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Vol. 16, No. 2

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Bona Fide or Not? The New Protecting Tenants at Foreclosure Act

Part of my practice involves advising buyers at foreclosure sales on how to manage occupants of residential property following the sale. While residential tenants have previously been afforded no special protection, a significant change in the law in 2009 bestows upon them a set of significant rights.

The burst of the housing bubble in the United States resulted in unprecedented foreclosures on properties and corresponding foreclosure sales of residential real property. In response, on May 20, 2009, President Obama signed Public Law No. 111-22, the Helping Families Save Their Homes Act of 2009. Title VII of that law, the Protecting Tenants at Foreclosure Act of 2009, is aimed at combating the impact of foreclosures on residential property on tenants. The Act protects tenants’ rights to occupy residential property for a period of time following a foreclosure sale. In keeping with the ameliorative nature of the Act, it will automatically sunset on December 31, 2012.

The most important aspect of the Act is the increased protection it gives to tenants of residential property, so long as those tenants can meet the Act’s criteria for being “bona fide” tenants. Previously, many jurisdictions afforded residential tenants no greater protection after foreclosure on a landlord’s federally related mortgage loan (as that term is defined in 12 U.S.C. § 2602) than that given to mortgagors themselves.

What actually constitutes a bona fide tenant is just as logical as what does not: The mortgagor foreclosed upon (or that mortgagor’s child, spouse, or parent) cannot be a bona fide tenant, even with a lease. Similarly, because the Act requires that the lease or tenancy be the result of an arms-length transaction, “friends and family” arrangements are implicitly excluded.

Finally, the rent paid for the premises must be either at or near fair market value or subsidized by a government agency. These restrictions demonstrate that the Act is designed to give sanctuary to unwitting residential tenants who have a market-rate living arrangement with their landlord.

The additional rights afforded to a bona fide tenant depend on the nature of the tenancy at the time of the trustee sale. A bona fide tenant with a month-to-month tenancy is entitled to 90 days’ notice to vacate. If a bona fide tenant is occupying the premises on a pre-foreclosure lease and the lease has a term exceeding 90 days beyond the date of sale, the tenant may remain in possession until the end of the lease term.

There is an exception to this rule, however: If the buyer of the residential property resells it to a buyer who will occupy it as a primary residence (in other words, when the buyer intends to “flip” the property), the new owner may terminate the lease upon 90 days’ notice. The timing and manner of the notice to vacate may vary by jurisdiction. Note that this exception does not apply to tenants who participate in the Housing Choice Voucher Program (commonly known as “Section 8”).

In slight contrast to the rule for standard tenants, a buyer may not terminate a Section 8 tenancy to “flip” the property. But the buyer may terminate a Section 8 lease upon 90 days’ notice if the buyer personally intends to occupy the property as a primary residence. Generally, Section 8 leases require a landlord to have “good cause” to terminate a tenancy.

Under the Act, Section 8 tenants are entitled to any additional time and protections that state and local law may provide. The buyer must assume any leases in existence at the time of the foreclosure sale. The Act also ensures that Section 8 tenants are not at risk of losing their housing vouchers if they vacate the leased property prior to the sale.

The nagging question for many practitioners is often how to handle the payment of rent. Imagine a buyer at a foreclosure sale purchases a property sight-unseen. Afterward, the buyer discovers that there are bona fide residential tenants in the property on a term lease. The buyer/landlord understandably expects timely payments from the tenants.

While no specific provision of the Act mandates payment of rent, payment certainly is assumed under the Act’s definition of a bona fide lease in section § 702(b)(3) as one requiring “the receipt of rent that is not substantially less than fair market rent.” In many instances, contacting the tenants and informing them of the new ownership are all that is required to begin payments to the new landlord, and the tenant often produces the lease for the buyer’s review.

If a tenant doesn’t pay or produce a valid lease within a reasonable time, check the laws of your jurisdiction to determine whether it’s feasible to bring an action for possession of the property on the basis of unpaid rent. In some cases, simply waiting out the end of the term may be preferable to attempting an eviction, though an action in small claims court to recover the overdue payments may be appropriate.

The Act bestows some strong protections on residential tenants in foreclosed property, but it balances those protections with the requirement to pay rent. The Act’s applicability depends on whether or not a tenant or lease is bona fide, and that is largely driven by the individual circumstances of each case. The onus is on the tenants to produce sufficient documentation to prove their bona fide status. This seemingly unorthodox process, though temporary, requires special attention and care from real estate practitioners. It also gives new meaning to the phrase, “Buyer beware!”

Etan Basseri is an associate at the Seattle, WA, Law Office of Evan L. Loeffler PLLC. He focuses on real estate litigation and landlord-tenant relations. He can be reached at (206) 443-8678 or ebasseri@loefflerlegal.com.

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