New Law Protects Tenants When Landlords Are Facing Foreclosure
Until very recently, the law offered little protection to a tenant whose landlord lost the rental property in foreclosure. In most cases, courts held that a lease that was made after the landlord's mortgage was recorded was terminated in foreclosure. Long-term tenants could be evicted, sometimes with short notice. Landlords who lose properties in foreclosure have a less-than-stellar record for returning security deposits and may be judgment proof.
But that changed on May 25, 2009, when President Obama signed the Protecting Tenants at Foreclosure Act (PTFA). The PTFA doesn't solve all of the problems faced by tenants in foreclosures, but it does provide, nationwide, the following protections under specified circumstances:
- It applies to residential properties. The statute uses terms like “dwelling,” “residential real property,” and “designed principally for the occupancy of . . . families” to describe the sorts of properties to which it applies. In other words, it doesn't apply to commercial leases.
- It only applies to bona fide leases. The statute also makes clear that the lease has to be a serious one. Landlords can't avoid foreclosure by leasing the property to themselves or a child, spouse, or parent. And they can't help their friends out with sweetheart leases. It only applies to leases made “at arms-length.”
- Some kinds of leases could be excluded. As mentioned, the statute does not apply to leases that weren't made at arms' length. Definitions of the term “arms-length” vary, but many standards exclude transactions between family members (those are already excluded, as mentioned above), business associates, and even employee and employer. The statute also excludes from coverage leases that call for rent that is “substantially less than fair market rent for the property,” unless the lease is part of a local, state or federal subsidy program. If you've got cheap rent, it could be a disadvantage.
- A notice to vacate isn't effective for at least 90 days. This buys every tenant at least three months to relocate, and it expands the minimum notice period in most jurisdictions. It was as short as 3 days in some places because tenants without leases are treated as “holdover tenants” or “tenants at sufferance” by most states.
- The bank has to honor your lease, but does not have to renew it. Under the statute, the new owner takes a foreclosed property subject to existing bona fide leases until the end of the current term. You've got no automatic right to renew your lease under the statute.
- Your lease terminates once the bank sells the property to someone who will live there. Even if you had 11 months left on your lease, the new owner can foreclose and sell it out from under you, but only if they sell it to someone who wants to occupy the place as their principal residence. If they do that, they must give you 90 days' notice of the termination.
- If you don't have a lease, you still get 90 days to move. If you have a tenancy that is terminable at will or no formal lease at all, the new owner must give you 90 days notice to leave the property.
- The statute doesn't clarify the security deposit question. The statute doesn't expressly make the new owner responsible for your security deposit or offer any additional remedies against your old landlord.
- It's only effective until December 31, 2012. The statute has a sunset provision and automatically expires on December 31, 2012.