Real Estate

Lessee's Rights on Foreclosure and Subsequent Sale of Home or Property

If you're a renter, how will the transfer of property ownership impact your lease or rental agreement?

Rental properties, like other types of property, can be sold to a new owner or foreclosed upon in certain situations. While sales and foreclosures are major events for owners of rental property, a sale or foreclosure can have just as big an impact on someone who doesn't own the property, such as a tenant or "renter."

What happens to the renter when the residential property where he or she lives is either sold or foreclosed upon? In most cases, the lease continues if there's a "normal" sale, and it ends after a foreclosure. (Some states and cities, though, provide protections to renters following foreclosure.)

As a renter, you can protect your rights and interests if you understand what happens after a sale or foreclosure of rental property.

What Happens to Tenants in an Ordinary Property Sale

Ordinarily, if your landlord sells the rental property where you live, your lease doesn't end (or “terminate”). Rather, the buyer of the property becomes your new landlord and must comply with both the length and terms of the existing lease.

Likewise, you remain bound by the lease and must perform all your obligations and duties under it, such as paying rent, keeping the premises clean, and not destroying or damaging the property.

If you don’t pay the rent or otherwise comply with the lease terms, the new landlord is entitled to the same remedies that the old landlord (the property seller) had against you. This means the new owner can try to collect whatever you owe or could begin eviction proceedings, just as the old landlord could have.

How Long the Tenant Gets to Stay in the Property Following a Sale

Whether you, as a renter, get to stay in the property following the sale (and for how long) will ultimately depend on the type of lease you have.

  • Fixed-term lease. If your lease is for a specific time period (say, one year), you have the right to stay in the rental property until the end of the term. The new owner/landlord can't evict you (unless there is a legal reason for the eviction) or raise the rent during this period. The landlord must also obtain the security deposit that you paid to the old landlord and then refund it to you when the lease expires (if you’re entitled to it).
  • Fixed-term lease with a special provision (a right of termination). Some leases specifically say that a sale of the property automatically ends the lease. If your lease contains this provision and your landlord sells the property, your lease terminates. You would then have to move out or sign a lease with the new owner. However, if your landlord sells the property solely for the purpose of terminating the lease, a court would likely find that the lease did not terminate and that you're entitled to stay on the premises or receive damages for the landlord's wrongful conduct.
  • Month-to-month lease. If your lease is month-to-month, the new owner can terminate your tenancy by giving you the required amount of notice, typically 30 days under state law, though it could be less. (For example, Colorado law requires only seven days' notice to terminate a month-to-month lease.)

Whether and When You Will Receive Notice About the Property Sale

State law typically requires the current landlord (or the new landlord) to give tenants information about the sale and/or to provide the new landlord's name and address. This way, you’ll know where to send rent payments and who to contact about maintenance or repair issues.

For example, in Massachusetts, the old landlord must send the last month’s rent and security deposit to the new landlord. The new landlord must then give the tenant written notice of the transfer within 45 days of receiving those amounts. The notice must also contain the new landlord’s name, business address, business telephone number, and contact information for the new landlord’s agent (if there is one).

What Happens to Tenants in a Property Foreclosure

Foreclosure is the legal process by which a lender gets the right to sell a property because the property owner defaulted on the mortgage. The sale proceeds are used to satisfy the mortgage debt.

If your landlord fails to make its loan payments, or defaults on a mortgage in some other way (such as not paying the property taxes or insurance premiums), the bank or mortgage company will likely start a foreclosure on the rental property.

  • You won’t have to move out while the foreclosure process is going on. You must, however, continue to pay rent and comply with all terms of the lease during the foreclosure.

When a Tenant Has to Move Out After a Foreclosure

Whether you’ll have to move out after the foreclosure primarily depends on two critical questions.

  • When did your lease begin?
  • When did the landlord take out the mortgage?

What happens if you signed the lease before the landlord got the mortgage. Usually, if you signed the lease before the landlord took out the mortgage on the property, the lease continues after the foreclosure. In this situation, you can't be evicted unless you violate the terms of the lease.

However, if you signed a subordination agreement, in which you agreed that the mortgage had priority over your lease, the foreclosure will probably terminate the agreement. (Residential leases sometimes have a clause that requires the tenant to sign a subordination agreement if the lender later takes out a new mortgage or refinances.)

What happens if you signed the lease after the landlord got the mortgage. If you signed your lease after the mortgage was taken out, the foreclosure terminates the lease. In most cases, the new owner can then have you evicted. (The new owner will have to give you proper notice to vacate before evicting you.)

Do Any Laws Protect Tenants After a Foreclosure?

In 2009, a federal law called the “Protecting Tenants at Foreclosure Act” went into effect. Under this law, the new owner (the person or entity that purchased the property at a foreclosure sale) had to honor an existing residential lease until it ended, unless that new owner wanted to live in the home. In that situation, the new owner had to give the tenant 90 days' notice to move out. In addition, month-to-month tenants were entitled to 90 days’ notice before having to move out under the law.

Unfortunately, this law expired at the end of 2014. A permanent version of the law was introduced to Congress in 2015, but it is unlikely that it will pass.

Other Laws That Protect Renters

Fortunately for some renters, certain states have laws that are similar to the expired federal law, which give tenants protection from eviction after a foreclosure. Some cities also provide eviction protections to tenants.

California law that protects renters. California law says that the purchaser who buys a property at a foreclosure sale must honor a fixed-term residential lease (if entered into before title is transferred at the sale) through the expiration of the lease, unless:

  • the purchaser intends to live in the home
  • the tenant is the child, spouse, or parent of the mortgage borrower
  • the lease between the tenant and the mortgage borrower was not an "arms' length" transaction, or
  • the rent is substantially below fair market value (not including government-subsidized tenancies).

If any of the above are true, the purchaser gets the right to evict the tenant. The purchaser must give the tenant a 90-day notice to quit (vacate) before filing an eviction lawsuit with the court. The purchaser must also give 90 days' notice to month-to-month renters to end a tenancy.

And, even if it looks like the purchaser can proceed with an eviction based on this law, an eviction might still not be possible in California cities that have “just cause” eviction laws.

The California law that protects renters after a foreclosure is scheduled to sunset (expire) on December 31, 2019, unless it is extended.

Illinois law that protects renters. Under Illinois law, anyone who buys a residential property through a foreclosure can terminate a bona fide (genuine) lease only:

  • when the lease ends, with no less than 90 days' written notice (though if the buyer at the foreclosure sale intends to occupy the property as a primary residence, the lease can be terminated with 90 days' notice) or
  • by no less than 90 days' written notice in the case of a month-to-month or week-to-week term.

The New Owner May Let You Rent the Property

If your state’s laws do not protect renters after a foreclosure, one way to avoid losing your rental home in this situation, at least for a while, is to work out a deal the new owner. You might be able negotiate a new lease or other agreement that will allow you to stay in the property.

Fannie Mae, for example, offers a program that allows renters to remain in the property after a foreclosure by paying rent to Fannie for a period of time. In addition, renters may be eligible to get financial assistance if/when they choose to move out.

Questions for Your Attorney

  • I just found out that my landlord is in foreclosure. I've been paying rent regularly, but now he's nowhere to be found. The bank says I'm late on rent and it wants to evict me. What can I do?
  • I heard that tenants in rent-controlled buildings can't be evicted in a landlord's foreclosure action. Is that true?
  • I just received a summons and complaint on my landlord's foreclosure action. Should I start looking for a new place to live right now, or will the bank keep my lease in place? Do I have any say in the matter?
  • Does my state have any laws protecting tenants during a sale or foreclosure?

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