If a landlord defaults on his or her mortgage and the property is foreclosed upon, the consequences for the property’s renter can be dire. If the mortgage was signed before your lease which usually is the case, then the foreclosure wipes out the lease even if the lease still has not expired. The bank owes no duty to the landlord and the lease is only a contract between the landlord and the tenant which means the bank will eventually attempt to evict any tenant so they can sell the property at a foreclosure sale.
When a landlord or property owner defaults on the mortgage, the bank or lender becomes the owner of the property and usually seeks to sell it as quickly as possible at a foreclosure sale.
Under the law of most states, if the mortgage was recorded before the lease agreement was signed, foreclosure terminates the lease, and the new owner can evict the tenants with little warning. In 2009, Congress passed an act called the Mortgage Reform Act that requires a 90 day notice given to tenants in order for tenants to be able to find a new place to move
Many mortgage holders are inclined to evict tenants after a property has been foreclosed on, believing that an empty property is easier to sell than a property with a tenant inside. However, in a slow rental market, it might be more prudent to have a tenant living on the property and paying rent rather than having a property sit empty.
There are certain laws that may secure a tenants rights in case of a foreclosure:
Protecting Tenants at Foreclosure Act of 2009 (PTFA): A Federal protection by requiring at least a 90 day notice before new owners can evict tenants if the tenants held the lease prior to the new landlord acquiring title of the property.
Section 8: Some states have rent control laws that protect tenants from being evicted by the new owners and the tenants cannot be evicted unless they pay rent or violate a material term of lease.
Some tenants are eligible to receive protection under federal or state laws:
- Recipients of Section 8 housing vouchers can preserve their leases.
- Some jurisdictions (including New Jersey, New Hampshire, Massachusetts, and the District of Columbia) require the new owner to honor the lease.
- Tenants who live in rent-controlled jurisdictions or jurisdictions that require “just cause” for eviction may also be protected
Although the lease cannot prevent a foreclosure, the lease was still a binding contract between the landlord and the tenant which gives the tenant the right to bring claim for a breach of contract. Landlords have a legal obligation to protect tenants’ right to the “use and quiet enjoyment” of the property. A tenant can sue for the costs associated with finding a new place to live, and the difference in rent between the old and new apartments. However, if a landlord/owner is in foreclosure, he or she may not have the assets to fulfill any judgment the tenant wins. Small claims court is the best place to recover from the tenant and you may recover expenses such as:
- Moving expenses
- Cost to find a new apartment
- The difference between your new rent and old rent for amount of time not expired
- Any application fees
- Any cost incurred for the relocation
A real estate attorney can help you discover who exactly owns the property and establish your rights against any eviction proceedings. An eviction caused by the landlord’s own mortgage problems can be disastrous, not only because you can lose your home, but also because you can lose future prospects of renting in the future if an eviction shows up on your credit report. A lawyer can help you avoid these stressful outcomes.