By Chris Qualmann
Check out the "SIGN" to the left ... pretty ridiculous, isn't it! Who in their right mind would EVER rent a property knowing they'll be immediately evicted once the property's "foreclosed"? Talk about NOT having "peace of mind" ... or, the right to "quiet enjoyment" of one's rented apartment, condo or house, as a renter normally expects!
Unfortunately, this particular "sign" is very, very real ... and a chilling "sign of the times" where tenants of rental property sometimes find themselves "out on the street" because, unbeknownst to them, their landlord stopped making mortgage payments.
Fortunately, the GOOD news is that renters whose landlords have lost their
properties through foreclosure have important rights under a Federal law
enacted in 2009 known as the “Protecting Tenants at Foreclosure Act” (“PTFA”). However, most renters are not aware of their rights and remedies under PTFA, and currently there are no laws or regulations requiring landlords to make tenants aware of these rights.
Renters and tenants are now being affected by foreclosures
almost as often as homeowners. The mortgage industry crisis that started in 2006
has resulted in thousands -- no, make that millions -- of foreclosed homes.
Most of the occupants are the homeowners themselves, who must scramble to find
alternate housing with very little notice. They're being joined by scores of
renters who discover, often with no warning, that their rented house or
apartment is now owned by a bank, which wants them out.
Who Are the Renters?
Renters who lose their homes to foreclosures don't fit a
single profile. Many of them live in smaller buildings, condos, and
single-family homes. They're located in cities and surrounding suburbs, in
low-income and upscale neighborhoods. In short, foreclosed homes are
everywhere, and they're rented by people with widely varying incomes, including
some with "Section 8" (federal housing assistance) vouchers.
Who Are the Defaulting Owners?
The typical foreclosed home may have originally been owner-occupied,
but more often it's owned by investors and speculators who were hoping to
profit from the rents. Caught between the slump in housing values and the rise
of mortgage interest rates, these owners could not feasibly sell or extract
enough rent to cover their monthly costs. In droves, they lost their
investments.
Who Are the "New" Landlords?
When an owner defaults on a mortgage, the mortgage holder,
often a bank, either becomes the new owner or sells the property at a public
sale. If the bank becomes the owner, it may pay a servicing company to handle
the property. But don't expect close attention -- these companies are focused
on financial matters, not mundane things like maintenance.
Some renters find themselves with a new owner even before
the foreclosure. Lawyers in Massachusetts, for example, contend that many new
rental property owners are investment trusts that specialize in purchasing
troubled loans directly from banks, then foreclosing, evicting, and selling.
"New Owners" Means No Maintenance
Many tenants have no idea that their building has been taken
at foreclosure. They continue to pay rent to the former owner, who often
pockets the money but is hardly inclined to maintain the building it no longer
owns. In the meantime, the new owners simply refuse to be landlords, never
making repairs or even paying utility bills. Because the banks are stuck with
increasing numbers of foreclosed properties that they can't sell, they remain
non-landlords for some time, making life impossible for their tenants until
those tenants are evicted.
BUT ... Renters in Foreclosed Properties No Longer Lose Their Leases
Before May 20, 2009, most renters lost their leases upon
foreclosure. The rule in most states was that if the mortgage was recorded
before the lease was signed, a foreclosure wiped out the lease (this rule is
known as "first in time, first in right"). Because most leases last
no longer than a year, it was all too common for the mortgage to predate the
lease and destroy it upon foreclosure.
The “Old Rules”
changed DRAMATICALLY on May 20, 2009 when President Obama signed the
"Protecting Tenants at Foreclosure Act”.
This legislation provided that leases would survive a
foreclosure -- meaning the tenant could stay at least until the end of the
lease, and that even 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, a real boon to tenants).
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.
Does It Make Sense for "New Owners" to Evict Tenants?
New owners may want to terminate existing tenants because
they believe that vacant properties are easier to sell. Common sense suggests
otherwise. In many situations a building full of stable, rent-paying tenants
will be more valuable (and command a higher price) than an empty building.
Emptied buildings are also prone to vandalism and other deterioration -- after
all, no one is on site to monitor their condition. When entire neighborhoods
become a wasteland of empty foreclosed multifamily buildings, their value drops
even further. It's hard to understand why new owners choose to pay lawyers to
start eviction procedures instead of paying a modest fee to a management
company to collect rent and manage the property while they wait to sell.
"Cash for Keys"
To encourage tenants to leave quickly and save on the court
costs associated with an eviction, banks offer tenants a cash payout in
exchange for their rapid departure. Thinking that they have little choice, many
tenants -- even Section 8, protected tenants -- take the deal. It doesn't help
them much as they join the swelling ranks of newly displaced tenants (and
former homeowners) who are competing to find an affordable new rental.
What Can a Foreclosed-Upon Tenant Do?
Thanks to the 2009 federal legislation, most tenants with
leases will keep their leases, and month-to-month tenants will have at least 90
days to relocate. Tenants with leases have no legal recourse against their
former landlords, because they are in the same position vis a vis the new owner
as they were with the old: The lease survives and ends as it would had there
been no foreclosure. Similarly, month-to-month tenants always know that they
can be terminated with proper notice, and 90 days is longer than any state's
termination period.
However, a lease-holding tenant whose rental has been bought
by a buyer who want to move in to the property ends up less fortunate than
before the new law -- he may lose his lease with 90 days' notice, a result that
probably would not have happened had the owner simply sold the property to a
buyer who intended to occupy the property. (Normally, the new owner has to wait
until the lease ends, absent a lease clause providing for termination upon
sale, though such clauses may not be legal in all situations.)
Suing a Former Landlord
A lease-holding tenant who has to move out so that new
owners may move in might consider bringing suit against a former landlord.
After signing a lease, the landlord is legally bound to deliver the rental for
the entire lease term. In legalese, this duty is known as the "covenant of
quiet enjoyment." A landlord who defaults on a mortgage, which sets in
motion the loss of the lease, violates this covenant, and the tenant can sue
for the damages it causes.
Potentially,
the tenant can sue the original landlord for moving and apartment-searching
costs, application fees, and the difference, if any, between the new rent for a
comparable rental and the rent under the old lease. Though the former owner is
probably not flush with money, the awards in these cases won't be very much,
and the court judgment and award will stay on the books for many years. A
persistent tenant may be able to obtain what's owed through aggressive
post-judgment collection procedures, such as garnishment and attachment.
