Mountain Law: New law protects tenants in foreclosures
In the recent economic downturn, many landlords lost their properties to foreclosure … and this resulted in many tenants being evicted with little notice by new property owners. To address this critical problem, Congress recently passed the Protecting Tenants at Foreclosure Act (PTFA), which slows down the eviction process after a foreclosure as discussed in this article.
Overview of state law before PTFA: Under Colorado state law, a completed foreclosure results in a new deed for the property being given to either the high bidder (which is often the foreclosing lender) at the public foreclosure sale or the redeemer of a junior lien. I discussed this process in more detail in my April 29, 2009, article entitled “Lien priority fundamentals.”
If the property is leased at the time of a foreclosure sale, the high bidder at the sale or redeeming junior lienholder can keep the lease(s) in effect by filing a notice with the officer conducting the foreclosure sale (either the sheriff or the public trustee) before the officer issues the deed. If the notice is not filed, existing leases are extinguished by the foreclosure. The new owner can then, upon receipt of the deed, commence an eviction action to regain possession of the property from the tenant(s) as necessary.
Effect of PTFA: PTFA slows down the ability of a new owner after foreclosure to evict an existing tenant. It provides that the new owner must give the tenant at least 90 days’ notice from when the new deed for the property is issued before commencing eviction. Subject to the limitations discussed below, every tenant is entitled to the 90 days’ notice, even if the lease was entered into after the foreclosure commenced; if there is not a written lease; or if the lease could be terminated at will by the landlord under state law.
In the case of a lease that was entered into before the foreclosure started, PTFA permits the tenant to remain in the property until the end of the lease term. The only exception is that the tenant may be evicted if the new owner sells the property to a purchaser who will occupy the property as a primary residence; however, even in that case, the tenant is still entitled to 90 days’ notice before the sale. PTFA unhelpfully does not address the respective rights of the new owner and tenant if the tenant does not pay rent to the new owner during the lease term.
Limitations of PTFA: PTFA generally applies if the lien foreclosed: (1) is not temporary financing (such as a construction loan); (2) encumbers residential property (not commercial property); and (3) is made by a lender whose accounts are insured by the federal government or who is regulated by the federal government (which includes most commercial lenders, but not necessarily all private lenders). There are other special times PTFA applies (or does not apply) as provided in the statute.
To qualify under PTFA:
1. The lease must be “bona fide,” which means the tenant is not the owner of the property or his child, spouse or parent;
2. The lease must be the result of an “arms-length” transaction, which means the landlord and tenant are not on close business terms; and
3. The rent received by the landlord cannot be substantially less than fair market rent for the property (unless the rent is subsidized under federal, state or local law).
PTFA does not limit any greater protections that might be provided to tenants under State, Federal, or local law, for subsidized leases.
Summary: When applicable, PTFA permits tenants to stay in a foreclosed property for at least 90 days after the deed is issued to the new owner, and in some cases longer. The law provides relief to tenants when their landlords lose the property.
Noah Klug is principal of The Klug Law Firm, LLC, a general law practice in Summit County emphasizing real estate, business law and litigation. He may be reached at (970)468-4953 or Noah@TheKlugLawFirm.com.
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