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TENANT RIGHTS AND FORECLOSURE - A DISCUSSION OF SAFEGUARDS

By
Real Estate Attorney with THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY

The unintended victims of the foreclosure process are often the occupant of the home that is a tenant.  The landlord is a borrower under a mortgage that has gone into default and is now being foreclosed.  What is going to happen to the tenant as a result of the foreclosure?  How can a tenant or future tenant be protected from the ill effects of a foreclosure?  This article will attempt to address these issues.

Landlord Tenant relationships are governed by State statute

The landlord tenant relationship is governed by statutes of the state in which the real estate is located.  Generally for the rental of a home there is a written lease, although some leases can be oral.  Usually any lease for a year or more must be in writing to be enforceable.

Most tenants obtain possession of a rental home once there is already a mortgage on the property, and this article presumes that is the case with the scenarios discussed.  If a tenant is in possession of the home before a mortgage is put on the property, the rights of the lender may be materially different than discussed in this article.

The foreclosure process and the "unknown tenant"

The mortgage is a lien upon the home.  The right of a tenant is almost always inferior, or subject, to the lien of the mortgage. 

In a foreclosure action, the tenant always gets served with process (the summons, lis pendens and foreclosure complaint) and is usually called the "unknown tenant".  The complaint is going to say that the rights of the tenant are "inferior to" and "subject to" the claims and rights of the lender holding the mortgage.  This means that the lender came first and has a superior interest in the property ahead of the tenant.  It does not matter that the tenant has already paid the last month's rent or a security deposit because the interest of the tenant and the payment by the tenant of those monies came after the lender was given the mortgage by the landlord.

Tenant can be removed from the rental property

The tenant gets served with the foreclosure complaint because the court is going to be asked to rule that the lender and its mortgage is superior to any rights of possession of the tenant to the property being foreclosed.  This is a requirement so that when the mortgage foreclosure sale occurs, the new owner of the property can get possession.  Of course this also means that the tenant is going to be kicked out.  This process is called dispossession or eviction.  It usually is effectuated with a writ of possession issued by the Clerk of the Court at the end of the foreclosure action.  This event happens after the foreclosure sale of the property - usually several months or even a year after the tenant was served with the foreclosure lawsuit.

Tenant gets served - should the tenant continue to pay the rent?

Let's assume that a tenant gets served with a foreclosure action because the landlord did not pay its mortgage.  The tenant paid first, last and security and those monies were all paid to the landlord.  The lease has 9 months to run.  Who does the tenant pay the rent to?  What happens to the last month's rent and what about getting a return of the security deposit?

The tenant has to make a decision about the rent.  The best course of action is for the tenant to respond to the foreclosure complaint by bringing to the attention of the court and the lender that tenant paid first, last and security, who is holding those monies, and what the monthly rent amount is being paid, when it is being paid and to whom.  The Tenant should ask the court to give it instruction on what to do with the rent still due. 

In most courts the judge can determine to have the rent still due to be paid into the court registry so the landlord nor the lender has access to it.  I like this position for a tenant because it creates a fund out of which the last month's rent and security deposit can be recovered without having to chase the now possibly insolvent landlord, thus answering the two remaining questions. 

The alternative of continued paying of the money to the landlord likely will result in an eventual financial loss to the tenant of those monies.  In addition, at the end of the foreclosure action, there is a theoretically better chance that the lender will make arrangements with the tenant to at least stay in the property for the duration of the lease, provided the remaining term is not long term.

The landlord can still evict for non-payment of rent

On the flip side, the tenant has a contract with the landlord.  The tenant promised to pay to the landlord rent in return for the landlord's obligation to provide quiet enjoyment of possession of the property to the tenant.  Obviously if the tenant gets served with a lawsuit to dispossess the tenant from the home, the landlord has breached its obligation of quiet enjoyment.  But, if the tenant stops paying rent to the landlord the tenant can be evicted.

The only protective measure for a tenant is to have the foreclosure judge make a determination of who the rent should be paid to.  See my recommendation above.

Be careful in advance - new leases

Getting into a lease in the first instance in this market is one where you really cannot protect the tenant from some eventuality of foreclosure in the future.  Obviously if a title search shows that the home is already in foreclosure, be sure the tenant understands that this is likely a short stay! 

