How Home Foreclosure Affects a Renter

When landlords lose their properties to foreclosure, tenants are usually not able to stay in their homes, but must face eviction and quickly find new housing. Sometimes owners can't meet their mortgage payments and banks sell or repossess their properties. Renters must rely on federal legislation and any additional state protection to keep their leases. 

State Laws Vary

State laws vary on notice to tenants of prospective foreclosure proceedings. So, the foreclosure might come as a sudden surprise to some tenants. Moreover, landlords facing foreclosure might become unresponsive to tenant concerns or stop maintaining the property.

Tenant’s Right to “Quiet Enjoyment”

Tenants who get evicted might consider filing lawsuits against their former landlords. Landlords are contractually required to provide their tenants access to the apartments or houses for the term of the lease. This is often called “quiet enjoyment.” Subjecting a property to foreclosure from defaulting on a mortgage is a clear breach of the landlord’s obligation to provide the tenant with quiet enjoyment and ground for damages for breach of contract. 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 the landlord knew that foreclosure was imminent, 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 must prove that the landlord knew or should have known that foreclosure was likely. This can be a very difficult task for the distraught tenant. 

Cost to Tenant in Pursuing Landlord

Of course, there’s a practical problem with tenants suing defaulting owners who have just gone through foreclosure. Many of them are broke. The tenant will spend money and time getting a court judgment against the former landlord only to discover the landlord doesn’t have any assets from which to collect it. The tenant paid court costs and even if issued an award, could 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 the 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 cannot simply choose to move out of the property. The lease remains 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 that situation, the landlord or lender can sue for damages.

Contact the Lender

Instead of acting unilaterally by withholding rent or moving out, tenants should attempt to contact the foreclosing lender and see if negotiation is possible. Some foreclosing lenders offer “cash for keys.” These programs encourage tenants to move out quickly in exchange for money. A cash payout is often made to tenants who cannot easily be evicted. 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. So the quick cash out might not be the best answer.

Federal Legislation

Federal legislation offers some tenant protection. Under 2009 legislation (Mortgage Reform and Anti-Predatory Lending Act), tenants can stay on their properties at least until the end of their present leases. Month-to-month tenants must receive at least 90 days notice before being forced out. Section 8 tenants are also covered by this new law. 

When faced with eviction after foreclosure, tenants may be wise to consult an attorney specializing in landlord-tenant law.