What To Expect If Your Landlord Is Facing Foreclosure

Having your home foreclosed upon is never a pleasant experience. But it can be even worse as a tenant. Despite most states providing substantial tenants’ rights, leases generally don’t offer renters the type of legal protections that landlords have during a foreclosure.  

If you’re a tenant going through this stressful experience, here's an overview of what to expect, including what your legal rights and obligations are and how they interact with the rights of the old owner and new owner of the rental property.

What Does The Foreclosure Process Look Like From A Tenant’s Perspective?

Foreclosure refers to the legal process wherein a lender takes back mortgaged property. The lender does this in an attempt to recover money owed under a mortgage loan. A mortgage is a type of secured debt that property owners assume when buying real estate. To secure the loan given to the home buyer, the lender will use the home itself as collateral to secure the debt. Foreclosures often occur after homeowners fail to make their monthly mortgage payments and can take place in two ways. 

First, there’s a judicial foreclosure, wherein the lender gets a court order before taking back the foreclosed property. A judicial foreclosure begins when the bank or mortgage holder files a lawsuit to reclaim the property subject to the mortgage.

After a judge agrees that the homeowner is delinquent, the lender will sell the property to recover its money. Foreclosure sale public auctions are common ways for lenders to sell foreclosed property. This entire process can take many months and even a few years, although the timeline can vary widely depending on state law.

Second, there’s nonjudicial foreclosure, wherein the lender can take back the property without first obtaining court permission. Nonjudicial foreclosure proceedings are more streamlined and as a result, often occur faster. This is good for the lender, but not the landlord owner or their tenants.

Foreclosures are largely governed by state law. So, the course of a foreclosure in one state can be much different from the one enforced in a neighboring state. But no matter what state you’re in, as long as your landlord still owns the rental property, you must continue paying rent money during the foreclosure process.

Tenants must also continue paying their utility bills. This isn’t a problem if the utilities are in the tenant’s name. But if they are in the landlord’s name, there’s a good chance that in addition to missed mortgage payments, your landlord could also have unpaid utility bills. Unpaid bills can lead to suspensions in service. Even if there is no eviction yet, the renter might lose their internet, electricity, gas, or water services due to no fault of their own.

The Great Recession and the U.S. subprime mortgage crisis led to a dramatic increase in foreclosures. These harmed innocent tenants who received little to no notice that they were about to get thrown out of their homes. In response to so many unfortunate evictions, Congress passed the Protecting Tenants at Foreclosure Act.

How Can The Protecting Tenants At Foreclosure Act (PTFA) Help Me?

The Protecting Tenants at Foreclosure Act (PTFA) was first signed into law in 2009, although it didn’t become permanent until 2018. Even though state law applies to most foreclosures and establishes tenancy rights, the PTFA created a basic set of rights that apply to residential tenants, no matter what state they live in.

The single most important right granted by the PTFA to tenants during a foreclosure is that bona fide tenants may stay at the property until their lease term ends or 90 days, whichever time period is longer. In practice, this means that tenants will have at least 90 days’ notice before getting evicted and being forced to move after a judicial or nonjudicial foreclosure. 

What’s A Bonafide Tenant?

A bona fide tenant is a tenant who meets the following requirements:

• The tenant is not part of the landlord’s immediate family; 

• The rental agreement consists of a contract made “at arm’s length;” and

• The rent is in line with fair market rental values for the area. Or, if the rent is significantly lower, it’s the result of a government subsidy. 

The term “arm’s length” refers to a transaction between two people who aren’t friends or family members. There must also be no special favors or terms in an arm’s length transaction.

If a tenant is not bona fide under the PTFA, state or local laws may still offer tenants a minimum amount of notice before a foreclosure eviction.

The right to this 90-day notice requires new landlords to give tenants a 90-day “Notice to Vacate,” even if there is no lease. It also applies to foreclosures on a variety of residential properties, including single-dwelling homes and multi-unit apartment properties. 

A Notice to Vacate is an official statement from the landlord to the tenant terminating the tenant’s right to the property. The Notice to Vacate also provides a deadline for the tenant to move out.

Exceptions To The 90-Day Notice

There are two exceptions wherein a new owner can evict the tenants after this 90 day notice period even if the terms of a written lease allow them to stay for a longer period of time. One situation occurs when the new owner plans to live in the property as a primary residence. The second situation occurs if there is a local law that permits the new owner to end the lease before the lease says that the term ends.

The overall purpose of the PTFA is to provide tenants with a minimum amount of time to find a new place to live should a bank or other lender foreclose upon their rental property.

