What are a Tenant's Rights in a Foreclosure?

Investment Property Is the First Casualty

While many foreclosures are on homes owned by individuals, large percentages are owned by investors maintaining the properties for profit. When the housing values slump along with rising interest rates, it creates a situation where investors can no longer extract enough rent to maintain the profitability of the property, nor can they sell off the investment due to a soft market. The inevitable result is the loss of the investment property to foreclosure. This process typically begins with a foreclosure action, which is the legal proceeding initiated by the lender or bank against the property owner. Tenants affected by foreclosure can come from both low income and more affluent backgrounds, highlighting the broad impact of these proceedings.

At Least 90 Days’ Notice Must Be Given

The good news for tenants is they no longer automatically lose their rights after a foreclosure. The Protecting Tenants at Foreclosure Act of 2009 (PTFA) guarantees that lease agreements will survive a foreclosure and month-to-month tenants will have at least 90 days’ notice prior to eviction after a foreclosure. The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 further allows tenants to stay until the end of a written lease despite a foreclosure. Tenants renting month to month have a 90-day notice period before being required to move out after a foreclosure. After a foreclosure sale, the new owner must provide written notice to all tenants advising them of their rights, including the new owner's name and address, and this notice must be given promptly after the effective date of the ownership change.

Tenants in rent-controlled and rent-stabilized units maintain the same rights and obligations as they did under agreements with their previous landlords after a foreclosure, and the new owner must continue to comply with all laws and regulations that apply to such units. Tenants in non-regulated units may remain in the unit for 90 days after receiving notice from the new owner, or until the end of their lease term, whichever is greater. Tenants without a written lease may remain in the unit for 90 days after receiving notice from the new owner. If a new owner intends to occupy the property as their primary residence, they can terminate the lease of an existing tenant with a 90-day notice period, even if the tenant is in a rent-controlled or rent-stabilized unit.

In many states, the new owner is responsible for returning the security deposit even if the previous landlord did not transfer the funds. Some cities require a 'just cause' for eviction, which may prevent removal of tenants simply due to foreclosure, and state law may provide broader protections for tenants than the federal PTFA, including just cause eviction ordinances. A bona fide lease must be a legitimate arm's-length transaction, and the tenant cannot be related to the former owner.

The PTFA requires the new owner after a foreclosure to provide tenants with 90 days' notice before initiating any post-foreclosure eviction or to honor a tenant's existing lease if it extends beyond the notice period, unless the owner intends to use the property as their primary residence. Tenants named in a foreclosure action receive a formal summons and complaint, but they have no legal obligation to appear in court to defend the action. Tenants with Section 8 vouchers are protected by the PTFA and their leases must be honored; tenants in Section 8 housing cannot be evicted solely due to a change in ownership from foreclosure without other compelling circumstances. The PTFA applies to tenants in HUD-insured and HUD-subsidized properties, including those with Section 8 Housing Choice Vouchers.

Tenants must receive a notice from the bank at the start of the foreclosure action before any post-foreclosure eviction action may be brought in court, and the bank must provide its name, address, and telephone number on all notices to tenants regarding foreclosure actions. Tenants may be named as defendants in the foreclosure action and will receive a formal summons and complaint from the county clerk. Tenants are required to continue paying rent to the landlord during the foreclosure process until ownership is transferred to a new owner. After the foreclosure sale is complete and title is transferred, the new owner must provide written notice to all tenants with their name and address, and advise them of their rights. If a receiver is appointed during the foreclosure process, tenants should receive proof of appointment and information on how to submit rental payments to the receiver instead of to the landlord. The foreclosing party must notify all affected tenants of the outcome of the foreclosure judgment.

A landlord or new owner cannot evict a tenant without a court order, and the eviction process must follow all legal procedures, including proper notice and court proceedings. The tenancy generally continues until the lease ends or until a court order is issued for eviction, depending on the lease term and applicable state law.

It Is Possible to Negotiate a New Lease

It is important to note that even after foreclosure, some tenants are able to negotiate a new lease on the property if they wish to stay. New owners may offer a voluntary payout, referred to as 'Cash for Keys' or a 'cash payout,' to encourage tenants to vacate early without going through the formal eviction process. This can be a positive situation for all parties involved, especially if the new owner sees the investment potential of the property as a rental and understands the wisdom of keeping paying tenants in the property. Tenants should also be aware of their right to quiet enjoyment during the transition; if this right is violated, they may be entitled to money or compensation for moving costs or damages. Additionally, rental assistance programs may be available to help tenants find new housing if they are required to move after foreclosure. Regardless of how the situation shapes up, even in the worst-case scenario, renters can rest assured that they will have at the minimum 90 days’ notice to find suitable housing should their property be foreclosed on.

State and Local Considerations

When it comes to foreclosed properties, understanding state and local laws is crucial for protecting tenants’ rights. While federal laws like the Protecting Tenants at Foreclosure Act set a baseline of protections, many states and cities have their own rules that can offer even more security for tenants living in properties undergoing foreclosure. These state and local laws can affect everything from how much notice a tenant must receive before eviction, to whether a new owner can terminate a lease, and even what qualifies as “good cause” for eviction.

For example, in some areas, rent control or rent stabilization laws may prevent a new property owner from raising the rent or evicting tenants without a valid reason, even after a foreclosure sale. Local law might also require the property owner—whether it is the former landlord, a bank, or a new landlord—to maintain the property and keep up with necessary repairs during the foreclosure process. In certain cities, tenants in foreclosed properties must be given detailed information about the foreclosure notice and their rights, and in some states, existing tenants may be allowed to stay in the property for a set period after the foreclosure sale, regardless of the new owner’s intentions.

Most tenants facing foreclosure will benefit from seeking out free legal services or tenant advocacy organizations in their area. These resources can help tenants understand their rights under both state and local laws, and may assist with negotiating with the new property owner to remain in the property, either by signing a new lease or continuing under the terms of an existing rental agreement. This is especially important for tenants in rent stabilized units or those covered by local rent control ordinances, as these laws often provide more protections than federal law alone.

It is important to remember that state and local laws can vary widely, so tenants should research the specific rules that apply in their city or state. Some areas have strong protections for bona fide tenants, while others may have fewer safeguards in place. By staying informed about the foreclosure process, the eviction process, and the responsibilities of both the former landlord and the new landlord, tenants can better protect their right to stay in their home, receive proper notice, and ensure the property is maintained.

In summary, while federal law provides a safety net for tenants in foreclosed properties, state and local laws often offer additional protections. Understanding these laws—and seeking help from free legal services when needed—can make a significant difference in protecting tenants’ rights during and after a foreclosure.