Publications
12 Aug 2009
New law aims to protect residential tenants from eviction following a foreclosure sale
Real Estate Alert
Michael A. Bedke
The Helping Families Save Their Homes Act of 2009, recently signed into law by President Barack Obama, includes the Protecting Tenants at Foreclosure Act (the Act), designed to protect residential renters from being evicted without notice following a foreclosure proceeding.
The Act benefits tenants by ensuring they have a minimum of 90 days to find a new home if they are renting in property that is foreclosed upon. However, the Act will likely be frowned upon by foreclosing lenders who may find themselves unwillingly managing rental properties.
The Act, which became effective as of May 20, 2009, provides that in the case of any foreclosure on a federally-related mortgage loan1 or on any dwelling or residential real property, any immediate successor in interest to the property (the Foreclosing Party) shall assume the property subject to the rights of any bona fide tenant. The Foreclosing Party must give the tenant at least 90 days notice before the tenant is required to vacate the premises, even if the tenancy is month-to-month or without a lease. However, if a bona fide lease was entered into prior to the foreclosure, then the tenant is entitled to remain in the premises until the end of the lease term.
The only exception is that the lease may be terminated if the property is sold at the foreclosure sale to a purchaser who will occupy the property as a primary residence, but the tenant must still be given 90 days notice to vacate.
The Act applies to all residential foreclosures, not just those brought by lenders. Accordingly, lien foreclosure actions brought by homeowner’s associations and condominium associations are also subject to the Act’s requirements.
One important point is that the tenancies or leases have to be “bona fide” in order for the tenant to qualify for the Act’s protection. To be considered a bona fide tenancy or lease, the following three requirements must be met: (1) the mortgagor or the child, spouse or parent of the mortgagor under the contract is not the tenant; (2) the lease or tenancy was the result of an arms-length transaction; and (3) the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property, or the unit’s rent is reduced or subsidized due to a federal, state or local subsidy. As a result, there are some circumstances in which the Foreclosing Party may be able to avoid the Act’s requirements.
The Act leaves us with some unanswered questions. For instance: Do the protections apply if the tenant is in default under the lease? What constitutes an “immediate successor in interest” (i.e., will the protections continue if the property is immediately re-sold to a third party)?
The Act contains a sunset provision and shall be repealed, and all requirements under the Act shall terminate, on December 31, 2012.
1 The term “federally related mortgage loan” includes any loan (other than temporary financing, such as a construction loan) that (A) is secured by a first or subordinate lien on residential real property (including individual condominium and cooperative units) designed principally for the occupancy of from one to four families; and (B) (i) is made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the federal government, or is made in whole or in part by any lender which is regulated by any agency of the federal government; or (ii) is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary or any other officer or agency of the federal government or under or in connection with a housing or urban development program administered by the Secretary or a housing or related program administered by any other such officer or agency; or (iii) is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation or a financial institution from which it is to be purchased by the Federal Home Loan Mortgage Corporation; or (iv) is made in whole or in part by any “creditor,” as defined in section 103(f) of the Consumer Credit Protection Act (15 U.S.C. 1602(f)), who makes or invests in residential real estate loans aggregating more than $1 million, except that the term “creditor” does not include any agency or instrumentality of any state.
See 12 U.S.C. 2602(3)(1).
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