More important is how to protect a new tenant's advanced rent paid and security deposit in this uncertain market.  We suggest to our clients that some third party hold the advanced rent and security deposit and that those monies not be paid to the landlord except pursuant to the lease contract terms.  The third party can be an attorney or title company or Realtor trust account.  Frankly no one can say that these accounts are 100% safe.  Reasonable judgment must be exercised.

There is a tremendous need to rental homes in this market - but tenants are urged to be careful in the lease terms and flow of money and remain diligent on the payment of each month's rent, advance rent and security deposits.

SPECIAL NOTE - SEE UPDATE AT - TENANT EVICTION LAW AND FORECLOSURE PROBLEMS

Copyright 2009 Richard P. Zaretsky, Esq.

Be sure to contact your own attorney for your state laws, and always consult your own attorney on any legal decision you need to make.  This article is for information purposes and is not specific advice to any one reader.

Richard Zaretsky, Esq., RICHARD P. ZARETSKY P.A. ATTORNEYS AT LAW, 1655 PALM BEACH LAKES BLVD, SUITE 900, WEST PALM BEACH, FLORIDA 33401, PHONE  561 689 6660   RPZ99@Florida-Counsel.com - FLORIDA BAR BOARD CERTIFIED IN REAL ESTATE LAW - We assist Brokers and Sellers with Short Sales and Modifications and Consult with Brokers and Sellers Nationwide!  Shortsales@Florida-Counsel.com  New Website www.Florida-Counsel.com.  See our easy to find table of contents of our articles at Need Short Sale Information? - These Articles Probably Answer Your Question

Comments (18)

Lynda Bennett
Realty World - Heritage Realty - Maggie Valley, NC

Very thought provoking. We ahndle quite a few rentals so thanks for the heads up.

Mar 03, 2009 01:15 PM
William J. Archambault, Jr.
The Real Estate Investment Institute - Houston, TX

Richard,

Great post. May I add to it?

I'm not an attorney and my experience with foreclosures is limited to two states.

You say that the tenant always gets served, prior to the sheriff's sale this is normally posting on the door of the property at the start of the foreclosure, at the same time that the NOD, notice of default is recorded. If the NOD is removed from the door before the tenant sees it or if the tenant leases the property after the NOD they may never see it. In either case the first time the tenant is aware of a problem is when the Sherif or Constable shows up to remove them or to order them out.

NOD's are public record and can be check for at you local the register of deeds or recorders office, these can often be checked on line. When checking you should check by both the owners name and property description, because tenants often don't know the real owners name or variations of it. States often allow you to record a notice of interest and request that you be notified of any filling against the property, it's not binding but normally works.

If a tenant should stop paying rent they may well be evicted and they may also face judgement for the owners loss not only of rent but possibly (slight) of causing the loss of the property.

If a tenant becomes aware of an NOD the tenant should consult an attorney!

I've been in banking and real estate for nearly four decades and I've never heard of a Federal Bank renting single family (1 to 4 units) it's against the rules! Banks are not allowed to operate single family REO's!

Bill

Mar 03, 2009 01:25 PM
Jon Zolsky, Daytona Beach, FL
Daytona Condo Realty, 386-405-4408 - Daytona Beach, FL
Buy Daytona condos for heavenly good prices

Richard,

Very important issue,. thanks for the informative blog. I also find Bill's comment very interesting. Yes, we do see sometimes when tenants come to us and ask what to do, as they have received the notice that the property is under foreclosure, but sometimes it comes to them as a complete surprise.

Mar 03, 2009 01:32 PM
Barbara-Jo Roberts Berberi, MA, PSA, TRC - Greater Clearwater Florida Residential Real Estate Professional
Charles Rutenberg Realty - Clearwater, FL
Palm Harbor, Dunedin, Clearwater, Safety Harbor

Great post with valuable information for all of us - especially in the current market!!! thanks!

Mar 04, 2009 12:44 AM
Rob Arnold
Sand Dollar Realty Group, Inc. - Altamonte Springs, FL
Metro Orlando Full Service - Investor Friendly & F

I see there is a new bill in the legislature requiring landlord's to legally disclose if there is a court action regarding the property.

Mar 04, 2009 05:41 AM
Maya Thomas, Broker
Tampa, FL
Please see my client recommendations.

FANTASTIC information!  Thanks so much! 

