What Happens To Tenant After Foreclosure
Added January 19, 2009 by Ilyce R. Glink and Samuel J. TamkinSummary: With the rise in foreclosures since the credit crisis, many renters or tenants find themselves directly affected. What options do tenants have if they're served with a lis pendens for foreclosure? Lenders used to evict tenants but in this housing market many landlords prefer to keep the tenants in the foreclosed homes. Foreclosure does not always have negative effects on tenants.
Q: I live in a house that had a lis pendens delivered for foreclosure with 20 days to respond. I have no interest or involvement with the owner or the house. Aside from moving out as soon as possible is there anything else I have to do? Do I have any legal issues to worry about?
A: Unfortunately the financial and mortgage crisis has been a wave that has taken many innocent people along with property owners and lenders.
You, it seems, are a renter in a property that is in the process of being foreclosed. The owner of the property you live in has either fallen behind on his payments to his lender or has simply stopped making the payments.
Now the property's lender is trying to recover what it can by foreclosing on the property to sell it off and get the loan repaid.
You on the other hand may have a lease with the owner of the property. That lease obligates you to make payments to the landlord for your rent. During normal real estate markets, a lender forecloses on a building or home and wants the place empty for resale purposes. The lender doesn't want to be in the business of being a landlord. So the lender moves to foreclose and notifies all occupants of the property of the foreclosure proceedings and follows through to evict all occupants.
Recently, however, more and more lenders are coming to the realization that tenants are good for properties and are a good source of income for the thousands of properties these lenders are foreclosing on.
Where does that leave you? There are several possibilities:
If you live on a month-to-month lease at the property and the property owner has effectively abandoned the building, most people in your shoes do what you are doing now and pack up their things to find another place to live.
But if you like where you live, you might want to see if the lender wants you to stay at the property. You should contact the lender directly to see if the lender would want the rent payments to continue or if there is some way the lender can finance your purchase of the property.
Until the lender forecloses on the property, the property is still owned by (and managed by) the current owner. But lenders have the ability to take possession of the property without becoming the owner by getting the court to allow them to operate the building until the foreclosure is final. If the lender goes this route, you may find that the lender will be eager to keep you at the property.
If you have no lease but lived in the property as a guest of the owner of the property, you shouldn't have anything to worry about with either the owner of the property or the lender when you move out. You're free to move out whenever you have to or want to.
If you are a tenant on the property, your lease continues to be valid until it is canceled through the foreclosure process. In theory, if you move out early, the current owner could sue you for defaulting under the terms of your lease. But most owners who are going through foreclosure stop being landlords and abandon their responsibilities as landlords and walk away from their properties.
If you're in a situation where your landlord no longer collects rent and is nowhere to be found, and you receive court papers that order you to vacate the property, you should be able to leave the property without worrying that someone is going to sue you down the line.
However, if your landlord continues to collect rent from you and is actively managing the property, you need to review the documentation you received from the court to determine if that documentation is sufficient to cancel your lease and allow you to move out without creating a Catch-22 situation for you in which you move out and the landlord sues you for non-payment of rent.
In some instances a lender will notify a tenant that the owner is going through foreclosure and instructs the tenant to forward all future rental payments to the lender.
As a tenant, you need to make sure that the information given to you by the lender is accurate and that you do, in fact, need to forward rent payments to the lender. The lender usually will have documentation that the building owner signed authorizing the lender to collect rents from the tenant if the building owner is in default under his loan.
It all goes back to the paperwork. To figure out whether you'll have trouble with the owner if you move out, you'll need to read through your lease and the documentation surrounding the foreclosure. In addition, you'll need to talk to your landlord and possibly the lender to get more information.
If after doing all this you are concerned about litigation, please consult with a good real estate attorney.
Jan. 19, 2009.
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Comments
Todd Rubinstein says
This is a very timely issue. I have written and advised many a tenant about this problem. Actually, there are no 'fool-proof' or 'absolute' ways to protect yourself from fraud by any Landlord/Lessor/property owner or anyone, for that matter. Just look at the Bernie Madoffs of the world, and he duped some significant players out there. However, there are many different and absolutely helpful steps you can take to keep yourself informed and lessen the likelihood you'll fall prey to an unscrupulous landlord/lessor. There are essentially several things you can do to arm yourself in this environment; I articulate three (3) below. First, I would definitely pay for some service to check to see if a landlord/lessor is in the foreclosure process; that process in many jurisdictions can take up to 6 mos. Although, I believe there a limit to which you should pay, and not all services are accurate or even promising, nevertheless you should consider some type of notification service. One service I know of that is accurate and relatively inexpensive is Tenant Protection Services (TenantProtectionServices.com) ***. Landlords/Lessors typically will pay (or sometimes charge their tenant/lessee) for a credit report fee of $25-$35 in some areas. It is proactive and a small fee for a tenant to pay $15 for a one-time report or $25 for a year (of monthly reports) to find out if a potential landlord is in foreclosure or once in the property to be notified if it falls into foreclosure at some point after signing a lease. Second, I would negotiate with the lessor at the outset and put some terms into any lease or month-to-month rental. Now, be aware that there is no guarantee that a lessor will agree, and if you are bidding on a rental that has multiple offers to rent, you could be out of luck inserting your favorable terms. Although, as tough as it may be, it is worth a try. I would suggest that you make it a covenant of the lease contract that the lessor makes all mortgage, property tax, HOA dues (if applicable), and insurance payments; if you are going to covenant paying rent, keeping the place up, adhering to other obligations in the lease, etc. So, if your landlord/lessor doesn’t comply with those covenants or obligations, you may be able to forego your obligation to pay rent if you made the lessor’s obligation to pay the mortgage (or taxes) an affirmative covenant of the lease, the breach of which could then relieve you of the obligation to pay rent until the lessor’s default is cured. Third, you can record your lease with the county recorder’s office for the county in which your potential property exists. This will put on notice any lienholder that is going to file a “notice of default” or “notice of Trustee sale” that you have a possessory interest in the property and should send you a copy of whatever they would record in the county with respect to that property. Although, you will have to pay for every page of your lease that gets recorded and every county charges differently; costs could amount to $10 per page, plus a recording fee. However, this is not a bad idea if notice is important. If you follow all this and complete your due diligence, you will greatly reduce the chances you’ll have to sue your lessor for your deposit or rents or be surprised one day when the sheriff or the bank rep comes knocking your door, because they won’t; you’ll have already been noticed weeks or months beforehand. All the best. Todd Rubinstein is a licensed California Real Estate Broker affiliated with Coldwell Banker Residential and Commercial Brokerage specializing in Single Family, Multi-Family, Probate, Trust Sales, Conservatorship, Trustee Sale Investor and REO (Bank and Lender Owned) transactions. Also, a licensed California Attorney he once prosecuted some of LA County’s finest, and currently provides advice on a myriad of legal issues, including but not limited to Real Estate issues, Criminal Defense matters, Family law and Landlord/Tenant rights and obligations as well as Condo and HOA law. *** disclosure – I know of the accuracy, because I have an affiliation to the service.