REAL ESTATE law
July 2009
The
Protecting Tenants at Foreclosure Act:
Changing the Rules of the Game
In May 2009, as part of the Helping Families Save Their
Homes Act of 2009 (Pub. L. 111-22), President Obama signed the Protecting
Tenants at Foreclosure Act of 2009 (the “Act”). The Act, which went into effect
May 20, 2009, and does not expire until December 31, 2012, substantially alters
the treatment of tenants after foreclosure of a residence. The scope of the Act
is broad, applying to any residential real property and any person who acquires
the property, whether a lender who acquires it via a credit bid or a third party
investor at a foreclosure sale.
Lenders, purchasers of foreclosed properties, and
residential tenants should be aware of the rights and obligations contained in
the Act. Pursuant to the Act, an immediate successor in interest “of any
foreclosure on a federally-related mortgage loan or on any dwelling or
residential real property” is required to (i) honor the remainder of the term
under a “bona fide lease” entered into prior to the notice of foreclosure and
(ii) give at least 90 days notice to vacate to a “bona fide tenant” who does not
have a lease or has a lease terminable at will.
A “bona fide” lease or tenant is one in which (a) the
borrower or his/her child, spouse or parent is not the tenant, (b) the lease or
tenancy is the result of an arms-length transaction; and (c) the rent is “not
substantially less than fair market rent” or is reduced or subsidized due to
federal, state or local subsidy. In the case of a bona fide lease, the successor
in interest may terminate the lease, subject to the 90-day notice requirement,
only upon the sale of the residence to a purchaser who intends to occupy it as a
primary residence (presumably, this applies if the purchaser at the foreclosure
sale meets this criteria as well).
By its terms, the Act will only replace state or local
law to the extent it offers less protection than the Act. Any state or local
laws that provide longer time periods or additional protections for tenants in
this situation will remain in effect. Under Arizona law, there are no special
protections offered to tenants after a foreclosure sale; lenders or third party
purchasers at a foreclosure sale could, in most cases, opt to honor the lease or
institute eviction proceedings. As a result, the Act will completely subsume
Arizona law on this issue.
Undoubtedly, the passage of the Act will spur a flurry
of litigation regarding whether a lease or tenant is “bona fide” – in
particular, whether the tenancy or lease is the result of an arms-length
transaction and whether the rent is not substantially less than “fair market
value” (a particularly difficult determination in today’s market). As a result,
for tenants without a written lease, a prudent approach for a lender or
purchaser would be to provide the 90-day notice to vacate regardless of whether
the tenant meets the “bona fide” requirements. Dependent on the remainder of the
term of the lease and how clear it is whether the “bona fide” requirements are
met, a cautious approach would dictate honoring the remainder of the lease as
well – or, at the very least, calling your attorney to discuss whether the
requirements are met.
These materials
are designed to provide general information prepared by
professionals in regard to the subject matter covered. It is
provided with the understanding that the author is not engaged
in rendering legal, accounting, or other professional service.
Although prepared by professionals, these materials should not
be utilized as a substitute for professional service in specific
situations. If legal advice or other expert assistance is
required, the service of a professional should be sought. |
