Foreclosure & Alternatives Law
If a homeowner defaults on their mortgage the lender usually forecloses on the home and the homeowner loses it. What happens to the renters who pay their rent every month but live in homes whose owner has not been paying the mortgage?
If you are a renter in a home or apartment building that is being foreclosed upon you are likely to be evicted. The lender who holds the mortgage, or the new owner, may try to evict you.
If you have a lease how can that lease be thrown out? It’s a contract; shouldn’t the new owner be required to fulfill the contract? Each state may vary but it is likely your lease can be canceled for two reasons. The first may be due to a clause in most leases that cancels it in the event of a foreclosure. The second is a part of property law called “first in time is first in right.” That means that if you rent a residence which is subject to a mortgage, the mortgage holder’s interest in the property is senior to your interest because it was entered into first.
But there is good news for renters! Before President Obama signed the “Protecting Tenants at Foreclosure Act of 2009,” most renters lost their leases upon foreclosure. But this legislation provided that leases would survive a foreclosure. The tenant could stay at least until the end of the lease, and month-to-month tenants would be entitled to 90 days' notice before having to move out. This notice period is longer than any state's non-foreclosure notice period, which really helps tenants caught in a foreclosed home.
An exception was carved out for the buyer who intends to live on the property — this buyer may terminate a lease with 90 days' notice. Importantly, the law provides that any state legislation that is more generous to tenants will not be preempted by the federal law. These protections apply to Section 8 tenants, too. Importantly, tenants who live in cities with rent control “just cause” eviction protection are also protected from terminations at the hands of an acquiring bank or new owner. These tenants can rely on their ordinance's list of allowable, or “just causes,” for termination. Because a change of ownership, without more, does not justify a termination, the fact that the change occurred through foreclosure will not justify a termination.
Apartment building owners are usually required by their lender to include the foreclosure clause in their leases. Lenders require this clause because it helps protect from an unnecessary risk. If a building is foreclosed on, the lender must sell it to recoup the loan. Lenders believe that at a foreclosure sale an empty building will sell for more than one that is occupied by tenants. If the value of a foreclosed property drops it may hinder the restorative effect a foreclosure is supposed to provide. This may leave the borrower “under water,” still owing even though the property has been sold.
Because many tenants of foreclosed buildings are helpless during a foreclosure, some new legal protections were put in place. Under the Protecting Tenants in Foreclosure Act of 2009, tenants living in foreclosed properties are entitled to a minimum of 90 days notice before eviction. In some cases, if the tenant has a binding lease for the property, then the tenant may be able to stay until the lease ends. However, if the new owner of a foreclosed property intends to live in it as their primary residence, then the full lease term does not have to be honored, in which case the tenant will still be entitled to the 90 days notice to vacate.