As a result of the downturn in our economy, many properties have been, and will continue to be, sold at foreclosure sales. The sale of bank owned properties comprises the majority of recent sales in many areas. Realtors must have some understanding of the foreclosure process and how it impacts on the rights and obligations of tenants in possession. In Oakland, some knowledge of the rent laws is essential.
Traditionally, the federal government keeps its hands off of real property issues. But given the large number of bank failures and bailouts, and the alarming increase in property foreclosures nationwide, Washington saw it prudent to pass legislation to protect tenants in occupancy.
Congress passed the Protecting Tenants at Foreclosure Act of 2009 in an effort to ease the impact of foreclosures on tenants. Under this law tenants after a foreclosure are entitled to 90 days notice to vacate instead of the traditional 3 day notice to quit or 30 day notice of termination of tenancy.
The Act requires immediate successors in interest at a foreclosure sale to: (1) provide bona fide tenants with a 90 day eviction notice, and (2) allow bona fide tenants with leases to occupy the property until the end of the lease term except that leases can be terminated on 90 days notice if properly purchased by an owner occupant.
Under the Act, a bona fide tenant is one where the tenant isn’t the foreclosed borrower or a member of his or her family, the lease is the result of an arms length transaction, and the lease requires rent that is not substantially lower than fair market value or is reduced or subsidized due to a federal, state or local subsidy.
For Section 8 tenancies, a foreclosure sale isn’t considered good cause to evict. A new owner must honor existing leases, but may give a 90 day notice to quit with expiring leases. The HAP contract remains in effect as to successors in interest at the foreclosure sale.
The provisions of the Act are set to expire on December 31, 2012.
The Protecting Tenants at Foreclosure Act of 2009 was designed to preempt state laws that permitted the unfettered eviction of tenants from foreclosed property. In California, the law permits the eviction of a tenant, after foreclosure, with the service of a 3 day notice to quit. However, this law is superseded by the new federal law for the time being.
While there has been talk in Sacramento about passing new laws to protect tenants in occupancy after foreclosure sales, nothing has happened. Perhaps our state lawmakers are busy with other projects, like preventing our state from going bankrupt.
State Attorney General (now Governor) Brown launched an investigation into what he calls the “forgotten victims" of the collapse in the housing market. While the investigation is aimed at violations of existing laws, the investigation results could lead to a call for new legislation at the state level.
But who needs state law where local eviction laws protect tenants. Many cities in California have eviction and rent control laws that protect tenants in occupancy. Oakland has such laws. In the case of Gross v. San Francisco Superior Court, it was held that following a foreclosure sale, a tenant in a rent controlled unit cannot be evicted without just cause. Nor can rent be raised in violation of the Oakland Rent Ordinance.
But other than providing protections against evictions and rent increases, Oakland law does not further protect tenants after a foreclosure sale.
Common Issues in Oakland
The single most problem encountered by purchasers of foreclosed property in Oakland is the problem of the sham lease. Because of the new protections, under federal and local law, for tenants with long term leases, there is an incentive for tenants to create fake long term leases. In addition, many of these falsified leases carry a very low monthly rent. If you see a lease that is for a term exceeding one year, or the rent is far below market value (taking rent control into consideration), you are probably looking at a sham lease.
In some cases, the fake leases don’t even contain the signature of the foreclosed borrower who would have been the landlord before the foreclosure sale. But other times, the foreclosed borrower offers a great deal to a friend or relative at the expense of the foreclosing bank. If you suspect a fake lease, talk to an attorney who specializes in these matters. Making a mistake early on can translate into a huge loss of equity.
The other common issue with tenant occupied properties relates to security deposits. The foreclosed borrower will most likely not be paying back the deposit and the tenant will be demanding that the new owner be responsible for returning the deposit.
Many times a tenant has paid deposits to the foreclosed landlord. These deposits include security deposits and the advanced payments of rent. Both are considered "security deposits" and are governed by California Civil Code §1950.5.
Within a reasonable time, the foreclosed landlord is required to transfer all security deposits to either the purchaser at the trustee's sale or to the tenant. Civil Code §1950.5(h). Foreclosed landlords rarely do either, but still remain personably liable to the tenant for the return of a deposit.
The purchaser at a trustee's sale is not immediately entitled to demand a transfer of a deposit and cannot sue to enforce a transfer. A purchaser is liable to a tenant for a return of a deposit when the trustor/landlord fails to deliver the deposit to the purchaser or lessee. If the purchaser becomes obligated to return a deposit, and no deposit was ever transferred by the foreclosed landlord, the purchaser might then be able to seek a recovery from the foreclosed landlord.
The problem for the purchaser will be the lack of accounting for deposits by the trustor. Tenants may recover deposits in small claims court based upon their own testimony that a deposit was paid. The purchaser at the trustee's sale will have little or no evidence to show that the deposit should not be refunded.
Copyright 2011 Clifford E. Fried. All Rights Reserved. The information provided in this article is general in nature. Consult with an attorney for any particular situation or set of facts. Clifford E. Fried has represented banks and foreclosure investors with evictions and other occupancy issues. You may reach him at 510-625-0100 or [email protected]