Foreclosing on Tenant-Occupied Properties

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I’ve received a lot of questions about tenants and what it means to foreclose on a property that has a tenant in it.

Do you have to rollover and accept whatever the existing lease is for the property? Can you be stuck with an occupied home and a troublesome tenant forever?

No, but you NEED to understand what having a tenant (or more importantly a lease) means on your exit strategy.

This summer President Obama signed into law the “Helping Families Save Their Homes Act of 2009” which includes provisions protecting tenants whom reside in a property that has been foreclosed upon.

The effect of all of this is that a foreclosing party (wake up! This means you!), must take the property subject to the rights of a bona fide tenant. I’ll get into what a “bona fide tenant” means – and no, it’s not what my law school professor used to call a “boner fides”!

According to this new law – you’re stuck with a 90-day notification requirement, at a minimum, prior to beginning an eviction action.

A bona fide tenant living in a property without a lease or on a month-to-month lease – and regardless of the State the property is located in, must be given 90 days notice prior to the effective date of the eviction. In the case there is a lease that was entered into before the foreclosure notice (e.g. a Notice of Default or a Lis Pendens); the lease governs a tenant’s occupancy rights.

In other words, if you foreclose on a tenant-occupied property and the tenant had a lease signed prior to your foreclosure notice, you are bound by the terms of the lease.

There is one saving grace!

The one exception where a lease will not govern is if the purchaser intends to occupy the premises as his/her primary residence. However, primary occupancy still requires a purchaser to provide a tenant with 90 days notice prior to eviction.
Furthermore, the Act also includes a provision stating that any State or local law providing for longer notice time periods or other additional protections for tenants shall trump the new Federal law.

A tenant qualified as a “bona fide” tenant if they meet ALL of the following criteria:

1) They are not the mortgagor or the child, spouse or parent of the mortgagor;
2) The lease/tenancy was the result of an arm’s length transaction; and
3) The rent is not substantially lower than the fair market rent.

What does “substantially lower” mean?

The Act doesn’t answer this question. In fact, it isn’t clear if market rate is determined at the time the lease was signed or at the time of the foreclosure sale. Say someone signed a lease in early 2007, and a foreclosure sale took place in late 2009 – there could be a significant difference in the rental rates!

There’s another question here: if your tenant doesn’t pay their rent – or if they didn’t pay the rent before the foreclosure, do you still have to give them 90 days’ notice?

Once again, the Act is silent on this.

There’s an interesting title-related question that’s being raised now due to the Act: will title companies that insure property require an exception for the rights of tenants pursuant to the Act’s notice requirements?

And in a related question, if title companies require an exception for notice requirements, will they be willing to delete the exception once the notice requirements have been met?

In conclusion, the Act severely affects the rights and increases the burdens of foreclosing lenders. For example, if a lender forecloses on a property in which a tenant has entered a one year lease a few days prior to the foreclosure notice, the lender (or any subsequent purchaser) will be required to honor that lease for its term.

As a result, the lender may not only become a landlord, but if the tenant happens to be a complete deadbeat who has trashed the property, for example, the lender/landlord may be stuck with them for an extra 90 days (or possibly longer) before they can start the eviction process.

NOTE: The information presented in this blog is for informational purposes only, and should not be construed as legal advice. There is no intent to create an attorney-client privilege or relationship by reading this email and/or blog update.