only to unsecured debt such as credit cards—not secured debt like your mortgage.

“If you borrow money for a home, the homestead exemption typically does not apply,” says David Reiss, research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. In other words, if you don’t pay your mortgage and default on your loan, your lender can foreclose and seize your home.

And we’re not saying you should run from your creditors, because eventually they’ll catch up to you. But if you are in financial straits and scared sick of losing your house, check your local homestead exemption laws first—you might be safer than you think.

Dollar Homes

Packmatt

Realtor.com quoted me in Buy a House for a Buck? The Real Story Behind $1 Listings. The story reads, in part,

Hidden deep within the bowels of real estate listings are a few head-scratchers that would no doubt catch any bargain hunter’s eye. They’re homes for sale for the grand total of one crisp American dollar. So what’s the deal? Are they for real?

I decided to find out by actually clicking, and calling, and learning the stories behind these tempting facades. And it turns out, $1 listings can mean many things. Here’s what this lowball price is actually all about.

*     *     *

Possibility No. 3: It truly is for sale for $1, but…

The next four places for $1 that I check out are all rundown properties in Detroit. They range in description from “fire damage sold as is” (translation: a charred pile of lumber—pic below) to “bungalow with three bedrooms, one bathroom, basement and much more” (translation: “more” means plywood for windows and doors).

Still, some houses sit on decent lot sizes of 3,000+ square feet in neighborhoods that seem habitable at first glance. The listing agent won’t return my call, but I track down an agent willing to show me the various rundown homes. Though back taxes or liens on the property may jack up the price, I ask whether the house will really sell for $1. “Sure,” he says. “This is Detroit.”

Now that I’ve found a true $1 listing, should I hand over a George Washington for one of these fixer-uppers?

“When a house is being sold for a dollar, it means that the local real estate market has cratered,” says David Reiss, professor of law at Brooklyn Law School who focuses on real estate issues and community development. “Land has no value. Or even worse, it has negative value and buyers of $1 homes will end up getting snookered. Owning land comes with various mandatory expenses like real property taxes. It’s possible the true value is even lower than a dollar. In that case, you will see a lot of $1 houses staying on the market, as hard as that is to believe.”

Reiss further explains how the Motor City’s market cratered so deeply: “Real estate’s value typically comes down to location. If jobs have disappeared, if residents have disappeared, if services have disappeared—then value disappears.”

Beyond having zero worth, a $1 home is likely a gaping money pit. When the New York Times ran a piece on the subject in 2007, it found that “the houses often require hundreds of thousands of dollars in renovations.”

Though my search for $1 properties was a bust in the end, there once were $1 homes worth buying. “Think of New York City,” says Reiss. “Homes that were abandoned in the 1970s are now selling for seven figures.”

Bottom line? One-dollar listings may be a risky gamble, but, hey, you never know.

 

Equitable Subrogation in Mortgage Refinancing

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Professor Freyermuth

I am speaking on Equitable Subrogation in Mortgage Refinancing and Land Purchase Transactions in an ABA Professor’s Corner webinar on Wednesday with Professor Wilson Freyermuth of the University of Missouri School of Law. If this sounds like an esoteric topic, it is!

Subrogation refers to the substitution of one party for another and equitable subrogation refers to the doctrine where a court may use its equitable powers to find an implied assignment of a mortgage in order to avoid the unjust enrichment of a party. Since the commencement of the foreclosure crisis, this doctrine has been put to the test. Wilson and I will take a look at some of the recent cases that do the testing. More info about the webinar is below:

Professors’ Corner

FREE monthly webinar featuring a panel of law professors, addressing topics of interest to practitioners of real estate and trusts/estates. All are welcome and encouraged to register and participate.

Wednesday, December 9, 2015

12:30 p.m. Eastern/11:30 a.m. Central/9:30 a.m. Pacific

Equitable Subrogation in Mortgage Refinancing and Land Purchase Transactions

Speakers:  

David Reiss, Brooklyn Law School

Wilson Freyermuth, University of Missouri School of Law

When a lender makes a mortgage loan to refinance an existing first mortgage, the lender typically expects its refinancing loan to have first priority.  If there is an intervening lien on the mortgaged property, however, a priority dispute may result in which the intervening lienholder argues that the recording statutes give it priority over the refinancing lender’s mortgage lien.

In this situation, the principle of equitable subrogation may apply to allow the refinancing lender to be subrogated to the priority of the paid-off mortgage so as to obtain priority over the intervening lien.  The Restatement (Third) of Property: Mortgages (1997) embraced the liberal application of equitable subrogation in this context.  While many courts have embraced the Restatement approach, not all courts have embraced the Restatement approach (including a recent Delaware Supreme Court decision rejecting the application of equitable subrogation in the refinancing context).

Our speakers will discuss a series of recent decisions (all decided in the 2015 calendar year) addressing the extent to which equitable subrogation is (or should be) available in the mortgage refinancing and land purchase context.

