As a tenant, if you received notice that your apartment or house is being foreclosed on, would you know what to do? Would you know your rights and duties? On the flipside, if you purchase property at a foreclosure auction, and the property already has tenants, would you know what your rights or duties are with regards to those tenants? If you are leasing property and you get served with a foreclosure suit, would you know how to proceed with your tenants? Both tenants and landlords have rights and duties during a foreclosure.

Whether you are renting or leasing a house, apartment, or condo, you should know that you have rights during foreclosure. This article briefly discusses the rights and duties of both landlords and tenants during foreclosure proceedings and can assist you in protecting your interests during a foreclosure.

What is a Foreclosure?

A foreclosure is a judicial proceeding instituted by a lending institution or other lien holder after the homeowner defaults on payments, such as the mortgages, taxes, or homeowner’s association fees. Foreclosure is the actual process of taking possession of a mortgaged property as a result of the mortgagor's failure to keep up certain payments. In foreclosure, the homeowner, as well as any other interested party, loses all rights to and interests in the property.

The Basics: The Protecting Tenants in Foreclosure Act

In May 2009, the Federal government created the Protecting Tenants in Foreclosure Act (“PTFA”). This Federal law is enforceable at the state level and protects bona fide tenants from being evicted without notice if the home they are renting is foreclosed on. At the same time, it also imposes duties on those who purchase foreclosed property at foreclosure sales if the foreclosed property has tenants of the previous owner.

To Qualify for Protection:

  • In order to qualify as a bona fide tenant, the tenant (1) must not be related to their previous landlord; (2) must be paying market value for rent; and (3) must have a lease that was the result of an arm’s length transaction.

The Protection:

  • If a bona fide tenant has a valid lease for the property they are renting, and that property has been foreclosed on and sold at a foreclosure auction, the new owner of the foreclosed property must honor the existing lease until the end of the lease term. The only exception to this is if the new owner wishes to occupy the property as his/her primary residence. In the event of this one exception, the new owner must give the tenant at least 90 days notice before terminating their tenancy, even if there is less than 90 days left on the lease. If the tenant is under a month-to-month lease, and the property has been foreclosed on and sold at a foreclosure auction, the new owner of the foreclosed property must give the tenant at least 90 days notice before terminating the tenancy.

What the Act Does NOT Do:

  • PTFA does not excuse tenants from paying rent even if their home is being foreclosed on. Therefore, the tenant must continue to pay their current landlord rent, or else the landlord has the right to evict them in the manner provided in the Landlord Tenant Act. Additionally, if the rented home is sold at a foreclosure auction, the new landlord is also entitled to receive rent upon giving notice to the tenants that there has been a change in ownership. Until the tenants are notified of this change in ownership, tenants are required to continue paying rent to their previous landlord.
  • If the tenants are not bona fide tenants, PTFA does not require the new landlord to provide notice of change of ownership to the new tenants. Nor does PTFA require the new owner to honor a tenant’s lease if they are not bona fide tenants.

What Should I Do If I Am Served With Notice of A Foreclosure Action Against My Landlord?

Upon receiving a notice of a foreclosure action against the landlord of the rental property, the tenants are usually listed as an “Unknown Tenant,” in which case the tenant should file an Answer. The Answer is essentially the tenant’s opportunity to respond to the foreclosure notice. Within the Answer, the tenant should explain to the court that they live in the property and are a bona fide tenant paying market rent. If the tenant has a lease, a copy of the lease should be attached to the Answer. After filing the Answer, the court will know it needs to send any papers filed in the action to the tenant and notify them of any hearings scheduled in the foreclosure case.

If you are a tenant that has been served with foreclosure papers, and you are unsure about what needs to be included in your Answer in order to protect your rights as a tenant, the attorneys at Heekin Law can assist you in drafting and filing your Answer.

What happens if the Mortgage is Foreclosed and a New Owner Becomes the Landlord?

If the mortgage is foreclosed, the court will enter a judgement against the previous landlord and schedule a foreclosure sale. Once the property is sold, a certificate of sale is issued to the new owner. No sooner than ten days later, a certificate of title is issued, which gives the new owner ownership rights to the property. Once the new owner assumes the role of the previous landlord, the new owner must take all reasonable steps to determine whether the property is occupied by bona fide tenants. If the property is occupied by bona fide tenants, the new landlord must send the tenants notice of new ownership, as well as proof of new ownership. Upon this notice, the tenants must begin sending their rent to the new property owner, or new landlord, to the address given by the landlord in the notice.

What happens if I Purchase Property at a Foreclosure Sale and Then Discover the Property is Occupied?

If upon purchasing property at a foreclosure sale you then realize there are occupants on the property, you have the following duties to ensure no potential rights are violated:

  • Try to establish contact with the occupants;
  • Notify the occupants of your new ownership and request documents from them showing they are bona fide tenants and showing proof of their rental payments; and,
  • If they are bona fide tenants, follow the steps previously discussed in this article; or,
  • If they are not bona fide tenants, you may apply to the court for immediate possession.

Please recognize that every circumstance is unique, and legal information is not the same thing as legal advice, which tailors information to your specific situation. The attorneys at Heekin Law can answer specific questions regarding your situation if there is something that you are unsure of, or if you need further information. Please contact us at (904) 998-9733 to speak with an experienced attorney in our office.