Tenant's Rights in a Foreclosure

Many property owners lose their rental homes in foreclosure, forcing eviction of the unsuspecting tenants. In most cases, these tenants have had no recourse. In May 2009, federal legislation was passed giving tenants rights when the landlord is being foreclosed on. Tenants are no longer being forced to find new homes without warning due to the landlord's shortcomings.

The Victims

No renter is immune to the danger of the property owner losing the home they are renting. Those most in danger are those renting single-family homes and small buildings. Tenants in large buildings also can suffer the consequences when the landlord fails to pay bills and the homes are being foreclosed on. Even tenants in Section 8 programs can be affected.

The Culprit

An unscrupulous landlord knows he is being foreclosed on but continues to accept rent payments without warning his tenants that they need to move. Typically, this is a person who previously lived in the home and then purchased a new and rented out the old one. When the cost of both homes got to be too much he let the one he was renting fall into foreclosure. Another culprit may be investors who purchased properties and when the investment was no longer solid, walked away.

New Owner

Ownership of the property transfers to a bank when the foreclosure is final. Ownership also can transfer to a new individual if it is sold in a bank foreclosure sale. If the home's ownership is transferred to the bank, a servicing company will take care of the property to assess the condition and ready it for sale. Either the servicing company or the new owner are usually the ones to inform the tenant that there is a new owner and they must move out. If the tenant refuses to move, the new owner begins the legal eviction process.

Rent Payment

Tenants should continue to pay rent even if they suspect the home is being foreclosed on. Be sure to keep receipts and canceled checks to prove that you paid. Pay your current landlord until you get a court order to pay the new owner. In many cases, the owner is trying to arrange to keep the house so it would not pay to fight against him. If you fail to pay rent on time, the landlord can evict you for as long as he still owns the house.

Lease Retention

Before the federal legislation was enacted in May 2009, renters would be evicted upon foreclosure of the rental property. The "first in time, first in right" rule in most states meant that if a lease predated a mortgage, then the lease was invalid when the mortgage was invalid. With the new law, the tenant can stay in the rental unit until the end of the lease; and month-to-month tenants could remain for 90 days. The exception to this is if the property is purchased by an individual who plans to occupy the property. This owner may request a faster move-out date.

Prosecution

In the past, tenants would have to sue the old landlord for the costs and distress of the move. With the new legislation, there is no change in the lease for most tenants. Tenants with leases can live out their leases and tenants without leases are entitled to a 90-day notice.

In cases where the home is purchased by a prospective home occupant and the tenant loses these entitlements, he may be able to sue the old landlord for damages. They can take the former landlord to small-claims court. They can also sue for rent differences and application fees for the new apartment. Collection will be difficult as most landlords who are foreclosed on have very little money left.

Other Entitlements

You are entitled to time to find a new home. This time will equal the balance of your lease or 90 days. Banks may try to force you to move and even offer money or hardball tactics to get you to move quicker.

The tenant may ask for "cash for keys." If the new owner or bank is willing to pay enough money to cover the first month's rent and security deposit on a new home, it may be in the tenant's best interest to move.

References

• Renters in foreclosure
• Larcc.org