What is the process of buying a foreclosed house with tenants in upstate NY?

Question

I'm looking to buy a house in upstate NY that is in foreclosure. It is a two-family home and there are currently tenants in both halves. I would like to get rid of the tenant who is paying less and live in that unit myself. Can I do this? What is the tenant foreclosure law in New York?

Answer

Landlords everywhere are covered by a federal law that spells-out the rights of new owners and resident tenants when a rental property is purchased at foreclosure. The Protecting Tenants At Foreclosure Act was signed by the President and became effective on May 20, 2009. It specifies, among other provisions, that:

  • Tenants whose leases were signed before the "notice of foreclosure" get to live out their leases, as long as they are "bona fide" tenants, unless the exception below applies. (The notice of foreclosure is the date on which complete title to a property is transferred to a new owner as a result of a court order or in accordance with provisions in a security deed, deed of trust, or mortgage.)
  • A bona fide tenant is one who is not the spouse, parent, or child of the former owner; who negotiated the lease at "arms' length," and whose rent is not substantially below market value.
  • Individuals who intend to use the property as their primary residence, who buy at the foreclosure sale or directly from the lender or mortgagee, may terminate leases with 90 days' notice.
  • Tenants who rent month-to-month are entitled to 90 days' notice.

The Act expires on December 31, 2014.

New York State Law

New York, like many states, has passed legislation that echoes the federal law. Like the federal law, New York gives tenants with leases the right to remain in their homes until the lease expires. But if the buyer intends to live on the property, the buyer may terminate the lease by giving 90 days' notice.

New York also covers tenants whose properties were dealt with in other ways besides foreclosure, such s a deed in lieu of foreclosure and a short sale, as long as the property was transferred during a foreclosure proceeding. New York law does not contain an expiration date. (See New York Real Property Actions and Procedures Law, § § 1303 and following.) New York requires foreclosing lenders to give notices to tenants at the same time that they file a lawsuit to begin foreclosure proceedings.

Importantly, all rent-stabilized and rent-controlled tenants continue to enjoy "eviction protection," just as they do when new owners buy their properties. In other words, a change of ownership as a result of a foreclosure does not by itself entitle the new owners to evict.

Your Options as a New Owner

Now that you know the legal landscape, you can begin to assess your options for moving into your new home. This analysis assumes that the property is not rent-stabilized.

The Tenants Have a Lease

First, if your tenants have a lease, when was it signed? If it was signed before the mortgage or loan was taken out by the lender, it will usually survive the foreclosure. But it's unlikely that this is the case; most mortgages are relatively long, and leases go from year to year. So unless this is a rather old and lengthy lease, it's subject to the new laws described above.

If you buy the property directly from the bank or other lender, and intend to use it as your primary residence, you can evict the current tenants with 90 days' notice.

The Tenants are Month-to-Month

Month-to-month tenants can be terminated by any new owner, even one who does not expect to use the property as a primary residence. You may terminate this tenancy with 90 days' notice.

Legal Procedures for Terminating Tenants

Be sure to follow New York rules for preparing and serving termination notices. If you don't cross every "t" and dot every "i," you may find yourself having to start over if the tenant challenges your termination and eviction.

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