Virtually any tenant in any type of property may find out that their landlord’s ownership interest in the property has been foreclosed. To some extent, this is the problem of the landlord rather than the tenant. Tenants may feel uncertain about what to expect from the new owner, though. This may be the bank that held the mortgage, which may result in a sharp decline in maintenance and the condition of the property if the bank transfers it to a mortgage servicer. The lender and the mortgage servicer have little incentive to sink money into maintaining the building or keeping up with utility payments. Often, tenants find that a property becomes uninhabitable if the bank fails to sell it.
Laws Protecting Tenants in Foreclosed Properties
In addition to practical concerns about the condition of the property, tenants may worry that they will be evicted immediately upon a foreclosure. However, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 renewed protections that were initially provided by the Obama administration. This federal law allows tenants to stay until the end of a lease despite a foreclosure. Tenants who are renting from month to month rather than under a fixed lease have a 90-day notice period before being required to move out. If the new owner of the property intends to live there, however, they can terminate the lease of an existing tenant with a 90-day notice period.
State and local laws sometimes provide broader protections. The federal law states that it does not preempt any state law that expands the scope of tenant rights. For example, some cities permit a landlord to terminate a lease only for just cause. This requirement transfers from the foreclosed property owner to a bank or a new property owner. Just cause does not include a change in property ownership.
Often, a new property owner will not want to evict a current tenant anyway. Leaving a building vacant may pose security risks and result in the property’s value dwindling quickly. Some property owners do not share this perspective, however, and may offer a tenant a cash payout to leave a property without the formal eviction process. You may want to think twice before taking this deal if you do not have a new home arranged. Going through the eviction process can give you more time to find a new home.
Rights of Tenants Against the Former Landlord
If you have a lease, it will transfer automatically to the new landlord, so the tenant usually will have no rights against the former landlord. If you do not have a lease, your tenancy can be terminated under the same rules that would have applied to the former landlord. There is only one significant situation in which a tenant may want to sue their former landlord.
This arises when a tenant who has a lease is forced to move out under state and federal notice laws because the new owner plans to move into the property. (As discussed above, this is an exception to the general rule that a lease transfers fully to the post-foreclosure property owner.) As a result, the tenant might bring a small claims case against the former landlord for violating the covenant of quiet enjoyment. This technical legal term simply means that the landlord failed to meet their obligation under the lease to give the tenant the rental for the lease term.
Damages that you can pursue in this type of lawsuit include the costs of finding a new home and moving there, as well as any increase in rent under the new lease. Collecting the full amount that you are owed can be challenging if the former landlord is facing financial difficulties. However, the judgment will remain valid and support collection efforts for a long time.