Historically, the rights of tenants living in homes that were being foreclosed ended as soon as the foreclosure occurred. In many cases, the renters would not even know their home was in danger of foreclosure until after the foreclosure was completed, when they were forced to move out without notice. Because of the record number of foreclosures in the mid-2000's, and because some 40 percent of foreclosed homes were occupied by tenants, both state and federal laws changed in mid-2009 to offer tenants at least some protections in foreclosures. Tenants now have protections during and after foreclosure of a rental home.
What protections does the law provide tenants during foreclosure?
Notice of pending foreclosure action
In nonjudicial foreclosure proceedings, state law requires that a tenant living in a home or apartment that is being foreclosed be notified at the beginning of the foreclosure action, at least 120 days before the foreclosure sale date. The notice must contain certain information about tenants' rights during and after foreclosure. There is no similar specific notice requirement for tenants regarding a judicial foreclosure action; however, 28 days' notice of a judicial foreclosure sale must be provided to any person with an interest in the property.
Landlord-tenant law applies during the foreclosure
During any foreclosure proceeding, landlord-tenant law still applies. The tenant must continue to pay rent, in most cases to the original landlord. In some cases, the home loan agreement gives the lender the right to collect rent from the tenants if the landlord misses mortgage payments. Except in rare cases, the only person who has the right to evict the tenant during the foreclosure process is the landlord.
Special rules on security deposits and prepaid rent
When a property is in any type of foreclosure, the tenant has the right to apply any security deposit or prepaid rent towards current or future rent. The tenant must notify the landlord in writing when doing this. If the landlord later provides written evidence that the property is no longer in foreclosure, the landlord may require restoration of the security deposit or prepaid rent, with 2 months' notice.
Special rule on early termination of fixed term lease:
Effective Jan. 1, 2014, when a property is in any type of foreclosure, a tenant with a fixed term tenancy may give 60 days' notice of termination without having to pay a fee for breaking the lease early. If the landlord does not provide evidence that the property is not in foreclosure within 30 days of receiving the termination notice, the lease is terminated.
What protections does the law provide after foreclosure?
Notice of new ownership after foreclosure sale
Notice of new ownership must be provided within 30 days after any foreclosure sale date. The notice must be posted on the property. After a nonjudicial foreclosure sale, the notice must contain information about tenants' rights to notice prior to eviction and information about where to get legal and other assistance. The notice required after a judicial foreclosure sale does not contain information specific to tenants.
Notice required prior to eviction by the new owner
Federal law requires the "forecloser" — the lender that is trying to recover its mortgage loan to the landlord — to give at least 90 days' notice after any foreclosure is finalized before the tenant can be required to move out. The law provides extra protection to tenants with fixed-term leases; they may finish out the full length of their lease term, unless the new owner after the foreclosure sale plans to live in the home as a primary residence. These protections apply to both judicial and nonjudicial foreclosures, and are in effect until Dec. 31, 2014. After that date, the federal law will expire unless renewed. State law will continue to provide 60 days' notice to tenants with fixed-term leases and 30 days' notice to other tenants, in nonjudicial foreclosure proceedings.
Which tenants qualify for protections after foreclosure?
Tenants qualify for the notice and eviction protections so long as they were "bona fide" tenants before the date of the foreclosure sale. In order to be "bona fide" tenants, they can't be the mortgagor (the person who has lost the property to foreclosure) or the child/spouse/parent of the mortgagor. 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. Tenants with Section 8 vouchers or living in public housing qualify for the protections, so long as they are "bona-fide" tenants.
Do tenants have to keep paying rent after the foreclosure sale?
Yes. If the new purchaser demands rent, tenants should pay rent. If the new purchaser demands rent, the purchaser becomes a landlord, and will have the duties of a landlord during the remainder of the notice period. Tenants will then have the same rights and responsibilities regarding the property and the landlord that they had previously. The regular provisions of landlord-tenant law will then apply to both sides.
The tenant must pay rent if it is demanded even if the purchaser gives a 90-day notice of eviction at the same time. The forecloser or new owner is required to provide the tenant with a notice of new ownership within 30 days of the sale date; this notice should provide information about where to pay rent, if rent is demanded.
What process must be followed to evict a tenant after a foreclosure sale?
Anyone who wants to evict a tenant from a rental unit must get permission from a court. The new owner of the property after a foreclosure sale cannot change the locks or force a tenant to leave without a court order. Tenants are entitled to get formal notice of any court action against them. They should get legal advice immediately if they receive court papers, because a hearing will be scheduled very quickly.
A new owner wishing to evict a bona fide tenant will have to show that proper notice was provided before an eviction action can proceed. Improper notice is a defense to a tenant in an eviction proceeding.
What can tenants do if the forecloser does not follow the law?
If a forecloser or a new purchaser after a foreclosure sale attempts to evict a tenant, change locks, or shut off utilities without following the law, tenants should get legal advice immediately. Tenants may also report improper conduct by banks or servicers to the federal Office of the Comptroller of Currency (OCC).The OCC complaint process is online only, at the OCC's website, https://appsec.helpwithmybank.gov/olcc_form. A complaint may also be filed at: http://www.federalreserveconsumerhelp.gov/ Note that filing 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.
What if the new owner offers the tenant cash to move out early, before the protected time period?
So long as the new owner is not misrepresenting the tenants' rights, it is legal to offer a tenant cash if the tenant will agree to move out before the end of the required notice period. The parties should be careful in negotiating the terms of any "cash for keys" agreement to be sure they are fair. The amount of cash offered should be commensurate with the rights the tenant is being asked to give up. It is advisable for the agreement to be in writing, and tenants may want to seek legal advice in reviewing and before accepting any offer.
Does the new purchaser become the landlord?
Maybe. The purchaser becomes the landlord intentionally by entering into a rental agreement or by accepting rent. After a nonjudicial foreclosure proceeding, 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.
Who is responsible for maintenance and repair of the rental after the purchase?
Unless the new owner accepts rent or otherwise becomes the landlord, the new owner has no responsibility to the tenant for repair and upkeep of the property or for any loss of rental value. The purchaser after a nonjudicial foreclosure sale who does become the landlord is liable only for damage, upkeep and repair after the purchase date, and for any new security deposit the purchaser collected from the tenant after the purchase date.
May the new purchaser ever give less than 90 days' notice to evict a tenant after foreclosure?
In some circumstances. If the purchaser becomes the new landlord, then the rental agreement applies and the tenant may be evicted for nonpayment of rent or other violation of the agreement as under ordinary landlord-tenant law. However, the landlord cannot give a no-cause notice less than 90 days in advance, and must allow a fixed-term tenant to stay through the length of the term. If the purchaser does not become the landlord, the right to evict the tenant is very limited. If the tenant behaves outrageously, the new purchaser may evict the tenant with 24 hours' notice. Otherwise, at least 90 days' notice is required.
When a tenant moves out after foreclosure, what happens to the security deposit or prepaid rent the tenant paid to the former owner?
The tenant does not have the right to make the new owner pay back a security deposit or any prepaid rent that the tenant paid to the former landlord. The tenant may wish to sue the former owner in small claims court to try to get the money back. Note that the former owner may not be able to repay those amounts if he or she is in bad financial straits. This is why the law gives the tenant the right to apply any deposit or rent prepaid against any current or future rent owed the landlord while the foreclosure proceeding is still pending.
Legal editor: Sybil Hebb, September 2013