Foreclosure Landlord-Tenant Evictions

If the rental property is in foreclosure, the Landlord owns a property until the property transfers to the new owner. The Landlord or Owner may occupy, use, lease or sell the property as he sees fit unless the mortgage and note have some restriction.  There are often restrictions like this in large building commercial mortgages. Still, it is rare to find such restrictions in the majority of residential mortgages, such as a single home or duplex.     About half of the persons facing eviction due to foreclosure are renters. However, the law has changed for most renters. Under the old law, a foreclosure would end a lease. Most states do not terminate a tenancy just because a property is foreclosed. Instead, the property is subject to the contract.  Without some protections foreclosure & landlord tenant lease evictions would happen often and quickly.  Kentucky has its own landlord-tenant laws. 

A buyer purchases the property subject to the leases.

The Helping Families Save Their Homes Act went into effect in 2009. This law included the Protecting Tenants at Foreclosure Act (PTFA) PFTA requires that any new owner takes the foreclosed property subject to the rights of the lease and tenant. A lease or tenancy is bona fide under Section 702 of the PTFA if: (a) a tenant is not the mortgagor or the mortgagor’s child, spouse, or parent; (b) the lease resulted from an arm’s length transaction; and (c) the rent is not substantially less than the fair market rent unless the reduction is due to a federal, state or local subsidy. PTFA expired in 2014, but most states kept the rule that a buyer purchases subject to the leases.

Under PITFA, bona fide tenants may continue to occupy the property until the end of a lease unless the lease is at will or the home is sold to a purchaser who intends to own the unit as a primary residence. In those cases, a 90-day notice must be given. Tenants with Section 8 vouchers are also protected. The statute also requires that any eviction notices must also be sent to the Housing Authority. If the individual rents from a corporation, the lease is still protected. PFTA entitles tenants to a 90-day notice to quit. Longer-term leases must enter into the contract before “notice of foreclosure. Dodd-Frank defines this “Notice of foreclosure,” as the date the foreclosure sale transfers the title.

Landlord and Tenant Rights 

Two rules govern a tenants rights:

  1. The tenant must pay rent to remain in the property. If the tenant does not pay rent, it constitutes an independent ground for eviction. The new owner merely steps into the shoes of the old owner. The failure to comply with a clause or provision of the lease can be grounds for eviction.
  2. The Landlord must give 90 days’ notice to evict and refund the tenant’s deposit even if the rent was not paid to the prior Landlord.

Understandably, a tenant can be confused and not know which Landlord to pay. But the failure to safeguard the funds even if the new Landlord will not take the rent is probably a breach of the lease. The new owner has the same rights and responsibilities as the prior Landlord. If utilities, heating, or services are supplied, the new owner must do so. Further, the security deposit has to be refunded. Even if the tenant did not pay rent during the 90-day notice to vacate, the new owner could not evict.

Sections 702 and 703 of the PTFA each require the tenant to be given the notice to evict “at least 90 days before the effective date of such notice. Even if the lease is month to month, a 90-day notice is required. Bank of N.Y. Mellon v. DeMeo,254 P.3d 1138(Ariz. App. 2011), published and unanimous decision. See also Curtis v. U.S. Bank National Association  ••confusing (language)” is “ineffective for the purpose of the PTFA”.   And further, any motion for possession is premature if it is filed before the expiration of the PTFA notice period.

Tennant Responsibilities

PTFA does not explicitly say the tenant must pay rent, but courts have stated that upon the transfer of the deed that the new owner has the right to rent. Until that time, the old owner collects and manages the property. PNMAC Mortgage v. Stanko, but even if the tenant has not paid rent to the new Landlord, the tenant is entitled to the 90-day notice period under the PTFA.

Two state trial courts have held PTFA’s 90-day notice requirement applies to post-foreclosure evictions even if the tenant fails to pay rent. Courts have concluded PTFA’s longer notice period, which makes no distinction between terminations with or without cause, preempts the requirement of a 90-day notice. In Stanko, the court held PTFA’s 90-day notice period “is inviolable no matter what theory of eviction a foreclosing party has available to it.” The new owner assumed the lease “subject to and conditioned upon. providing the tenant a notice to vacate ‘at least 90 days before the effective date of such notice….”

PFTA is an affirmative defense, but the burden of proof of the plaintiff that the laws have been complied with typically makes it the plaintiff’s burden of proof the statute has been complied with and that a lease exists. Several factors, such as the amount of the rent, relationship to the Landlord, nature of the property, the timing of the lease, the term of the lease, number of people in the home, determine if the tenant entered into an arm’s length contract.

The New Owner is subject to the lease

In  U.S. Bank v. Love, No. CLJ 201704, at *3-4 (Cal. Sup. Ct. July 30, 2012). The court awarded $112,896.00 against US Bank for wrongful eviction. The court stated:

“it is her ouster from possession during that remaining ten months and one week period that the Appellate Department has now ruled was wrongful, said ruling being because the Judge Pro Tern in the Unlawful Detainer trial committed error in failing to accord Ms. Costello the protection of the Protecting Tenants At Foreclosure Act of 2009 (Public Law 111-.22,701 -704, enacted May 20, 2009) 42 U.S.C. 1437f(O) (7) (hereafter “PTFA Act,,).fu3, I.e., under that Act, U.S. Bank, as a matter of Federal law, took ownership subject to Ms. Costello’s remaining lease and, accordingly, U.S. Bank was not entitled to any Judgment of Possession against her. The Act was part of certain emergency legislation to address the residential mortgage crisis that has beset the nation during the past few years’ depressed economy, the worst since the Great Depression of the 1930’s.”

If you are faced with foreclosure as a Landlord or Tenant with a Lease in Louisville Kentucky, see Nick Thompson.

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