A federal law was recently passed which significantly impacts a lender’s right to take possession of tenant occupied property bought at foreclosure sale. This law is known as the Protecting Tenants at Foreclosure Act and became effective upon its enactment on May 20, 2009. This law applies to tenant occupied property that is bought by a lender who has foreclosed a “federally related mortgage loan” as defined in the Real Estate Settlement Procedures Act of 1974 (“RESPA”).
LOAN CATAGORIES IMPACTED BY NEW LAW SET FORTH IN RESPA
If you’re a lender that’s either regulated by or has accounts insured by the Federal Government or an investor who invests in residential real estate loans aggregating more than $1,000.000 per year, this new law will almost certainly apply.
CASES WHERE THE TENANT RESIDES AT THE PROPERTY WITHOUT A WRITTEN LEASE
Where a tenant resides at the property without a written lease, the lender must serve a 90-day notice to vacate after confirmation of the foreclosure sale.
After expiration of this 90-day notice to vacate, the lender must then take possession by legal process pursuant to applicable state law.
CASES WHERE TENANT RESIDES AT THE PROPERTY WITH A WRITTEN LEASE
Under this law, if the property is tenant occupied and the loan is a “federally related mortgage loan” lender’s rights may be subject to tenant’s written lease. This would occur only where there is “bona fide” written lease that pre-dates confirmation of the foreclosure sale.
REQUIREMENT THAT LEASE CONSTITUTE A “BONA FIDE” LEASE
To be enforceable against a lender, any written lease pre-dating confirmation must also qualify as a “bona fide” lease. “Bona fide” lease as outlined in this new law requires: 1. The tenant not be either a child, spouse, or parent of the mortgagor; 2. The lease is the result of an arms-length transaction; and, 3. The rent being paid represents a fair market rental rate.
Where there’s a bona fide lease and the tenant continues to perform required duties under that lease, the lease remains in force until its expiration.
EXCEPTION:There is one exception to this rule. This exception applies when the lender has a signed purchase agreement with a purchaser who will utilize the property as a primary residence. In this instance, once the lender has a signed purchase agreement it can serve a 90-day notice to vacate.
After the 90-day notice to vacate expires, the lender would then have to take possession by legal process pursuant to applicable state law.
NOTICING REQUIREMENTS WHERE PROPERTY INVOLVES A SECTION 8 TENANCY
If a Section 8 tenancy is involved, all noticing requirements for federally subsidized property apply in addition to the requirement of a 90-day notice to vacate.
After federal noticing under Section 8 and expiration of 90-day notice to vacate, the lender would then have to take possession by legal process pursuant to applicable state law.
SUNSET PROVISION OF PROTECTING TENANTS AT FORECLOSURE ACT
This law is slated to terminate pursuant to sunset provision on December 31, 2012.