Q. My wife and I recently purchased a single-family house at a foreclosure sale. The tenants in the house showed us a lease signed a month ago, in which the former owner not only gave them a three-year lease (they had been month to month), but at a rent that’s about a third below what a home of this nature would rent for. We’d like to do substantial work on the house and would need it to be vacant, but the tenants say they are entitled to stay. Who’s right?
A. In the days before the foreclosure crisis, the answer would be rather simple: If the lease was signed after the mortgage was recorded, a foreclosure on the mortgage would usually wipe out the lease. And, conversely, a lease signed before the mortgage was recorded would survive the foreclosure (unless the tenant agreed in the lease to waive that survival right as to any subsequent lender).
But those rules, known as “first in time, first in right,” changed substantially in May 2009, when President Barack Obama signed the Protecting Tenants at Foreclosure Act. A concise law (it fits easily on one sheet of paper), it provides that leases signed before the “notice of foreclosure” would survive, even if they were entered into after the mortgage was recorded or they predated the mortgage, but the tenant had waived his right to survive.
Until recently, it was unclear what the “notice of foreclosure” meant. The Dodd-Frank Act, signed this fall, makes it the date of the transfer of title. In California, this is the date of sale, as long as the new owner records the deed within 15 days (if he records later, the notice of foreclosure is the date he records).
So far, it would seem that maybe your tenants have an argument. But maybe not. Congress was concerned that tenants and defaulting owners not be able to game this new rule, by deciding in bad faith to tie up the house for the new owners. Specifically, to take advantage of their right to stay in this situation, tenants must be “bona fide” tenants. They must not be the spouse, parent or child of the defaulting owner; the leasing deal must have been done at “arm’s length”; and rent must not be substantially below fair market value.
Here’s where you may have ammunition. Tenants renting month to month don’t usually sign three-year leases unless it’s an extraordinary situation. One wonders whether these tenants can rationally explain their sudden decision to put down roots: Did one of them obtain a three-year appointment at a school or secure a three-year employment contract? Without a good explanation, this lease is beginning to look like an attempt by the former owner to do his tenants a favor. That’s hardly an arm’s-length deal.
The third requirement may help you too. If the rent for comparable homes in the neighborhood when the lease was signed was one-third higher than the rent specified in the lease, perhaps a judge would conclude that the stated rent is indeed “substantially below fair market rent.” To know your chances of prevailing on this point, you’d need to find real estate experts who could substantiate your valuations, but the ultimate decision would be up to a judge.
Dealing with tenants in a post-foreclosure situation is not something most new owners will feel comfortable doing on their own. Unlike a “normal” eviction, which in many states can be done by nonlawyers using court-designed forms, a post-foreclosure eviction is a more protracted process, requiring unique documents. You’ll need the help of an attorney to bring such a lawsuit.
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