What is the Protecting Tenants at Foreclosure Act of 2009, and Why Do Real Estate Investors Need to Care About It?
Many real estate investors in the current market are focusing on properties in foreclosure. Many of these properties are rental properties which were lost by prior investor-owners when the interest rates on the adjustable rate mortgages which financed their investment property acquisitions adjusted to levels which the investors could not afford, or when the investor-owners became unemployed due to the recession. While some of these properties now sit vacant, others remain occupied by tenants who are still under lease agreements with the prior owner. What happens to these tenants when the new owner purchases the property?
Lost in all the publicity related to the Homebuyer tax credit and mortgage modification programs has been the Protecting Tenants at Foreclosure Act of 2009 . This temporary statute has important implications for real estate investors, as the law could bring a proposed sale to a screeching halt if not complied with.
The Protecting Tenants at Foreclosure Act of 2009 protects tenants from eviction because of foreclosure on the properties they are renting. These provisions took effect on May 20, 2009, and will expire on December 31, 2012.
The tenant protection provisions apply in the case of any foreclosure of a “federally related mortgage loan” or on any dwelling or residential real property. These provisions provide that “any immediate successor in interest” in such a foreclosed property, including a bank that takes title to a house upon foreclosure, will assume the interest subject to the rights of any bona fide tenant and will need to comply with certain notice requirements.
Under this law, the immediate successor in interest of a dwelling or residential real property must provide tenants with a notice to vacate at least 90 days before the effective date of such notice. Additionally, tenants must be permitted to state in the residence until the end of their lease, with two exceptions:
(1) When the property is sold after foreclosure to a purchaser who will occupy the property as a primary residence or,
(2) When there is no lease or the lease is terminable at will under state law.
However, even when these exceptions apply, tenants must still receive 90 days notice before they may be evicted.
The protections of this law apply to tenants under a “bona fide” lease or tenancy. A lease or tenancy is “bona fide” only if:
(1) The mortgagor or a child, spouse, or parent of the mortgagor under the contract is not the tenant;
(2) The lease or tenancy was the product of an arm’s-length transaction; and
(3) The lease or tenancy requires the receipt of rent that is not substantially less than fair market rent or the rent is reduced
or subsidized due to a federal, state or local subsidy.
One key point to this law: the tenant(s) are still required to comply with the provisions of the lease (such as payment of monthly rent). If a tenant defaults on the rent obligations, the new landlord can still bring an eviction action without having to give the notices required under the Act.
For those investors looking to redeem a property in foreclosure as a junior creditor and make a quick turn to a new buyer who intends to occupy the property, care must be taken to ensure that all required notices have been given under the Protecting Tenants at Foreclosure Act in order for the closing to occur as planned and on schedule.