Foreclosing On A Residential Tenant
by Valerie L. Marciano & Janessa E. Koenig
Today's unstable economy has prompted Congress to make an
extraordinary change in the law relating to residential real
estate. The change may have been intended to address the
situation where an unscrupulous landlord leases a residence to an
unwitting tenant who prepays rent to the landlord, only to then be
ousted from the premises when the lender completes the foreclosure
the tenant knows nothing about. Before the change in the law,
typically, a lender foreclosing upon a residence that was being
leased to a third party was entitled to remove the tenant upon
completion of the foreclosure. Upon completion of the
foreclosure, the new owner of the property would make a demand upon
the tenant and if the tenant did not move out, a forcible detainer
action was filed to forcibly remove the tenant. However, with
the change in the law, immediate removal of the tenant following
the foreclosure is no longer permitted.
The law "Protecting Tenants at Foreclosure Act of 2009" (i)
requires additional written notification to the tenant of the
foreclosure and the right to remove the tenant from the property,
(ii) gives the tenant a longer time frame to vacate the property,
and (iii) and in some instances, allows the tenant to occupy the
property until the end of the lease, even after the foreclosure is
completed. Specifically, in order to remove a tenant, a
written notice to vacate will need to be issued to the tenant at
least 90 days before the effective date for removing the
tenant. Moreover, if the lease is entered into before the
notice of foreclosure is issued, the tenant may be able to occupy
the property until the end of the remaining term of the lease,
unless the party purchasing the property at the foreclosure sale
will be occupying the property as a primary residence.
To be entitled to the benefit of the new law, the lease or the
tenant will need to be "bona fide". A lease or a tenancy will
be considered "bona fide" only if:
- the mortgagor, or the child, spouse, or parent of the mortgagor
under the lease is not the tenant;
- the lease or tenancy is the result of an arms-length
transaction; and
- the rent is not substantially less than fair market rent for
the property or the rent is reduced or subsidized due to a Federal,
State, or local subsidy.
The change will give the tenant some breathing room before being
removed from the property following a foreclosure. However,
the change will increase the costs of a foreclosure. The
lender foreclosing the property will need to conduct additional due
diligence to determine who is occupying the property. Also,
the change will most likely create a "chilling effect" on potential
purchasers of foreclosed properties, particularly those people who
are interested in the foreclosed properties as an investment, and
who have no intention of actually living in the residences.
The change may also increase the disputes concerning the right
to occupy the residence following the foreclosure. The
obvious disputes will involve whether the rent paid by the tenant
is "fair market rent", and whether the lease is truly an
"arms-length transaction". The law also does not specifically
state that the rent under the lease or tenancy cannot be pre-paid,
which raises a concern that the tenant could pre-pay some or all of
the rent to the previous owner, (before the foreclosure is
completed), leaving the new owner with a tenant who is not paying
rent.
The new owner will be faced with other questions. Will the
new owner be stuck with the lease terms? How will the new
owner get the tenant to pay rent? Will the new owner be
entitled to a copy of the lease? Will the new owner be bound
by all of the terms of the lease? Can the new owner evict the
tenant for non-payment of rent? All of those questions will
be a breeding ground for litigious tenants. Thus, while the
intended result of the legislation is laudable because of Congress'
apparent desire to help tenants during these turbulent economic
times, the legislation may further curtail the flow of commerce in
the real estate industry.