What Condo Boards and Property Managers Need to Know About the Protecting Tenants at Foreclosure Act
Congress recently passed a federal law entitled Protecting Tenants at Foreclosure Act (“Foreclosure Act") that supersedes state law and also amends existing federal laws. The primary focus of the Foreclosure Act is to provide protections to tenants of a foreclosed property related to a “federally-related mortgage loan" or a foreclosure on “any dwelling or residential real property." Broadly speaking, the Foreclosure Act requires that a party taking title to a dwelling or residential property pursuant to a foreclosure (“Foreclosing Party") assumes such dwelling subject to certain rights of any bona fide tenant.
So what does this mean for you? Massachusetts General Laws 183A and the condominium documents govern the rights of condominium associations against unit owners who refuse/fail to pay common area fees and permit the associations to initiate foreclosure sales, where necessary. As a condominium board member or property manager, there may come a time when you are forced to initiate a foreclosure sale against a defaulting unit owner and his unit because of a failure by the unit owner to pay his condominium fees. In the majority of these situations, a mortgage holder usually steps in at the foreclosure sale and purchases the unit to protect its mortgage. Occasionally, the association purchases the unit itself, either because the mortgage holder failed to act on the foreclosure notices it received, the current mortgage holder could not be located, or there was no mortgage on the unit.
In the situation where the association purchases the unit at a foreclosure sale, the association may unwittingly become a landlord if it is determined that a tenant is lawfully residing in the foreclosed unit. Becoming a landlord has certain advantages but also carries with it numerous responsibilities and duties, such as to maintain the foreclosed unit in a safe and sanitary condition, some of which have changed with the passage of the Foreclosure Act.
The Foreclosure Act addresses two types of tenants: (1) those that occupy a residential dwelling pursuant to a written lease; and (2) those that occupy a residential dwelling without a lease or with an “at will" tenancy. It should be noted, however, that the Foreclosure Act is very specific that its protections represent the “minimum" and, therefore, do not preempt state or local laws governing foreclosures that provide tenants with broader rights.
In the case of a tenant with no lease or if there is a lease which may be terminated at will, the Foreclosing Party must give the tenant a 90-day written termination notice, i.e., a notice to vacate the premises. Although the Foreclosure Act doesn’t specify how a written termination notice must be given to the tenant, associations and property managers must be weary of the tenant who claims that he or she never received the notice to terminate. To be safe, one must be diligent and make sure of proof of the service of a 90-day termination notice to a tenant, either by using the services of a constable or sending the notice by certified mail, return receipt requested.
The situation gets a little more complex if a tenant has a bona fide lease - i.e., a lease that was entered into before the date of the foreclosure. In that case, the Foreclosure Act states that the tenant has the right to remain in the dwelling until the end of the lease term even if that time period exceeds 90 days from the date of the eviction notice. The exception to this provision is if the property is sold to a purchaser at the foreclosure sale who will occupy the property as a primary residence. In that situation, the 90-day written notice requirement applies.
In Massachusetts, prior to the passage of the Foreclosure Act, M.G.L. c. 186 governed tenant rights in a foreclosure situation. Under M.G.L. c. 186, Section 13A, a tenant occupying a dwelling pursuant to a written lease becomes a “tenant at will" after a foreclosure sale. Under M.G.L. c. 186, Section 13, the tenant, as a tenant at will, is then entitled to a 30-day written notice to vacate. Clearly, the Foreclosure Act grants broader protection than existing Massachusetts laws to tenants in such a situation. As such, in situations where there exists a tenancy at will, the Foreclosure Act trumps the state law and extends the required written notice to 90 days.
Although this situation may arise less frequently, it is also important to touch the portion of the Foreclosure Act which addresses tenants that occupy a residential dwelling and are recipients of state and/or federal housing assistance, i.e., Section 8. In this situation, the Foreclosure Act provides that the party who purchases a unit at a foreclosure sale assumes the existing Section 8 lease as well as the existing housing assistance contract between the prior owner and the public housing agency for the occupied unit.
Foreclosing upon a unit in a condominium is a complex and stressful process for any condominium or property manager and navigating new and existing laws can sometimes make the process even more difficult. That is even truer where there is a tenant involved. Associations faced with the decision of whether to purchase a unit at a foreclosure sale that is subject to a written lease must carefully weigh the pros and cons of entering into a landlord-tenant relationship. There are definite benefits to associations purchasing units with existing tenants. For example, tenants in Massachusetts are still required to pay rent to the new owner of the unit despite the foreclosure. In fact, under M.G.L. c. 186, Section 13, tenants are required to pay their rent even after receiving a written notice of termination. If all goes well, this means a steady flow of income to the condominium which can then be used to pay off the outstanding condominium fees on the unit. Along with the benefits of collecting rental income, the association must provide basic safety and security to comply with applicable codes and regulations that impose a warranty of habitability. But failure of unit owners to pay common area charges for extended periods often leave associations with no alternative but to foreclose.
Attorney Howard S. Goldman is the founding partner of the law firm of Goldman & Pease, LLC, 160 Gould Street, Suite 320, Needham, Massachusetts 02116. He has vast experience in dealing with real estate law and litigation, which he has accumulated from years of representing property managers, condominium associations, developers and contractors. He is also an active member of the Massachusetts, Boston, Norfolk, and Rhode Island Bar Associations and also an active member of CAI and IREM, where he frequently lectures and writes columns affecting the real estate industry. Attorney Goldman can be reached at (781) 292-1080.