What Is The “Protecting Tenants at Foreclosure Act” And Does It Apply To Foreclosures On Multi-Family Properties?
The Statute. The Protecting Tenants at Foreclosure Act (the "Act"), 12 U.S.C. Section 5220, is a 2018 federal law that offers security for renters living in foreclosed properties. The Act imposes certain obligations on "immediate successors in interest" (presumably including lenders/mortgagees) of foreclosed residential properties. These obligations are as follows:
1. A duty to give bona fide tenants "a notice to vacate [of] at least 90 days before the effective date of such notice."
2. A duty to allow bona fide tenants "to occupy the premises until the end of the remaining term of [their leases]."
The purpose of the Act is to ensure that tenants receive sufficient notice of foreclosure proceedings and are not abruptly displaced. The statute was not intended to create a private right of action for evicted residents, however, but merely to serve as a defense against eviction proceedings.
Applicability to certain foreclosures. The Act's language is not crystal clear. For example, the statute does not use terms like “lender” or “eviction.” However, because both of the Act’s obligations seem to presuppose a scenario in which an immediate successor is attempting to force tenants to vacate a foreclosed property (i.e. to evict residents), immediate successors are not required to take action under the Act unless and until they seek to force tenants to vacate. Thus, our conclusion is that the Act will not apply to mortgage foreclosures unless the action seeks to evict/remove residential tenants from the mortgaged property.
Because the goal of the vast majority of a commercial lender’s foreclosures on multi-family properties is to keep the tenants (and thus the income) intact, as a practical matter the Act rarely will apply to a commercial foreclosure. However, if a foreclosing mortgagee ultimately intends to take title to the real estate and terminate the lease rights of the existing tenants, then the Act will apply.
The Act’s obligations come into play where there is "any foreclosure on a federally-related mortgage loan or on any dwelling or residential property after the date of enactment of this title." Courts are split on whether the Act encompasses only foreclosures on federally-related mortgage loans or on all residential property. Because courts have held that immediate successors carry the burden of proving they are not beholden to the Act's obligations, it is safe to assume that the Act casts a broad net and attaches to foreclosures on "any dwelling or residential property." Stated otherwise, immediate successors of foreclosed real property occupied by residential tenants should abide by the Act. Our conclusion is in line with the Act's purpose of protecting renters who live in foreclosed properties, but we have not comprehensively researched the issue across the country.
Duty to give bona fide tenants "a notice to vacate [of] at least 90 days before the effective date of such notice."
Bona fide tenants of foreclosed properties are entitled to a 90-day notice before they may be forced to vacate the premises by immediate successors. This 90-day notice requirement is not subject to exceptions.
A tenant is "bona fide" where (1) the tenant and mortgagor are not the same individual, (2) the tenant's lease was the result of an arms-length transaction, and (3) the tenant's lease requires unsubsidized rent that is at least fair market value.
Duty to allow bona fide tenants "to occupy the premises until the end of the remaining term of [their leases.]"
Immediate successors must permit bona fide tenants to reside at the property until their leases have expired. The duty to honor bona fide leases does not negate the 90-day notice requirement, however. If a tenant's remaining lease term is less than 90 days, that tenant is still entitled to 90 days before he or she must vacate the property with proper notice thereof.
The duty to honor bona fide leases is subject to three exceptions. Immediate successors are not required to honor bona fide leases where: (1) the lease is invalid, (2) the lease is terminable at will, or (3) the property is sold after foreclosure to a purchaser who will occupy the property as a primary residence.
Note: I’d like to thank our associate Alex Layton for his research and input into today’s post.
I represent parties involved in disputes arising out of loans that are in default. If you need assistance with a similar matter, please call me at 317-639-6151 or email me at [email protected]. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted on my home page.