New Foreclosure Laws Allow Protection for Tenants

Whether you are landlord or tenant of a house that is foreclosure, it may bring up a whole gambit of new questions of what happens between the lease, sale, and renter displacement.

As an owner, it may be an extra headache on top of  dealing with the sale. As a tenant, it can be confusing and frustrating to learn the home you’ve made a commitment to, doesn’t share the same commitment back. On either side, it’s important to know your rights.

First and foremost, the agreement the owner (seller) has with the bank, and the agreement the tenant has with the owner are two completely separate things; one does not negate the other when the Seller falls behind on the payments to the existing lien holders.

If there is a lease in place, it’s stays in place and has to be honored in most cases. If the house is going to auction in 3 months, but the lease  is good for another 6 months, the new owner has to abide by the existing lease, (in most, but not all, instances). 

Protecting Tenants of Foreclosure Act

Let’s explore this a little more:

The law that was set in place Protecting Tenants At Foreclosure Act of 2009 has been extended and included some changes. 

Before, a lease must have been signed at least 3 months (90 days) BEFORE the foreclosure auction in order for the tenants to recognize any rights. Now, tenants can sign the lease at almost any time before the auction date to realize the same protections. 

Now that doesn’t mean the tenants get to stop paying rent. Much to their frustration, I’m sure, but if they stop making payments, you as a landlord can still start the eviction process. It doesn’t matter if you as the owner have stopped making payments to the bank; their lease agreement is a completely separate and legally binding lease that has to be acted upon according to the terms and conditions in place.

But as the tenant, even though it might be vexing to know you’re making payments to an owner that isn’t using those funds towards a mortgage payment, it’s important to pay rent on time in order to avoid getting evicted. Try to work with your current landlord as best you can before the foreclosure happens, and perhaps a local tenant advocacy group or attorney that can help you understand you rights and responsibilities.

Federal laws and local laws

Since there are state laws in place, I cannot speak to any of those, but let’s cover some of the benefits and exclusions of the federal law for tenants in homes in foreclosure. 

1) Even if the renters in place only have a month to month lease, they can still stay up to 3 months after the date of the title transfer (after the foreclosure). The lease has to be valid though. 

2) Once the foreclosure occurs, tenants on a longer term lease can exercise the rest of the lease. But, this is a challenge if the new buyer is actually going to be moving into the home. If that’s the case, the existing renter have 3 months (90 days) from the date of the title change to move from the property. Although it might not be ideal, it’s still a buffer of time for both parties. 

3) Notably, the Tenants in Foreclosure Act doesn’t protect renters who are behind on payments, have invalid or fraudulent agreements, or put together a lease after the foreclosure date (which is now recognized as the date of transfer of title). 

As a tenant, again, the best advice is try to work out something with the current owner, try to stay up to date on any and all changes, and if you do work out some sort of agreement other than what you have in place, keep everything in writing. 

As an owner, it would be wise to do the same, as well as speak with a local eviction attorney that understands the caveats and rights of Landlords of a home in foreclosure. 

Please note, I’m not an attorney, I’m not a CPA, and none of this is advice for your particular case. If you are in a situation that pertains to the information contained in this article, you are encouraged to contact local professionals and do your own due diligence. 

Resources: (Full Act)
Protecting Tenants At Foreclosure Act of 2009

Tracy (G+) is an Arizona Short Sale Realtor, Investor, Rehabber, and Foreclosure Expert.

She is also an avid blogger, vlogger, contributor to the Bigger Pockets Blog, and consultant on all things Arizona Foreclosures.