Historically, the rights of residential tenants ended as soon as the foreclosure occurred. In many cases, the tenants did not even know their home was in danger until they were forced to move out without notice by the new owner. Because of the record number of foreclosures in 2007, 2008 and 2009, and because some 40 per cent of foreclosed homes were occupied by tenants, both state and federal law changed in mid-2009 to offer those tenants at least some protections in foreclosures.
What protections does the federal law provide?
Federal law now requires “foreclosers” — the lender who is trying to recover its loan to the former owner — to give a minimum of 90 days notice to move to most tenants. The federal statute allows tenants with term leases to finish out the term, with some exceptions. Even then, the tenants are entitled to receive 90 days’ written notice before they are required to move out. The federal protections do not apply in all cases, however. And the law will no longer be in effect after Dec. 31, 2012.
To have the protection of the federal law, tenants must be “bona fide” tenants. They can’t be the mortgagor (the person who has lost the property to foreclosure) or a member of that person’s family. They must have become tenants in an “arm’s-length” transaction. And the rent amount (including housing authority or other government subsidies) must be reasonably close to market rent.
Which term leases does federal law protect?
The forecloser does not have to honor a term lease if it sells the property to a new owner who will live in the home. In this circumstance, the forecloser must only give the tenant 90 days’ written notice even if the lease does not end by that time. The tenant with a term lease can remain in the home only if he or she can prove that the new owner does not plan to move into the property — a difficult challenge.
Protection of the term lease is somewhat stronger for tenants who live in housing authority-administered “Section 8” rentals: The existing lease from the prior landlord must be honored unless the forecloser intends to use the home as his or her primary residence and gives the tenants 90 days’ written notice.
Do tenants have to keep paying rent after they receive their 90-day notice to move?
Yes. Tenants continue to have the same duties as before. They can be evicted for cause under the regular provisions of landlord-tenant law.
To whom should tenants pay rent after foreclosure?
The forecloser or new owner is entitled to receive the rent money. In most cases, the forecloser or new owner will notify the tenant whom to pay. If the tenant is uncertain about who is entitled to the rent money, he or she can check circuit court records to see who the current owner is.
It is not unheard-of for a former landlord to continue demanding payments even when that person no longer has a right to the money.
Under federal law, what can tenants do if the forecloser tries to force them out of their rented homes in violation of the law?
Anyone who wants tenants out of a rental unit must get permission from a court to do so. Tenants are entitled to get formal notice of any court action. They should get legal advice immediately if they receive court papers, because a hearing will be scheduled very quickly.
A tenant in good standing will have to show that he or she did not receive the proper notice prior to the forecloser or new owner’s attempt to evict. In the case of a term lease that a new owner wants to terminate early, the tenant may have to show that the new owner does not intend to live in the home.
Even if the foreclosing lender does not file a court case to evict the tenant, some banks have been reported to be pressuring or harassing tenants to move before the 90-day notice period ends. The misconduct has included changing locks, shutting off utilities, refusing to honor term leases and misrepresenting tenant rights. Tenants should report this improper conduct to the federal Office of the Comptroller of Currency (OCC), which is responsible for regulating most banks. Tenants also should get legal advice and assistance immediately so they can get back into their homes.
How does a tenant file a complaint with the OCC?
The OCC complaint process is online only, at the OCC’s website, https://appsec.helpwithmybank.gov/olcc_form/.
Note that filing such a complaint is not enough if the tenant wants to protect his or her right to remain in the home. The tenant should get legal advice quickly.
When a tenant moves out after foreclosure, what happens to the security deposit the tenant paid to the former owner?
Federal law does not give the tenant the right to get back from the forecloser or new owner a security deposit or any prepaid rent that the tenant paid to the foreclosed mortgagor. The tenant may wish to sue the former owner in small claims court to try to get the money back. The former owner may not be able to repay those amounts if he or she is in bad financial straits.
What protections do tenants have under state law in case of foreclosure?
While federal law provides some protections to residential tenants against both foreclosing lenders and purchasers, state law focuses on tenants’ rights against immediate eviction by purchasers only. The tenants must take steps to secure those rights before the foreclosure occurs.
When a foreclosure is pending, both the owner and anyone living in the rental are entitled to get written notice of the pending sale. The tenant must provide proof of the tenancy to the trustee responsible for the sale, at least 30 days before the proposed date of sale. If the tenant does not provide proof, he or she will not get the benefit of the new law.
For a tenant with a fixed-term lease, the proof is the lease itself. For month-to-month or week-to-week tenants, the written rental agreement can serve as proof and so can other proof of tenancy, such as rent receipts, cancelled rent checks or other evidence.
Once the tenant has notice of the pending foreclosure, the tenant can apply any deposits paid, including “last month’s” rent, to future rent as it becomes due to the landlord. The tenant must notify the landlord in writing of this plan at or before the time the next rent is due.
For the protections of state law to apply to the tenant, the landlord must have entered into the rental agreement in good faith. Note that the definition of good faith is different from that under federal law. Under state law, a landlord who enters into a month-to-month or week-to-week rental agreement with a residential tenant is presumably acting in bad faith if the landlord has already received notice of the pending foreclosure. The landlord and the tenant may be able to overcome this presumption. If the landlord has entered into a term lease after learning of the foreclosure, however, the law is conclusive that the landlord made the agreement in bad faith.
This situation can be bad news for a tenant who innocently started renting from such a landlord without notice of the foreclosure. It is not uncommon for a landlord facing foreclosure to rent the unit just to have some money coming in while the foreclosure goes through.
What does the purchaser have to do to get a residential renter to move?
In the case of a fixed-term lease, the purchaser must give a termination notice at least 60 days before the end of the fixed term — if the tenant gave the trustee a copy of the rental agreement at least 30 days before the sale. There is an exception to this protection; if the purchaser intends to make the unit his or her primary residence, only 30 days’ notice is needed. The notice takes effect three days after it is mailed.
For a week-to-week or month-to-month tenant who has given timely proof of tenancy to the trustee before the foreclosure, the purchaser must give 30 days’ notice of the intent to terminate the tenancy.
Who is responsible for maintenance and repair of the rental after the purchase?
If the purchaser does not intend to be the landlord of the existing tenant, the purchaser has no responsibility for damage to the property or for any loss of rental value. The purchaser who does become the landlord is liable only for damage after the purchase, and for any security deposit the purchaser collected from the tenant.
How does the purchaser become the landlord?
The purchaser becomes the landlord intentionally by entering into a rental agreement or by accepting rent. The purchaser can also become the landlord by failing to send a notice of termination of tenancy to the residential tenant within 30 days after the date of the purchase.
If federal and state laws conflict, which one applies?
Federal law states that the law that provides greater protection to the tenant is the law that the parties must follow.
Legal editor: Janay Haas, November 2009