If the owner is going to do a short sale, it means that they could also find themselves in a foreclosure. Either way, it is never fun living under that kind of uncertainty. The landlord's offer to change the terms of the lease does not immediately void the original lease; your rights are still there. If you choose to vacate, make sure everything is in writing, including how last month's rent and security deposits are going to be handled.
You can look at this as a negative or a positive. On the down side, you might have real estate agents looking in your closets whether you like it or not, and the house could sell rather quickly. You could find yourself dealing with a new landlord that is less agreeable.
On the plus side, you can accept and take him up on a month to month contract with a reduced rent. Arguably, they are being kind enough to give you warning of what is coming - you have time to decide that you would rather relocate now then deal with the uncertainty that comes with short sales. I would negotiate for a VERY reduced payment.
Douglas Edmunds is in the business of helping people and companies file for bankruptcy protection. The bankruptcy code requires that I call my firm a "debt relief agency." Any answers or information provided is for general information purposes only and is not intended to be a legal opinion, legal advice or a complete discussion of the legal issues. This is not intended to create a attorney-client relationship. Each individual's situation is different and you should seek independent legal advice from an attorney familiar with the laws of your state for specific information.
In addition to the guidance offered in the preceding response, keep in mind that there are Federal laws in place to protect you and the current lease you have should your landlord end up losing the home in foreclosure, laws that, for the most part, will allow you to continue with your existing lease as-is. I raise this because the law requires that "the tenant not be paying substantially less than fair market value". So, while it would be great to have a lower rent, if it's too low and the landlord's ownership interest is foreclosed, you may end up getting kicked out.
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I agree with the previous answers in that the original lease is valid until a new lease is negotiated and entered, but if the landlord is offering you the opportunity to move now and you want out you can accept that offer. If you enter into a new lease agreement to allow the showing of the property you can get some consideration in the rental rate due to the inconvenience to you but as the previous answer states to have any protection to remain in the home after a foreclosure the rental rate must be a fair market rate (or at least close). I would be concerned about a month to month lease agreement as the new owner after foreclosure could get terminate the tenancy much easier on a month to month agreement, but that is going to be your decision based on what is best for you. Good luck.
This information is provided for general informational purposes and is not intended as legal advice. An attorney licensed in your jurisdiction can answer questions specific to your specific fact situation and provide you appropriate advice as necessary based on the specific facts of your matter and the jurisdiction in which you reside.