How Does a Foreclosure Affect the Tenant (in California)

With the large numbers of investors losing their rentals to foreclosure, it is no wonder that lots of tenants have questions about the process.  Here is some information on the subject, but be aware that HomePointe is not an attorney and you should seek legal counsel before acting on any of this information as your situation may differ.

The first step in the foreclosure process is for the bank to notify the owner of the property that they are in default on their loan.  By law, the owner has three months from the date the notice is filed with the recorder's office to cure the default.   The owner can continue to collect rent during this process and the rent is owed to the owner.  The owner can still do anything they would normally do with regard to the tenant such as serve notices to pay rent or to vacate. 

If the owner can no longer be contacted or if a rent check is returned by the post office, the tenant should set aside any rent funds in case the tenant receives a notice to pay the rent or quit.  The tenant could be evicted for failure to pay the rent.

The owner will be notified of Trustee's Sale by the bank.  After the Trustees Sale the bank or new owner now owns the property.  The property will be posted with a 3 day notice to quit and it will be addressed to the old owner.  This notice applies only to the old owner of the property.  After the foreclosure the tenants are entitled to a 30 day notice to vacate, regardless of the length of their tenancy and regardless if there is a lease.   If the tenant fails to vacate by the end of the 30 day notice, the bank or new owner may file an unlawful detainer to regain possession of the property.  The tenant is obligated to pay the bank or the new owner rent until they vacate.  A new owner may want to keep the current tenant and if the tenant wants to stay a new agreement could be signed. 

The other issue is the security deposit.  Upon foreclosure, the old owner must either return the security deposit to the tenant or transfer the deposit to the new owner or bank.  The new owner has responsibility to obtain the deposit from the previous owner and upon vacating the tenant could sue both the old and new owner for return of their deposit.  Note that if the deposit cannot be located the new owner cannot require the tenant to pay another deposit.

If the tenant has withheld any rent during the foreclosure, that withheld rent could be used by the old or new owner in determining the deposit refund along with any damage to the property.

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