Foreclosure and Renting to a New Tenant: Tenant Remedies

When a landlord rents to a tenant property that the landlord knows will soon be in foreclosure, what remedies does the tenant have?

The foreclosure crisis has affected many tenants, who learn mid-lease that their landlord has failed to pay the mortgage. But as the meltdown continues, new tenants are becoming the next wave of unintended victims, as landlords continue to rent to new residents in the face of looming foreclosure.

Usually, when a landlord enters into a rental agreement with a tenant while foreclosure is imminent, the tenant has no idea that the rental unit may soon be in foreclosure. Whether tenants have any recourse against their landlord when foreclosure hits depends on the type of tenancy, and the intentions of the new owner.

What Happens to Tenants When a Property is Foreclosed?

Until recently, tenants whose rented homes were the subject of a foreclosure almost always lost their leases. This was because in most states, a mortgage that was recorded before a lease was signed wiped out that lease when the mortgage was foreclosed. But on May 20, 2009, President Obama signed the "Helping Families Save Their Homes Act," which changed the rules. Quite simply, leases will survive a foreclosure, meaning the tenants can't be evicted, unless the new owner intends to occupy the home in which case the lease can be terminated with 90 days' notice. Month-to-month tenants, who were always subject to termination upon proper notice, can now be terminated after a foreclosure with 90 days' notice (which is as long or longer than any state's regular notice period).

Even if the lease or rental agreement can be terminated with the notice above, the new owner of the property must still follow state eviction procedures in order to remove a tenant from the rental unit. (To learn more about eviction procedures, read Nolo's article How Evictions Work: What Renters Need to Know.)

Are New Tenants Better Off or Worse Off Under the New Law?

The new federal law is actually a boon to month-to-month tenants. They are entitled to a 90-day notice period, which puts them in a better position than they had with the original owner. Lease-holding tenants (those with a lease) whose new owner will not occupy the home similarly have no legal beef with the new law they are in the same position as a tenant whose landlord sells mid-lease (the tenant simply gets a new owner/landlord).

What about the tenant whose new owner terminates the lease in order to live there himself? This tenant ends up less fortunate than before the foreclosure the tenant may lose his lease with 90 days' notice, a result that probably would not have happened had the owner simply sold the property to a buyer who intended to occupy the property. (Normally, the new owner has to wait until the lease ends, absent a lease clause providing for termination upon sale.) In this case the tenant may want to seek compensation from the original landlord for the consequences of losing the lease.

Suing the Original Landlord

If a tenant can prove that the original landlord failed to disclose that a foreclosure was imminent, amounting to fraud, the tenant can sue the landlord for monetary damages the cost to the tenant of moving and any increased rent. (To learn how to sue for damages in small claims court, see Nolo's Small Claims Court area.) However, the tenant would still have to move out of the rental unit, which is not an ideal situation for most tenants.

When Does a Landlord Have to Disclose a Possible Foreclosure?

Landlords are under a duty to disclose material information that any tenant would want to know when considering whether to sign a lease. Is the possibility of foreclosure something that the landlord should have disclosed to any prospective tenant? The more likely it was that foreclosure would happen (for example, the landlord has already received notice of foreclosure), the more likely it is that the landlord should have disclosed the possibility of foreclosure.

On the flip side, if the landlord is merely worrying about a remote possibility that he won't be able to meet his mortgage, the landlord's duty to disclose this worry decreases (as well as his risk of a charge of fraud if he doesn't disclose it). We're dealing with a bit of a sliding scale here at the time the lease is signed, the more certain it is that the bank will foreclose, the higher the landlord's duty is to disclose the possibility of foreclosure during the lease term.

Does a Landlord Have to Disclose that a New Owner Might Want to Move In?

Should the landlord have educated the applicant that if a new owner bought the property and wanted to occupy it, the new owner could terminate the lease with 90 days' notice? (The landlord cannot know whether a new owner will decide to live on the property, but the landlord could alert a tenant to this possibility.) This law is too new for there to be a definitive legal answer, but the fact that the landlord can't know whether a new owner will decide to occupy the property probably weakens a tenant's argument that the landlord should have disclosed a foreseeable problem.

Oregon's Approach: Landlords Must Disclose Defaults

At least one state has thought about this problem and has addressed it legislatively. Since 1997 in Oregon, landlords with properties of four or fewer units must disclose, before signing a lease, any outstanding notice of default, lawsuit to foreclose, declaration of forfeiture, or lawsuit to foreclose because of a tax lien. If the landlord fails to disclose any of these matters and the tenant has to move as a result, the tenant can recover twice his actual damages and all prepaid rent (Or. Rev. Stat. §90.310). Perhaps with the subprime meltdown, and the grief this has cost renters who happened to be living in these homes, more states will give some thought to protecting tenants caught in foreclosure.

More Information on Tenants' Rights

For information about tenants' legal rights in other situations, as well as tips on all aspects of renting from inspecting a unit to getting along with roommates get Every Tenant's Legal Guide, by Janet Portman and Marcia Stewart (Nolo).