Register for this FREE webinar at http://ambar.org/ProfessorsCorner.

Sponsored by the ABA Real Property, Trust and Estate Law Section, Legal Education and Uniform Laws Group.

LawProfs in MERS Litigation

The Legal Services Center of Harvard Law School (through Max Weinstein et al.); Melanie Leslie, Benjamin N. Cardozo School of Law; Joseph William Singer, Harvard Law School; Rebecca Tushnet, Georgetown University Law Center and I filed an amicus brief  (also on SSRN) in County of Montgomery Recorder v. MERSCorp Inc, et al. (3rd Cir. No. 14-4315). The brief argues,

MERS represents a major departure from and grave disruption of recording practices in counties such as Montgomery County, Pennsylvania, that have traditionally ensured the orderly transfer of real property across the country. Prior to MERS, records of real property interests were public, transparent, and provided a secure foundation upon which the American economy could grow. MERS is a privately run recording system created to reduce costs for large investment banks, the “sell-side” of the mortgage industry, which is largely inaccessible to the public. MERS is recorded as the mortgage holder in traditional county records, as a “nominee” for the holder of the mortgage note. Meanwhile, the promissory note secured by the mortgage is pooled, securitized, and transferred multiple times, but MERS does not require that its members enter these transfers into its database. MERS is a system that is “grafted” onto the traditional recording system and could not exist without it, but it usurps the function of county recorders and eviscerates the system recorders are charged with maintaining.

The MERS system was modeled after the Depository Trust Company (DTC), an institution created to hold corporate and municipal securities, but, unlike the DTC, MERS has no statutory basis, nor is it regulated by the SEC. MERS’s lack of statutory grounding and oversight means that it has neither legal authority nor public accountability. By allowing its members to transfer mortgages from MERS to themselves without any evidence of ownership, MERS dispensed with the traditional requirement that purported assignees prove their relationship to the mortgagee of record with a complete chain of mortgage assignments, in order to foreclose. MERS thereby eliminated the rules that protected the rights of mortgage holders and homeowners. Surveys, government audits, reporting by public media, and court cases from across the country have revealed that MERS’s records are inaccurate, incomplete, and unreliable. Moreover, because MERS does not allow public access to its records, the full extent of its system’s destruction of chains of title and the clarity of entitlements to real property is not yet known.

Electronic and paper recording systems alike can contain errors and inconsistencies. Electronic systems have the potential to increase the accessibility and accuracy of public records, but MERS has not done this. Rather, by making recording of mortgage assignments voluntary, and cloaking its system in secrecy, it has introduced unprecedented and perhaps irreparable levels of opacity, inaccuracy, and incompleteness, wreaking havoc on the local title recording systems that have existed in America since colonial times. (2-3)

Are Billions Enough?

Jenner & Block has issued the Citi Monitorship First Report. By way of background,

The Settlement Agreement resolved potential federal and state legal claims for violations of law in connection with the packaging, marketing, sale, structuring, arrangement, and issuance of residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDOs) between 2006 and 2007. As explained below, in the Settlement Agreement, Citi agreed to pay $4.5 billion to the settling governmental entities, acknowledged a statement of facts attached as Annex 1, and agreed to provide consumer relief that would be valued at $2.5 billion under the valuation principles set forth in Annex 2.2 As part of the Settlement Agreement, [Jenner partner] Thomas J. Perrelli was appointed as independent monitor (Monitor) to determine Citi’s compliance with the consumer relief and corresponding requirements of the Settlement Agreement. This is the first report assessing Citi’s progress toward completion of those obligations. (3, footnote omitted)

Because this is the first report, much of it sets the stage for what is to come. I was, however, struck by the section titled “Impact of Relief Provided:”

To evaluate fully the impact of the relief that is the subject of this report and authorized under the Settlement Agreement would require a variety of activities not contemplated by the settlement and not easily achievable (e.g., interviews with individual homeowners). Isolating the effect of this settlement, the National Mortgage Settlement, and other RMBS settlements from the broader housing market is also difficult.

One question frequently asked is whether the relief provided to borrowers and for which Citi has received credit would have been provided in any event (e.g., is this really additional?) On this question, the answer is mixed. Given ordinary accounting practices, loans for which foreclosure does not make economic sense are frequently written-off by financial institutions. In that circumstance, however, the banks may not release liens as a matter of routine, leaving borrowers with an ongoing burden and impeding potential efforts to redevelop the property. To get credit under the Settlement Agreement, Citi was required to release the lien, thus giving an additional benefit to the homeowner to allow him or her to make a fresh start and to remove any legal obstacles from the transfer of the property. (17, footnote omitted)

As I have noted before, it is hard to truly assess the restorative and retributive impacts of the ten and eleven digit settlements of litigation arising from the financial crisis. Are individuals appropriately helped? Are wrongdoers appropriately punished? Are current actors appropriately deterred?  I find it bizarre that it is so hard to tell even when settlements are measured in the billions of dollars.