Local Laws Vary
Local law varies on important issues like whether the tenant gets notice of the foreclosure proceedings and whether the tenant must be made a party to a foreclosure lawsuit, so the foreclosure might come as a sudden surprise to some tenants. Moreover, a landlord who is facing foreclosure might become unresponsive to tenant concerns or stop maintaining the property.
Tenant’s Right to “Quiet Enjoyment”
Tenants who get evicted have a few remedies against their former landlords. For one thing, they can sue for breach of the lease agreement. Landlords are contractually required to provide the tenant access to the apartment or house for the term of the lease. This is often called “quiet enjoyment.” Subjecting the property to foreclosure is a clear breach of the landlord’s obligation to provide the tenant with quiet enjoyment. Some landlords include a clause in their leases in which they attempt to limit the landlord’s liability in cases where the landlord can’t provide “quiet enjoyment” of the property. These clauses usually say that the tenant cannot recover damages, but will not be responsible for rent. It is not clear whether a court would permit a tenant to recover damages in spite of such a clause in a case where the tenant has been displaced by foreclosure.
Claiming Damages from the Landlord for Fraud
Under some circumstances, the tenant might be able to recover against the landlord for fraud. If the tenant could show that the landlord knew that foreclosure was looming, and entered into the lease without disclosing that fact, a court might award the tenant damages for fraud. While a suit for fraud is tempting, the tenant would have to prove that the landlord knew or should have known that foreclosure was likely, which might be difficult.
Cost to Tenant in Pursuing Landlord
Of course, there’s a practical problem with tenants suing landlords who have just gone through foreclosure: Many of them are broke. A trip to court might net the tenant a judgment, but court isn’t free. The tenant will spend money and time getting the judgment only to discover that the landlord doesn’t have any assets from which to collect it—or see the judgment discharged in bankruptcy.
Tenant Should Continue To Make Rental Payments
A tenant who discovers that the landlord is in foreclosure should continue to make rental payments. Until the foreclosure is complete, the landlord still holds the property and the tenant still owes rent and is bound by the lease. Failure to pay rent will make eviction easier for the landlord or the lender later on. In most cases, a tenant may not choose to move out of the property, because a lease will remain in force during the foreclosure process. To complicate matters further, in some cases the lender may have what’s called an assignment of rents and leases, which entitles the lender to begin collecting rent and enforcing the lease during the foreclosure. If the tenant moves out or stops paying rent in a case like that, the landlord or lender can sue for damages.
Contact the Lender
Instead of acting unilaterally by withholding rent or moving out, tenants should contact the foreclosing lender and see what they can negotiate. Some foreclosing lenders offer “cash for keys.” These programs encourage tenants to move out quickly in exchange for money, and can be a bad deal for the tenant. Many are made to tenants who can’t be evicted, or can’t be evicted quickly. Obviously, tenants should seek what is best for them, which could include a new lease, or arrangements for a friendly termination of the current one.
In certain situations and in particular where the case against the landlord appears strong, a tenant may be wise to consult an attorney who specializes in landlord-tenant law.