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.

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