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Tenant rights: What happens in foreclosure?

Peter Miller
The Mortgage Reports contributor

In this article:

If your landlord is involved in a foreclosure, there are several things to know:

  1. Your rights depend on the state in which you live — often, your lease can be terminated
  2. Your obligation to pay rent continues as long as you remain in the property
  3. You have leverage because banks preferred occupied homes to abandoned property

Tenant rights usually involve such issues as rent increases and making sure the heat is on. But for some renters, the problem is foreclosure when their landlord loses the property.

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What happens in foreclosure to renters?

Landlords are pretty much like homeowners when it comes to mortgage payments. If they don’t pay the mortgage, they can be foreclosed. The difference is that when a landlord is foreclosed, the process can harm tenants more than the property owner.

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For renters, the big issue when a landlord is involved in a foreclosure is what happens to the tenancy. Do you stay? Do you go? Does the rent go up? Who takes care of the property if the refrigerator fails?

Tenant protection ended in 2014

The answer to such questions was once fairly clear under the Protecting Tenants at Foreclosure Act of 2009 (PTFA). This legislation applied to “federally related” mortgage loans secured by any dwelling or residential real estate.

Under PTFA, tenants had the right to stay at the property in most cases until the lease expired. This means if your lease had eight months to go, you could continue to rent for eight months. There were some exceptions, but in any case, the tenant received at least 90 days notice for that vacate.

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Unfortunately, national tenant protection legislation ended on December 31st, 2014. The result is that when it comes to tenant rights in a foreclosure situation, we have to look at state and local regulations if any.

Tenant rights and real life

When the landlord faces financial problems, they are likely to harm renters. If the landlord has no money, how does the heating system gets fixed in the dead of winter? Yes, the landlord has an obligation to fix the system, but in practice, how is that quickly enforced before the renters freeze?

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You may have to take care of the repairs yourself and sort it out with the landlord later or deduct it from your rent.

As a tenant, it’s your obligation to pay the rent on time and in full. This becomes problematic in a foreclosure situation, because the landlord who receives the funds may not be making mortgage payments.

Or the landlord may not use the money to keep the property in good repair. In such situations, tenants will need to contact the local housing office or an attorney for advice.

After the foreclosure

When a rental property is sold, the rights of the tenant typically carry over despite the change of ownership. If there is a lease in place, the lease must be respected. Some leases, however, have a provision which says they automatically end upon the sale of the property.

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With a foreclosure, the rules can change depending on the jurisdiction where you live. “In most cases,” reports Lawyers.com, “the lease continues if there’s a ‘normal’ sale, and it ends after a foreclosure.”

Tenant rights and leverage

In the battle between landlords and lenders, it might seem as though tenants have no leverage. This may not be the case.

First, you’re paying rent. Whether the property is owned by the old owner, the new owner, or a foreclosing bank, everyone will be much happier if they get a monthly check.

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Second, you’re occupying the property. The mere fact of occupancy has great value for landlords and banks. What they don’t want is an empty property. If the property is empty, it may be subject to vandalism or weather damage.

In some situations, if the property is not occupied for a given time, insurance can lapse. The owner can then be stuck with a vacant property and no insurance. That’s not a good situation if something goes wrong.

Third, in some jurisdictions, rent control is in place. Property owners in such areas might be especially willing to work with tenants and avoid serious penalties for violations.

Fourth, in situations where the new owner really wants the property vacated, you might be able to get a moving allowance for leaving.

In the end, tenants and property owners will probably do best getting together and comparing interests. As a renter, you likely have some leverage, so don’t be afraid to tell property owners what you want. If you need help speak with local attorneys and housing office officials. With any luck, everybody will see the benefit of just working things out.

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