New Law to Protect Tenants After Foreclosure – 90 Days to Vacate
Effective May 20, 2009 the federal Congress passed a law that protects tenants when the residence they are leasing is foreclosed on. The federal law provides greater protection than does California Law (CCP 1161b gives 60 days) and under the same circumstances.
The new federal law requires a buyer of a house at a foreclosure sale to give 90 days notice to vacate to tenants in possession of the property at the time of the foreclosure. The tenants can have either a lease or be on a “month to month” tenancy. Either will do.
The 90 Days Only Applies to Tenants – Not the Foreclosed on Owner
The limitation on the notice period under both federal law and state law is that the lease must be “bona fide.” That is it must not be a sham created to get extra time to occupy the property. (If there is no tenant then the former owner is only entitled to a 3 day notice!!) A bona-fide lease can’t be one to an immediate family member like a child, parent, or spouse. It must be an arms- length transaction. For example, you can’t write a lease to yourself or create a fake lease. Furthermore, the lease must be at “market value” or at least not “substantially less than fair market value” -whatever that is.
Federal Law Supersedes the California 60 day Notice Law
California state law is even more strict. The 60 day notice does not apply if the original owner is occupying the property. So if there is a duplex and the owner lives in one unit on the same parcel the tenant in the other parcel technically would only be entitled to a 3 day notice. (Not a very well thought out rule. ) Fortunately, the federal rule does not have this provision.
The Bank Will Usually Evict The Previous Owner And The Tenant At The Same Time
If I was about to go into default on my mortgage here is what I would do. I would sign a lease to someone that is not within my family before the date of the “Notice of Foreclosure” is served and recorded. I would make the lease market value. After all, what is the market value to a lease for property that is about to be declared in default of the mortgage? Probably not much. (To be forthright I would disclose the status of the mortgage to the tenant.) Interestingly, the federal law does not require that the lease be for the tenant’s primary residence. It can be a part time rental. So, I would want to find someone that would not be there much. The law does not require that the tenant be current on the rent payment either, but the lease will require the tenant to pay rent. My tenant will have an enforceable right to occupy some portion of the property and I will have an enforceable right to collect rent from my tenant which I will demand in the form of a personal check (which I will photocopy for my records before I deposit it into my bank).
After the foreclosure when the Notice to Vacate the property is served it will probably be a 3 day notice to vacate because the bank that takes ownership after the foreclosure will not know that I have leased a portion of the property to someone else. (I might just lease out one of the rooms because the federal law does not require that the entire property be leased out. The bank is not likely to try and oust me while my tenant is allowed to remain. They will want to do it all at once.)
When the unlawful detainer complaint comes my tenant will file a special “prejudgment claim of right to possession” which does not require a court filing fee. My tenant will file this on the last day required. This prejudgment claim of right to possession is for anyone that is not named in the lawsuit who claims a right to possession of the property.
Once the prejudgment claim of right to possession is filed my tenant will have 5 more days to file an answer to the complaint. My tenant will file this on the last day also and allege that the 3 day notice was invalid by a properly alleged affirmative defense. A tenant at the time the bank serves/records the Notice of Default has a right to a 90 day notice after the foreclosure under the federal law. This means the lawsuit will have to be dismissed and the bank will have to start over after a 90 day notice is given.
By handling it right I (and my tenant) can probably get another few months of occupancy out of the foreclosed on property. To be really smart I recommend you hire an unlawful detainer attorney to handle the filing so that I know it all gets done right.
For the full text of the federal act see the ”Protecting Tenants at Foreclosure Act of 2009″ P.L. 111-22, Div. A, Title VII, 123 Stat. 1660, which is an amendment to 42 USCS section 1437f(o)(7) and also appers in part as 12 USCS section 5220.
Mr Tapley:
When does the new “90 days notice to vacate to tenants in possession of the property at the time of the foreclosure” federal law actually cover?
“At the time of foreclosure” refers to what? The filing of the NOD, the NOT, or the actual date of reversion to the (lender) beneficiary on the deed of trust or sale to a 3rd party at the courthouse?
In other words, if someone is in possession BEFORE the sale date but AFTER the filing of the NOD and NOT what then?
What if the NOD was filed (so the effective date of the start of the foreclosure process) BEFORE the May 20, 2009 date of the federal legislation but AFTER the CA 1161b date?
Would a tenant be only protected by 1161 or would they have the federal protection?
This comes up quite a bit because even though it is technically a 111 day clock from NOD to sale date, many of the lenders have LAGGED big time on the foreclosure process. If they even file an NOD, they may wait months and months before filing the NOT, and then may postpone the sale repeatedly.
Bottom line – it can be a very drawn out process where it is quite possible for a unit to be rented out even though it may be well into the foreclosure process.
Mr Tapley:
RE: unlawful detainer filing
If a tenant “goes on record” in order to fight a u/d complaint, what are the credit implications?
When a Notice to Quit or U/D is filed/served it may be addressed as “(Name of owner of record) and all occupants, tenants and Does 1-10″ or something to that effect.
At that point, the tenant is anonymous and unknown. Once they file a Prejud claim of right of possession or any type of answer, they effectively “surface”, are updated in the evicting attorney’s paperwork, and are now known.
Even if the tenant prevails, the case is settled without an adverse judgment against the tenant,etc will the tenant’s answer and defense become public record and therefore scrap-able by the credit bureau data parasites?
Could an eviction end up on a tenant’s credit report even if the do not “lose” the u/d case?
Thanks.
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