Recourse for Unknown Tenants

Question: We recently purchased an investment home in the San Tan Valley for $425,000 cash. When our real estate agent showed us the home, this home had some furniture in the living room and in two of the bedrooms. Our real estate agent said that he thought that was furniture left behind by the last owner. Two days later we signed the purchase contract to buy the home. After escrow closed, and we had the keys, we went to the home with two contractors to start the repairs to the home. To our surprise, there was a family of four living there. They showed us a one-year lease that they had signed with our seller when they had moved in the week before we signed our purchase contract with the seller. Our escrow company said that we have no claim under our title insurance policy because our title insurance policy excluded from coverage a “tenant in possession,” whatever that means. We now will probably lose one year’s rental income. Although we know that we have a fraud claim against the seller, the seller was a “single asset” LLC, i.e., the only asset of this LLC was the investment home that we bought. Is the tenant entitled to stay in the home? If yes, will we have any chance to recover from the LLC seller the one year’s lost rent of more than $20,000?

Answer: First, the tenant is probably entitled to stay in the home for the lease term of one year. In other words, a “tenant in possession” of a home at the time of a purchase contract to a buyer has the right to enforce the lease, even if the lease was not recorded. Any potential buyer of a home with a tenant living in the home with furniture, etc., is required to discover the terms of the tenant’s lease, primarily, the length of the lease and any option to renew. Therefore, you probably have no defense to the tenant’s one-year lease. Second, you should demand that your seller assign the lease and the monthly rent payments to you. Third, if your seller refuses to assign the lease and monthly rent payments to you, you probably have a claim for fraud. Although an owner of an LLC is generally protected from personal liability for the wrongful acts of an LLC, there is an exception if the owner of an LLC commits fraud, e.g., selling the home to you without disclosing to you the existing one-year lease. You should be able to get a personal money judgment for fraud against the owner of the LLC for the loss of the rental income for one year. Finally, you should have the right to get a court order “garnishing” the monthly rent payments from the tenant to be paid to you, and not to the owner of the LLC.

Note: A buyer’s title insurance policy generally excludes any liability of the title insurance company for “a tenant in possession.”