Issues Regarding Tenant Occupied Properties in Short Sales and Foreclosures and the Impact of TITLE VII--'Protecting Tenants at Foreclosure Act of 2009'

Issues Regarding Tenant Occupied Properties in Short Sales and Foreclosures and the Impact of  TITLE VII--'Protecting Tenants at Foreclosure Act of 2009'

Tenant Occupant after Trustee Sale

The Protecting Tenants at Foreclosure Act ("PTFA") is a tenant-friendly law that seeks to protect many renters in the recent wave of foreclosures when their landlords lost the leased property to foreclosure.  The problem is more times than not, it leads to exploitation instead of protection, but we don’t make the rules, just play the game.

Tenants in Foreclosed Houses Must Receive 90 Days Notice to Vacate

PTFA provides that if there is a foreclosure on any dwelling or residential real estate after May 20, 2009, the person who takes legal title after foreclosure takes the property subject to the following terms:

• The new owner must give any preexisting "bona fide tenant" at least 90 days notice to vacate the premises.
• The 90-day notice requirement applies if the tenancy is for a term of years, month-to-month or terminable at-will.
• The 90-day notice requirement applies even if the renter has no formal lease but does have a verifiable history of paying rent.
• Unless the purchaser of the foreclosed property intends to occupy the premises as his or her primary residence, the new owner cannot break the lease, if the lease was entered into prior to Notice of Foreclosure.

What is a "Bona Fide Tenancy" Under the PTFA?

The Protecting Tenants at Foreclosure Act applies only to "bona fide" tenancies or leases. Under the law, a tenancy or lease is "bona fide" only if:

• The tenant is not the child, spouse or parent of the landlord in foreclosure.
• The lease or tenancy was the result of an arm's-length transaction.
• The rent under the lease is not substantially below fair market rent for the property.
• The rent has not been reduced by a federal, state or local subsidy. However, the PTFA does apply to rental units occupied by holders of Section 8 vouchers.

The Protections of the PTFA End in 2012

The Protecting Tenants at Foreclosure Act contains a sunset provision, which means that it is set to expire at a specified time. In this case, the protections of the PTFA are set to terminate on December 31, 2012. Until that time, renters whose homes have been the subject of foreclosure are protected against having their leases broken with little or no notice by the new landlords.

Opinion:

I am all for protecting the rights of the innocent, and in some situations this occurs, but from experience over the last several years, this legislation has been exploited and abused to a degree that has surely outweighed any potential benefit of the legislation. 

We already had reasonable protections under CA Law, including 60-Day Notice requirements: Tenants in non-just cause eviction jurisdictions who live in foreclosed properties before May 20^th, 2009, had a reasonable right to 60 day notice to quit before the new owner was permitted to file an eviction action in court.   

The new Federal Legislation has led to the systematic and fraudulent creation of  leases, and has allowed squatters, former owners, trespassers, (disgruntled non-paying tenants along for the ride) Holdover Occupants in breach of an existing lease to manipulate banks and investors for higher Cash-For-Key payouts, and have rewarded individuals who have already been in default or breach for a substantial amount of time.  In practice, it puts a tremendous amount of pressure on the Court system to analyze the merits of a Bona Fide Tenancy, and thus, banks, Investors, and the Court system have basically capitulated to the idea that Notice is now 90 days regardless of the merits of any alleged lease agreement.

My favorite fact pattern, is the foreclosed property that is actually occupied by one of the former title holders (usually a divorce situation), whereby one of the former title holders occupies the property with the new girlfriend or boyfriend.  These facts obviously come out later in the process, but typically the generated lease is between the new girlfriend or boyfriend and the former title holder.  Not really a bona fide tenancy, and definitely not arms-length, and to top it off, it is always for some ridiculous amount like $1,200.00 dollars on a property that would have a FMV rental rate of $3,500.00 a month.

Now with that being said, I certainly do feel for legitimate bona fide tenants, who have been duped by an unscrupulous Landlord.  There are situations, whereby, and good hard-working Tenant is abiding by their lease term, and are willfully paying on the terms of a lease, and are unaware that the Landlord is intentionally defaulting on their mortgage/ deed of trust, and in active foreclosure.  Realistically, these scenarios are far and few between, and since there is such a procedure process to non-judicially foreclose in the state of California, it is rare that a Tenant is completely in the dark regarding these matters.

Overly Opinionated:

The term Pundit is severely overused in our Political System, and unfortunately, Congress tends to hang their hat way too often on pundit theory and political firepower, rather than speaking to those of us who actually practice in the trenches.  Instead of listening to Pundits and Legislating for votes, Congress should take the time to talk to Brokers, Lawyers, Landlords, Tenants, local and state governments, and actually come up with practical and relevant legislation that will not be exploited or manipulated by the masses. 

We have been dealing with this legislation since May of 2009, but we are really seeing firsthand how poorly it was written, and secondly, how courts and lawyers want to avoid its implications all together.  In theory, I can agree with the idea, that if a legitimate and bona fide tenant is caught in the middle of a foreclosure action, it sounds right that we should given them a 60 or 90 day notice, but in practice it is not leading to the highest and best use of property, stalling the default market recovery, and allowing individuals who are already exploiting the system, to benefit further.

Once again, Protecting Tenants at Foreclosure Act of 2009 sounds great on paper, in that it is suppose to protect Tenant interests that have been harmed by a foreclosure sale, but in practice, it has led to a massive stalemate between Banks, Investors, Occupants, and our overly inundated Court system.  Ultimately, these increased time restraints restrict productive rehabilitation and alienation of Property, and will just cost the taxpayer down the road, when bank losses in this market debacle increase due to increase hold time of REO properties, and/or Investors avoiding occupied properties at Trustee Sale, or choosing to pay less in the market for properties due to the increased risks and occupancy issues.

Just Plain Old Ranting and Venting:

             In looking at the big picture: Two Parties are to BLAME

• 1) Our government should think practically before they legislate, just like our Parents told us to think before we speak.  The Government should also not be so naïve to think that a good plan in theory will correlate into practical and positive implementation; AND

• 2) We as a people and a culture should feel less entitled, and instead of seeing the loophole or the exploitive ability of our system of rules, maybe we should see the underlying intent and good in them, and take the higher ground. 

• The truth is, we will not really see a positive change in our Country economically and/or culturally until we shake off these cobwebs of complacency and entitlement in our society.  Political theory will just tell us that is the nature of an Aging Hegemon in a changing world, but a faint piece of me believes we as a people are better than that, and have proven it many times in the past.  I can’t wait to see the outcome, but so far, it is not looking good.