Written by attorney Perry B. Thompson

Tenants’ Rights And Foreclosed Homes

Tenants’ Rights & Foreclosed Homes

As foreclosures have continued in record number across Michigan, it has become common for renters to find that the house they have leased is now owned by a bank. Until May of 2009 these renters were in a very bad position. The bank’s interest in the property trumped their lease. That meant the bank could evict them during their lease term with no warning. Typically what would happen is that the real estate agent who would be listing the house for the bank would drive by the house periodically during the six month redemption period to make sure it was occupied, but would not contact the occupant during this time. So for six months after the foreclosure the renter had no idea that anything was wrong unless the landlord mentioned it. They continued making their rent payment to the old owner and believed nothing was wrong. As soon as the redemption period was over the renter would be contacted by the real estate agent offering them “cash for keys", a payment often around $1000 to be out of the house quickly and leave it clean. Or worse, they would just get home one day to find an eviction notice on the door.

This changed with the passage of the Protecting Tenants at Foreclosure Act of 2009. This law is intended to allow bona fide tenants to remain in the property for the duration of their written lease, or 90 days in the case of tenants without a written lease, even after the bank would otherwise have a right to possession of the house.

There are a few exceptions to this law that remove a lot of its power though. First, most leases require the tenant to cooperate with showing the property to prospective buyers. This provision would apply in this situation as well, so if you are a tenant in a bank owned property, you can expect to either need to cooperate with showings or face eviction for breaching this term of your lease. More importantly, even if the lease has more than 90 days remaining, the bank may terminate the lease upon sale to a buyer who will use the house as their primary residence as long as they give 90 days notice to the renter.

It is also important to note that only leases entered into before the foreclosure are protected by this law. Until this summer it was unclear what this meant. Did the lease need to be signed before the first notice of foreclosure or before the sheriff's sale. The law was ammended this summer to clarify that the date of the sheeriff's sale is the important date.

Also, the protection applies only to the current term of the lease. So, a right to renew is not going to be protected. But, if your current lease term ends in less than 90 days from the time of the notice you get from the bank, you will have the 90 day minimum notice period to look for a new home even though you will not be able to renew for another full year.

Finally, leases with an option to purchase are becoming increasingly common. But, this law does nothing to protect the option contract. And, the bank’s mortgage right is almost always going to trump the option contract. So, potential renters should be very careful before paying for an option to buy property unless they are completely certain that it is not in foreclosure.

Because of this law, it is a very good idea for renters to get a written statement from their landlord, either as a provision within the lease or a separate document signed at the time the lease is executed, stating the no foreclosure notice has been issued against the property. If a tenant later finds that the property was in some stage of foreclosure at the time the lease was signed, they would then very likely have a valid lawsuit against the landlord.

An item that frequently gets overlooked in a situation like this is the security deposit. Under Michigan law the security deposit is the tenant’s property until the landlord establishes some reason to be able to keep it. A landlord loosing possession of a property during the lease term is almost never going to be able to do this. So, the security deposit must either be returned to the tenant or forwarded to the bank with notice to the tenant and then the bank must give the tenant the required notices about where the security deposit will be held. The landlord should be contacted immediately to demand return of the security deposit if they have not sent the renter notice that it has been forwarded to the bank. If the landlord indicates that they do not have the money, they have technically committed a crime – although the police and prosecutor will probably not get involved. More importantly, by not returning the deposit, the landlord may have violated several other state laws, including the consumer protection law which provides attorney’s fees in addition to damages to the tenant. So, even though the amount sought is fairly low, an attorney would likely be willing to take the case because the statute provides that the landlord will have to pay their fees if the renter wins. Also, it should be noted that landlords in a foreclosure situation are likely candidates for bankruptcy. Any renter who learns that their landlord is filing for bankruptcy should seek legal advice immediately. The landlord’s obligation to repay the security deposit could be extinguished in the bankruptcy if something called an adversary proceeding is not used to have the debt declared non-dischargeable because it arose through embezzlement.

A final issue that is relevant to tenants whose rented home goes through foreclosure is illegal entry and rekeying by the bank. This is a growing problem as the contractors hired by banks get more aggressive in their tactics to get homes into their inventory. In some cases, occupied homes have been rekeyed before the foreclosure sale actually happened. But, even after the foreclosure sale the bank and their representatives do not have a right to break into a house that is not abandoned. They do not have a right to rekey a house that is not abandoned. And, they do not have a right to remove personal property, except under an order of eviction and then the property will be removed under the supervision of a court officer. This issue applies equally to renters and homeowners and is serious enough to deserve its own article. For now I will just say that any homeowner or renter who suddenly finds their house rekeyed or property removed from their home by contractors working for the foreclosing bank should immediately seek legal advice.

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