Mar 07, 2009 02:36 AM
Anonymous
Missy

Have you checked out http://nopaytenants.com/

Jun 01, 2009 08:31 AM
#7
Ann Heitland
Retired from RE/MAX Peak Properties - Flagstaff, AZ
Retired from Flagstaff Real Estate Sales

What if, while waiting for short sale approval, the prospective buyer becomes a tenant? I'm assuming this needs to be fully disclosed to the seller's mortgagee as part of short sale process. Does this create a "relationship" that would preclude related-parties transaction? Buyer needs a place to live and wants to move in to prevent further deterioration of the property during the winter.

What is the property is listed as a short-sale while the tenant is still there? Can the tenant become a buyer? This is another one I'm dealing with.

I know you can't give legal advice, but perhaps these will inspire some posts by you.

Love your blog!

Oct 29, 2009 09:19 AM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Ann

The "relationship" is familial.  The lease would need to have a term and it would need to be entered into prior to the filing of the foreclosure action.

Tenants can be buyers.

If the goal is a closing then it all does not matter -- if the house went to a foreclosure sale there would be no short sale and the tenant will be subject to eviction rather than purchase.

Nov 01, 2009 01:49 PM
Anonymous
Uden

Are there any regulations regarding eviction when a minor child is involved.  I read somewhere and now can't seem to find it that if your child is attending public school, that they can't evict until the school year is commenced.  Is anyone aware of this, and do you have any other info that you can spare me?

Dec 09, 2009 09:22 AM
#10
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

I know of no such federal law.  None exists in the State of Florida.

Dec 14, 2009 01:52 PM
Anonymous
Venus

As the tenant of a home up for short sale I was curious to know if there are limits to when when the home can be shown to prospective buyers? I read somewhere within normal business hours but those can vary depending on a business, which leaves me confused. Thanks in advance for any information!

Jan 09, 2010 03:08 AM
#12
Anonymous
gail kayajian

Can a tenant sue a landlord for the rent they have collected on a property that is in short sale? If a lease was entered into upon false pretense, that being the landlord not disclosing the status of the property thus giving the tenant no option to make a informed decision to rent?

In my case, that amount is substantial @ 1850p/mo with the full 12 months rent now all paid.

My God, there HAS to be some protection for potential renters.

 

Mar 08, 2010 10:35 PM
#13
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Gail

Be sure to see the newer article which link is at the bottom of this article.  The Federal law that protects tenants is there discussed in detail.

The key for a new prospective tenant is to check with the clerk of the court the day the lease is being signed to see if any foreclosure suit has been filed against the landlord.  If not, the Federal law will apply and provide the protections in the Act.

Mar 08, 2010 11:11 PM
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Gail

Be sure to see the newer article which link is at the bottom of this article.  The Federal law that protects tenants is there discussed in detail.

The key for a new prospective tenant is to check with the clerk of the court the day the lease is being signed to see if any foreclosure suit has been filed against the landlord.  If not, the Federal law will apply and provide the protections in the Act.

Mar 08, 2010 11:11 PM
Anonymous
Mia Finch

The law seems to helped a lot in this case. Thanks to all of the information provided. I am myself facing a lot of problems in this.

 

_____________________________________________________________________________<a href="http://www.forleasebyowner.com">houses for rent</a>

Aug 19, 2012 04:18 PM
#16
Anonymous
Molly

We are looking to rent  a home that is currently pending forclosure. The forclosure notice was filed in 2010 and answered 2 months later. To date the house has not been forclosed on and no other filings have been recorded. The landlord no longer lives in the US and is asking for first months, last months and 2nd to last months rent. Our move-in date is not until October 25th. If for any reason the house is forclosed on prior to our move-in date, are we due a refund of our deposit? Thanks so much for your help!

Sep 21, 2012 04:19 AM
#17
Richard Zaretsky
THE ZARETSKY LAW GROUP - Board Certified Real Estate Atty and AUTOMATED LAND TITLE COMPANY - West Palm Beach, FL
Florida Real Estate Attorney

Molly - comment #17.

Either your comment is a joke - or if you are serious about this lease, let me give you a bit of free advice - RUN IN THE OTHER DIRECTION!

You would be insane to enter into this transaction.  You are taking on all the risk and getting none of the benefit. 

To answer your question, the house is already IN foreclosure but not yet sold. Yes you would be due the deposit but your chances of actually getting it back are about ZERO.

Don't do it!!!!!

Sep 21, 2012 07:44 AM