Foreclosure of a Rental Unit

Foreclosure of a Rental Unit

Table of Contents

An estimated 10% of homes in the Unites States are in the process of being foreclosed upon. So what do you do if you are a tenant in a home or building that is being foreclosed upon?

The Tenant’s Right to Possession

Long ago, the California Supreme Court held that the foreclosure of a mortgage ended not just the leasehold but the lessee’s (tenant’s) right of possession. This is because there is no contract that is entered into between the new purchaser (whoever buys the building from the bank) and the tenant. The purchaser may, therefore, treat the tenants as an occupant without right, and maintain ejectment for the premises (eviction).

California code of civil procedure section 1161a also allows the buyer at a foreclosure sale to bring an unlawful-detainer (eviction) action against the former homeowner or their tenants following service of a notice to quit. That same code section requires 60-days notice to quit for rental housing units. The notice also needs to have a cover sheet explaining the procedure for eviction. If the notice to quit gives at least 90-days notice, the notice may explain the eviction process instead of including a cover sheet.

The Protecting Tenants at Foreclosure Act of 2009 mandates 90-days notice to many residential tenants. This applies to a foreclosure on a federally-related mortgage loan or on any dwelling or residential real property after the date of enactment of the Act. This Act gives a tenant facing an eviction action a defense to raise if the new purchaser did not provide proper 90-days notice.

The Tenant’s Liability for rent to the New Owner

Because foreclosure extinguishes the landlord-tenant relationship, the buyer has no contract with the occupying former tenant and cannot demand rent.  This means the buyer cannot evict a tenant on the basis of a three-day notice to pay rent or quit before the 90- or 60-day notice period expires. If the new owner accepts rent, this creates a new month-to-month lease.

The Security Deposit

California civil code section 1950.5 governs the disposition of the security deposit. Landlords whose interest in their properties terminate may do two things. They may either transfer the security deposit to the new owner, and notify the tenant, or they may return it to the the tenant after making lawful deductions. If the landlord elects to return the security deposit to the tenant, it must be returned with an accounting of deductions made.

It is important to note that landlords often lose their rental properties to foreclosure because they do not have money, so the landlord may not be able to come up with the tenant’s security deposit.

The important take-away: Most residential tenants will require 90-days notice under federal law. Other residential tenants will still require 60-days notice. Foreclosed tenants also owe no rent to the new buyer.

New purchasers and banks will often not follow the law and try to evict tenants without proper notice, or with no notice. If you are a tenant facing eviction due to foreclosure please contact The Law Office of Veronica R. Guzman.

Portions of this article are excerpted from “Your Rental Unit is in Foreclosure: Now What?” a publication of the State Bar of California.

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