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Tenant Protection in Foreclosure: Lenders as Landlords
By Meghan Musselman

With the current economic and housing crisis tending to focus on homeowners and mortgagors, tenants are an at-risk group often overlooked. Even if they pay their rent on time and otherwise abide by their lease terms, tenants may lose their home when the owner of the property fails to pay the mortgage and the lender forecloses. Recently, the U.S. Congress and several localities have moved to protect tenants by enacting laws that restrict a landlord’s or property owner’s ability to evict tenants in the event of foreclosure. Because the lender takes possession of the property in foreclosure, the lender is the landlord or property owner for purposes of these laws.

In May 2009, Congress passed, and President Obama signed the Protecting Tenants at Foreclosure Act of 2009 (the “Act”). The Act appears as Title VII of the Helping Families Save Their Homes Act of 2009 (P.L. 111-22). The Act provides that in the event of a foreclosure, the successor in interest to the property assumes the interest subject to certain restrictions on the ability to evict a tenant. The successor in interest must give any “bona fide tenant” 90 days’ notice before requiring the tenant to vacate. Further, bona fide tenants have the right to continue to occupy the property until the end of the lease with the following two exceptions: (1) the property is sold to a purchaser who will occupy the property as a primary residence; or (2) there is no lease or the lease is terminable at will. While tenants in these two circumstances will not have the right to occupy the property until the end of the lease term, they are still entitled to receive the 90-day eviction notice.

The Act applies to “bona fide tenants” where the property is subject to a “federally related mortgage loan.” A “bona fide tenant” means that the lessee is not the mortgagor or the child, spouse, or parent of the mortgagor; that the lease was an arms-length transaction; and that the tenant pays rent that is not substantially less than fair market rent for the property or the rent has been reduced pursuant to a federal, state, or local subsidy. “Federally related mortgage loans,” include any loan secured by a lien on one- to four-family residential real property, including individual units of condominiums and cooperatives.

The Act’s protections went into effect May 20, 2009, and will expire on December 30, 2012. The Office of the Comptroller of the Currency (OCC) issued a Bulletin on August 13, 2009, (OCC 2009-28) advising national banks to “adopt policies and procedures to ensure compliance with these new tenant protection provisions” and stating that the OCC will evaluate compliance with these provisions.

In addition to Congress’s efforts on the federal level, cities and towns around the country have adopted similar tenant protection measures. Ridgecrest, California, for example, passed an ordinance that restricts a landlord’s ability to evict tenants when the property is foreclosed (“Ridgecrest Ordinance”). Landlord is defined to include an owner (in most cases the lender) who takes title to the property in foreclosure. The Ridgecrest Ordinance specifies that after the title to a property has transferred in foreclosure, the landlord can only evict in certain circumstances, including failure to pay rent, violation of lease terms, or the owner seeks to recover the unit for use by a resident manager (if no alternative vacant unit is available) or by the landlord or the landlord’s immediate family. In addition, the Ridgecrest Ordinance provides that in certain circumstances, if the landlord evicts a tenant, the landlord must pay a relocation fee of twice the monthly rent plus $1,000. The relocation fee is required if the landlord evicts in order to recover the unit for use by a resident manager or by the landlord or the landlord’s immediate family, if the landlord intends to stop renting the unit, the landlord seeks to demolish or perform work on the unit, or the landlord evicts in order to comply with a government mandate to vacate. If the tenant is entitled to relocation assistance under any other law, the amount payable under that law will act as a credit against the amount the landlord is required to pay under the Ridgecrest Ordinance. If a landlord evicts a tenant, the landlord must provide the tenant with written notice of the reason for eviction “with specific facts to permit a determination of the date, place and circumstances concerning the reason.” Additionally, a landlord must provide written notice if the tenant is entitled to the relocation fee. The Ridgecrest Ordinance took effect September 1, 2009, and will expire on September 1, 2010, unless renewed by the City Council.

The Ridgecrest Ordinance was enacted recently to specifically address tenant evictions in the context of a foreclosure. Richmond, California, and Providence, Rhode Island, have also enacted tenant protection statutes that specifically address eviction in foreclosure. However, other ordinances that have been on the books for years, often known as “just cause” eviction ordinances, may apply to an eviction in foreclosure by virtue of the fact that they limit evictions to a specific list of permissible causes. Thus, in addition to monitoring the enactment of recent foreclosure eviction ordinances, lenders must also be aware of any previously existing “just cause” eviction ordinances that may apply. Localities in California with “just cause” eviction ordinances include West Hollywood, Los Angeles, Berkeley, Oakland, and San Francisco. Seattle, Washington, also has a “just cause” eviction ordinance.

Meghan Musselman is an associate in the Maryland office of Hudson Cook, LLP. Basis Points readers can reach Meghan at 410-865-5403 or by email at mmusselman@hudco.com.

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