Can A Tenant Stay In The Property After A Foreclosure?

The answer to this question depends on many factors, including applicable state law, terms of your lease, and the new owner’s plans for the property. The first thing you should do once you find out that your rental property has been foreclosed upon is talk to the new property owner. They can then tell you if they want you to stay or leave.

If the new owner wants you to stay, they will be your new landlord and you’ll need to sign a new lease with them. You can negotiate with the owner what the terms will be. If the new owner wants you to leave, there are several ways they can ask for you to move out. 

One way is to wait until the term of your lease is up and to not renew it. Another way is to make you a cash-for-keys offer, wherein they end your lease early and offer you money to leave by a certain date. A third possibility involves an eviction.

The new landlord could start eviction procedures against you, but only if you stay on the property after your legal right to do so no longer applies. For example, your lease ends without getting renewed or the 90-day notice deadline under the PTFA ends.

Due to the coronavirus pandemic, there’s another way a tenant can stay at the property after a foreclosure. The Coronavirus Aid, Relief, and Economic Security (CARES) Act placed a moratorium on rental evictions until June 30, 2021. 

If at all possible, do everything you can to avoid getting an eviction notice. Having an eviction notice entered against you will show up on a background check and will damage your credit. This will make it harder for you to find a new apartment or other rental property in the future.

If you can stay at the property, you may still need to get in touch with your original landlord, especially if you gave them a security deposit. Depending on the state, the original landlord must return your security deposit to you or transfer it to the new landlord.

How Do I Know If The Property I Live In Is Being Foreclosed Upon?

The foreclosure process involves a lot of paperwork. This includes the bank or lender sending the property owner notices that the property is about to go into foreclosure and information about what that process will entail. But there is no requirement for the bank to send foreclosure notices to tenants. Instead, it’s up to the landowner to inform the tenants. 

The bad news is that this doesn’t always happen. The good news is that the foreclosure process is public. Tenants can find this foreclosure information from public records.Most mortgage property documents are part of the public record, which means anyone can access them. These documents are sometimes available online through a state or county government website. In other cases, these records are accessible in-person by visiting the county clerk’s office. 

For example, let’s say that you’re renting a property in Chicago, Illinois and believe the property is subject to foreclosure. You can go to the Cook County Clerk’s office and look up any recorded property subject to a mortgage. You can search for properties with either an address or a Property Index Number (PIN). You can find a PIN from the Cook County Assessor’s Office.

After you find your property, you will see a host of information about it, such as the identity of its former owner, when your landlord bought it, and who holds the mortgage. If the bank has filed a foreclosure lawsuit against your landlord, you will see a notice that says lis pendens foreclosure. This is a notification that your landlord is not paying the mortgage and the bank has decided to move forward with the foreclosure.

Another way to obtain information about foreclosures concerning the property you’re renting is to check civil court records. In judicial foreclosures, the litigation paperwork is also part of the public record. Depending on the court and its docket system, you can view these court documents online. If they’re not available online, they’ll be available for viewing in person. You can search for your landlord’s name or the property address to see if any court cases involve either.

Don’t Wait Until You’ve Moved In To Check Foreclosure Status

The above steps can be helpful after you’re already a tenant and have moved in. But you can also complete these steps before you sign a lease and rent a property. This is your opportunity to learn if the property you’re about to rent might have a foreclosure action pending against it. 

This is important because the PTFA only protects you if the foreclosure action begins after you have signed a lease. So, if you start renting a property after foreclosure proceedings have started, you could find yourself subject to eviction with almost no notice.

Another reason you might want to look up a property you’re about to rent is to get an idea as to what kind of person your landlord is. Do they get sued a lot? If so, who’s suing them? Lenders or tenants? The answers to these questions can give you advanced warning as to how your potential landlord treats renters and whether they are in financial trouble that could lead to a foreclosure.

If the above research process seems a bit daunting or you’re having trouble finding the information you need, don’t worry. Employees at the county clerk’s office can help you get started with your property records search. You would not be the first person to call or stop by in person to ask for help finding a document relating to a particular piece of real estate.

Let’s Summarize...

As a tenant, you don’t enjoy the same rights that a property owner does when it comes to foreclosure. If your landlord falls behind on a mortgage because of non-payment, all of the information concerning the foreclosure will go to them, not you. But you still have rights under local, state, and federal law.

If you’re afraid that your rental unit could go into foreclosure, consider speaking with a local lawyer. They can listen to your situation and give you legal advice concerning your rights and how to exercise them.