If a landlord defaults on their mortgage and their mortgage lender forecloses on the property, the consequences for the tenant can be dire. The tenant may be at risk of losing their home.
Technically, foreclosure is the legal process through which a mortgage lender effectively ends an owner’s ownership of a property because they have failed to pay their mortgage. It can be a complicated process and may take several months to complete.
At the end of a foreclosure, the owner/landlord of a property loses their ownership and their mortgage lender ends up as the owner. The lender may want to sell the property immediately.
The mortgage loan for a property may have been made before the lease of a tenant who occupies it was signed, which is usually the case. If so, then the foreclosure effectively terminates the lease even if the lease has not expired. The bank owes no duty to the landlord or the tenant, and the lease is a binding contract only between the landlord and the tenant.
This means that the lender may eventually evict any tenant of the property so they can sell it off quickly at a foreclosure sale. The new owner would also not be legally obligated to continue the lease.
What Happens to Tenants When a Property Is Foreclosed?
When a property owner who is a landlord defaults on their mortgage, the mortgage lender becomes the owner of the property and usually seeks to sell it as quickly as possible at a foreclosure sale.
As noted above, under the law of most states, if the mortgage was recorded before the lease agreement was signed, the foreclosure terminates the lease. This gives the new owner the right to evict the tenants with little warning.
In 2009, the federal Protecting Tenants at Foreclosure Act (PTFA) became law. This law requires that a new owner who takes over rental property after a foreclosure must give a tenant at least 90 days’ notice to quit so the tenant has adequate time to locate new housing.
The PTFA applies to all foreclosures on all residential properties; traditional one-unit single-family homes are covered; multi-unit rental properties are also covered. The law applies to both kinds of foreclosures, judicial and nonjudicial. If a tenant’s lease is in effect as of the date of transfer of title at foreclosure, the tenant has a right to 90 day’s notice. This is the case for month-to-month leases or leases that can be terminated at will.
Whether a new owner wants to evict existing tenants would depend on the use that the new owner wants to make of the property. If the new owner has purchased the home to serve as their new permanent residence, then they may wish to evict the tenants.
If the new owner wants to own a rental property, then they might wish to talk to the tenants and see if they can agree on a new lease that is acceptable to both the new owner and the tenant.
Many mortgage holders are inclined to evict tenants after a foreclosure, believing that an empty property is easier to sell than a property with a lease and a tenant. However, in a slow real estate market, it might make sense to have a property occupied by a tenant who pays rent reliably rather than a property that is empty.
It might be wise to keep the tenant, assuming an acceptable lease agreement is possible, and wait for a better market in which to sell.
Are There Any Protections for Tenants?
There are laws that may secure a tenant’s rights in case of a foreclosure:
- Protecting Tenants at Foreclosure Act of 2009 (PTFA): As noted above, this is a federal law requiring that after a foreclosure, new owners give notice of at least 90 days to tenants of the property acquired in the foreclosure. This is the case if the tenant’s lease pre-dates the new owner’s acquisition of the property;
- Section 8: Under PTFA, tenants who have federal Section 8 housing choice voucher assistance have additional protection. This allows them to keep their Section 8 lease and requires any person or lending institution that acquires ownership of the rental property to assume the housing assistance payment contract associated with the lease on the property.
There is an exception. If the new owner wants to occupy the unit as their primary residence and gives the tenant a 90-day notice to vacate, the tenant must vacate the residence.
There may be state or local laws that impose additional requirements on the new owner or offer more protection for tenants. For example, in Berkeley, California, new owners are required to do several things in addition to giving notice before they can move in. For instance, a municipal ordinance requires the new owner to pay the tenant $4,500 in moving expenses.
Of course, the tenant must continue to pay rent during the entire time they occupy a rental unit that is going through a foreclosure process. If they stop paying rent, they can be evicted for their nonpayment. If the new owner refuses to accept your rent, place the amount in an escrow or savings account so that you can make payment to the appropriate person at the proper time.
What Can Tenants Do to Prevent Eviction After a Foreclosure?
A tenant can make contact with the mortgage lender and any new owner and attempt to negotiate a resolution of the situation. If the tenant wants to remain in their rental unit, they can ask if it is possible to make a new lease agreement.
The tenant should continue to pay rent. If the lender or new owner refuses to accept the rent, the tenant might put the rent in a savings account so they have it if they should have an opportunity to maintain their lease.
Some states, such as New Jersey, New Hampshire, Massachusetts, and the District of Columbia, require the new owner to honor the lease. Tenants who live in cities, counties, or states that are rent-controlled or that require “just cause” for eviction may also be protected.
Of course, if a tenant only has a month-to-month lease, it is subject to termination on 30 day’s notice. Other residential leases can be terminated at will, which means that a landlord can terminate the lease at any time. Or, if a tenant violates a material term of their lease, they can be evicted.
This does not change in a foreclosure situation. The only kind of lease that would offer meaningful protection would be a lease that has a term of a year or more and still has several months to run when the foreclosure takes place.
In the final analysis, however, if a lender or new owner does not want to continue the lease, the tenant’s best bet may be to start looking for a new rental. If the lender or new owner offers a settlement, e.g., some amount of cash in exchange for the tenant’s moving out, a tenant may well want to accept it. They might use the cash to obtain a new lease.
When a person who is a tenant learns that their unit is going into foreclosure, they may want to consult a landlord-tenant lawyer in order to identify their options and decide which one would be the best given their needs.
Do I Need a Lawyer?
A landlord-tenant lawyer can help you figure out who exactly owns the property in which you live and establish your rights in any foreclosure proceedings.
An eviction caused by the landlord’s own mortgage problems can be challenging because you can lose your lease. But you may have options. LegalMatch.com can connect you to a lawyer who can help you think through your options and decide on a course of action that is best for you.
