Many people are confused as to what happens if the property in which they live has been foreclosed. Most fear that a Sheriff will come knocking on the door to suddenly kick them out. In California (an likely most other states) that cannot legally occur.  A foreclosure simply creates a change in the ownership of the property. The rights of the occupants in the property are determined by what their status was before the foreclosure and now, Federal and California has made these rights even clearer.  This creates more protection for tenants and a possible trap for unaware foreclosure buyers.

Here are the current rules:

1. FORMER OWNER IS OCCUPANT - If the former owner remains as an occupant of the property after a foreclosure, the new owner must give that person only a 3 DAY NOTICE TO QUIT. The theory is that the former owner knew the foreclosure was coming so they should have made arrangements to move.

2. OCCUPANT IS RELATED TO FORMER OWNER - If the occupant is related to the former owner, ie: child, parent, or spouse, and the former owner is not an occupant, then the new owner must give the occupants a 60 DAY NOTICE TO QUIT. In theory related parties should be aware of what is going on. Even so, this change gives these parties more time than they had before.

3.  UNRELATED OCCUPANTS ON PERIODIC TENANCY - If the occupant is not a former owner or related to the former owner and is on a periodic tenancy such as month-to-month (not a Lease), then the new owner must give the occupants a 90 DAY NOTICE TO QUIT. The thought here is that periodic tenants are innocent victims who may be surprised by the foreclosure and will need more time to find a new place to live.

4.  UNRELATED OCCUPANTS ON LEASES -  If the occupant is not a former owner or related to the former owner and is on a fixed-term Lease (such as 6 months, one year, etc.), then the new owner cannot terminate the occupant’s tenancy UNTIL THE END OF THE LEASE TERM unless the new owner intends to occupy the property themseves in which time the new owner must give the occupants a 90 DAY NOTICE TO QUIT. The thought here is that while Lease tenants are innocent victims who may be surprised by the foreclosure, they contracted for a specific term and had no right to expect a longer tenancy. However, as set forth below, they may have to actually pay rent to get the benefit. Despite this however, since the foreclosure extinguished the Lease, the new owner can treat this resulting tenancy as a periodic month-to-month tenancy if they intend to move-in.

Much of the new requirements arise under President Obama’s “Protecting Tenants at Foreclosure Act of 2009’’ which was contained in the ‘‘Helping Families Save Their Homes Act of 2009’’, which was signed into law by the President on May 20, 2009. California amended its laws effective January 1, 2010 in compliance. While any new law becomes a fertile ground for disputes, this one presents an interesting issue concerning tenants on leases seeking to stay the duration of the lease. The Act defines a “bone fide lease” as being a lease which requires the receipt of rent that is not substantially less than fair market rent for the property. But does this mean that the rent must be paid? That remains unclear. If so, this would seem punitive considering that a tenant without a lease would get a 90 day notice with no obligation to pay. But is it really fair to the new owner to let someone live their longer than 90 days without paying? Perhaps the intent was only to establish that the lease was real…not to provide an ability for the new owner to collect the rent. But with no payment, who would ever want to bid at a foreclosure sale? Of course, it It will be up to the court’s to decide who’s interpretation is correct.

If you have specific questions about your loans, liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com or call us at (916) 966-2260 for a phone or personal appointment. We offer a $200 flat fee attorney consultation to enable you to evaluate your judgment and tax risks and to plan a strategy to minimize or even avoid them. Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage.

While little has been done at the State or Federal level to provide assistance to upside down homeowners, efforts have been made to give greater protection to tenants in foreclosed properties. 

As a general rule, a foreclosure wipes out all leases and other rental agreements leaving the tenant in a month-to-month situation. For tenants on a lease, this can be a great shock when a Notice to Quit is posted on the front door.  Typically, state law requires the new owner to give the tenant 30 Days to vacate and if they don’t do so an eviction action can be started.  In July, 2008, California has adopted Code of Civil Procedure Section 1161(b) granting all residential tenants or sub-tenants a 60 days written notice to vacate after foreclosure.

In addition, in May, 2009, President Obama signed the “Protecting Tenants at Foreclosure Act of 2009″. The Act establishes a ninety (90) day notice to vacate period and grants additional rights to tenants in foreclosed properties. The central purpose is to provide innocent tenants, whose landlords have lost properties to foreclosure, with additional time within which to secure alternative housing arrangements.

EVEN MORE SIGNIFICANT is a portion of the Act which provides that, in the case of foreclosure on any federally-related mortgage loan or on any residential real property in which a recipient of public housing assistance resides, the immediate successor in interest assumes such interest subject to: (1) the lease between the prior owner and the tenant, and (2) the housing assistance payments contract between the prior owner and the public housing agency for the occupied unit.  Definition of a “federally-related mortgage loan” include any loan that a) is made by a lender that is either regulated by or whose deposits or accounts are insured by any agency of the Federal Government; b)  is made in whole or in part, or is insured, guaranteed, supplemented, or assisted in any way by the Federal Government; or c) is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation (or its successors).  This is a very broad spectrum of loans.  A ”housing assistance payments contract” means such Programs as Section 8. 

A thorough statement as to the purpose, import and impact of the Act can be found in a recent Federal Register Notice from the Department of Housing and Urban Development (”HUD”) and in a summary of Senate Bill 896. [Source www.thomas.gov].

The Act is extremely broad and vague and has given rise to more questions than answers, it is abundantly clear that the rights of persons or entities purchasing tenant occupied properties purchased through foreclosure after May 20, 2009, will be significantly impacted.

  If you have specific questions about your liability, foreclosure, or any legal issue, feel free to contact me at sjbeede@bpelaw.com.  Need help Coping with an Upside Down Loan? Checkout Steve’s audio-seminar and e-book at: http://www.stevebeede.com/copingwithanupsidedownmortgage/.