With a vigorous real estate sales market, far fewer properties are in foreclosure than during the “real estate bust” of ten years ago. However, there are always situations that can render homeowners unable to service their mortgage debt. When the property is occupied by tenants, there are practical and legal considerations regarding the impact of a foreclosure.
On May 24, 2018 the “Protecting Tenants at Foreclosure Act” (PTFA) of 2009 was revived as part of a larger piece of legislation (the Dodd-Frank Amendments) after expiring in 2014. The Act is designed to provide a buffer for tenants who live in property, pay rent as promised, and through no fault of their own become impacted by the landlord’s inability to service the mortgage.
Prior to PTFA, foreclosure by a lender automatically nullified the lease and subjected tenants to the prospect of removal from the property. The term “cash for keys” was coined when lenders would offer tenants money to relinquish possession and move on, rather than endure an eviction process and the stress that would entail.
The PTFA is designed to protect bona fide tenants, which are defined as those who:
- Are not the borrower or spouse, child, or parent of the borrower
- Leased the property in an arm’s-length transaction
- Are paying a rent that is not substantially less than the market rate
Among the key provisions of PTFA are:
- Tenants in a property that is acquired by a lender or investor through foreclosure must be allowed to remain for the balance of their lease term
- If there is no written lease or the lease is terminable at will, the tenant is entitled to a 90 day notice to vacate
- The tenant remains obligated to pay rent while the property is in foreclosure and to the new owner when the property is acquired
- Successors (new owners) who intend to occupy the property as their primary residence can issue a 90 day notice regardless of the lease term
The takeaway for tenants who have concerns or receive notice the mortgage is in arrears is that this law will provide reasonable time to seek other housing. If a property manager is involved, he/she will be able to walk through the timelines and requirements to minimize the impact of the situation on the occupants. There will also be some notice to the tenants should the property be transferred to an investor with the intent the lease will continue through the end of the agreed term. In brief, tenants have no reason to panic when the mortgage is in arrears under this law.
At The Real Estate Group, keeping abreast of current laws affecting rental property and continuing education are priorities. The laws affecting rental are complex and a single misstep can cost thousands of dollars and/or expose the landlord to liability claims. Let our property management team show you why having a pro in your corner is a sound business decision.