The foreclosure crisis affects almost as many renters as homeowners. When landlords default on their mortgages, innocent tenants often end up evicted. Research by the National Low Income Housing Coalition shows that 40% of households facing eviction are renters.
New Federal Law
Prior to May 2009, tenants whose rentals were the subject of a foreclosure almost always lost their leases when the property was sold to a new owner. That's because in most states, a mortgage that was recorded before a lease was signed wiped out the lease upon foreclosure. (In the unusual instance where the lease pre-dated the mortgage, the lease might have survived.) But as of May 20, 2009, the Helping Families Save their Homes Act changed the rules. In the portion called "Protecting Tenants At Foreclosure" ("PFTA"), the law for all states became quite simple: As long as the lease was signed before the notice of foreclosure (the date the title was transferred to a new owner), the lease would survive. Two "but ifs" apply, however:
- The tenant must be "bona fide:" that is, not be a spouse, child, or parent of the former owner; the lease must have been negotiated at arms' length; and the rent must not be substantially below market rates.
- A purchaser at the foreclosure sale who is a natural person (that is, not an entity such as a corporation or real estate investment trust) and who intends to move into the property and use it as his primary residence may terminate a lease with 90 days' notice.
Tenants with month-to-month rental agreements are entitled to 90 days' notice, which is longer than the notice period they would normally receive in a non-foreclosure termination (most states provide for 30 to 60 days).
Section 8 tenants and those in "just cause" eviction protection jurisdictions (rent control cities and some states) cannot be evicted on 90 days' notice. Section 8 tenants get to live out the length of their lease, even if the new owner wants to live in the property. Both Section 8 tenants, and those protected by just cause protections, can be evicted only for reasons that fit within the list of just causes, as enumerated in the Section 8 Addendum or the rent control ordinance.
Common Violations of the Protecting Tenants At Foreclosure Act
In spite of clear direction in the federal law, many lenders and agents (including their lawyers) disregard PFTA's terms. Commonly seen violations include:
- Notices to vacate, sometimes telling tenants that they must move immediately, in clear contravention of the PFTA.
- Unclear and misleading information sent to renters.
- Offers of "cash for keys," in which the tenant leaves voluntarily in exchange for a set amount of money, which are being made without also telling tenants that they have the right to stay under PFTA.
- No communication at all, and often, no maintenance.
- With Section 8 tenants, failure to get in touch with the local public housing authority in order to learn of the obligations the new owners are assuming.
- Failure to acknowledge that Section 8 tenants and those who enjoy "just cause" protection (rent control cities and some states) cannot be evicted on 90 days' notice unless it's "for cause," as defined by the Section 8 Addendum or the rent control ordinance.
Additional State Protections
Many states have added more protections for tenants who are caught in foreclosure. These laws typically cover issues like:
- Tenants' rights to receive notice (or longer notice0 of a foreclosure action against the property
- Tenants' rights to receive notice of the intended sale
- Additional time in which to vacate the premises
- The right to have the successor to the landlord maintain the property (most important when the successor is a bank or other institution)
- The right to deduct or withhold rent when, for example, habitability repairs are needed
- The right to demand that the landlord use the security deposit for rent after a notice of default has been sent.