Is a Lease Wiped Out by a Foreclosure Under Illinois Law?
Illinois has one of the highest foreclosure rates in the country, according to RealtyTrac, an online real estate marketplace and real estate data firm. Both tenants and owners there have felt the oppressive impacts of foreclosure. Tenants are offered some protections in a foreclosure, however, in the form of their leases and notice requirements.
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Pre-2009
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Before May 20, 2009, according to Nolo, the self-help legal publisher, most tenants in Illinois and all other states lost their leases in a foreclosure. Leases signed after a mortgage was obtained on the property were wiped out in a foreclosure in the same way a second or third lien is wiped out when the holder of the first lien forecloses, as a result of a general legal tenet referred to as "first in time, first in right." Because most residential leases are for a year or less and most mortgages are for 30 years, many tenants had leases signed after the mortgages were secured on the property.
Protecting Tenants at Foreclosure
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The federal Protecting Tenants at Foreclosure Act of 2009, in effect since May 20, 2009, contains two significant clauses. First, it changes the "first in time, first in right" principal as it relates to tenants in foreclosure by mandating that foreclosing lenders or others buying foreclosure properties honor existing residential leases. Second, it requires lenders and buyers to provide at least 90 days' notice to tenants before instigating an eviction order in court. The law benefits tenants with unexpired term leases most because it prevents new owners from evicting those tenants until after their leases expire. Tenants with month-to-month leases effectively have the same protection as tenants without a lease: they would be subject to the 90-day notice requirement. The act applies in all 50 states, including Illinois, and is scheduled to expire at the end of 2012.
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Bona Fide Tenancy
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Under the Protecting Tenants at Foreclosure Act, the tenants and tenancy must be bona fide. Neither the borrower nor his family members are protected under the act. The lease or tenancy must have also been the result of an arms-length transaction, that is, a transaction with no ulterior motive or influenced by anything other than standard business practice. Also, the tenancy must be for a rent that is not substantially below market rent unless it is subsidized.
Exception
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If a foreclosed property in Illinois is purchased by a buyer intending to occupy the unit himself, a lease does not survive a foreclosure under the Protecting Tenants at Foreclosure Act. This is the act's sole exception. Under this exception, the new owner must give the tenants 90 days' notice before filing for an eviction.
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