Tenant Eviction in Foreclosure: What Are Your Rights?
A financial crisis, like the recent sub-prime mortgage crisis, can result in millions of tenant evictions after the property they rent enters foreclosure. When hard times cause a landlord to default on his or her loan, the bank becomes the new landlord and - as the bank will make clear to you - banks aren't in the rental business. The bank will typically move to sell the property as soon as it can, resulting in the eviction of any tenant living on the property quickly and with little warning. Here's how it happens and what renters-in-foreclosure can do about it.
Your Landlord in Default
Sometimes landlords can't cover the mortgage payments on the property that they are renting out to tenants. This can happen for many reasons. The landlord may have taken out too big of a loan in the first place, or maybe there is a second, or even third, mortgage on the property that the landlord is behind in paying off. Whatever the cause, if the bank begins foreclosure proceedings on the property, it is very likely that the bank will eventually attempt an eviction of any tenant renting there.
Meet Your New Landlord – The Bank
Banks are not in the business of renting to consumers, and this will become immediately apparent when they become your new landlord. The bank has two potential decisions it can make:
- First, the bank could hire a managing company to run the property, maintain the building and collect rent. This is likely a smarter long-term decision, where a bank could manage the property until better times and then recover any potential losses if the value of the property has gone below the amount the bank intially loaned for its purchase. Holding onto the property also prevents further property value deterioration by preventing hard-hit areas from becoming ghost towns because of foreclosures. As smart as it may be in the long run, however, this is unlikely because, especially during a crisis, banks want certainty, and they want cash in hand. If the landlord was unable to cover costs through rent, the bank probably considers itself even less likely to. If this does happen, expect poor service, because the bank is mostly concerned with money, not happy tenants.
- Second, and far more likely, the bank just wants to sell the property. Often, a tenant will have no idea that the property has been taken to foreclosure. This means that overnight, you'll get a notice of a new owner and potentially an eviction notice. Some banks will even offer "cash for keys" programs, designed to get you out of the property as quickly as possible. This may not be a good decision to accept if you're a protected tenant, such as a Section 8 or rent-controlled tenant (see next section).
Losing Your Lease upon Foreclosure
When the property is foreclosed, in most circumstances, it also ends your lease. If the mortgage was signed before your lease (and it usually was given the preference for year-long leases), the foreclosure wipes out your lease. Sadly, it doesn't matter if you still had 10 months left on your lease, it's done.
Fortunately, that doesn't necessarily mean you have to leave immediately. The new owner is still required to give you proper notice of the lease termination. In 2009, Congress passed the Mortgage Reform and Anti-Predatory Lending Act in the wake of the sub-prime mortgage crisis, which now typically requires 90 days notice. Before, tenants had 30 days at most, with some tenants receiving far less notice. If a tenant refuses to leave after the expiration of the notice period, thus forcing eviction proceedings, expect a lawsuit that you likely can't win and isn't worth the risk. Having an eviction on your record can seriously harm your ability to find future housing, regardless of whose fault the situation was.
The only real exception to this are what are called Section 8 tenants, rent control tenants and tenants in a few states that have more protection (including the District of Columbia, New Jersey, New Hampshire and Massachusetts). Such tenants often cannot be evicted by the new owners unless they fail to pay rent or violate a material term of their lease.
What Are Your Rights?
Although you can't prevent the foreclosure from wiping out your lease, that lease was a contract, and as such, the landlord who signed it is still bound by its terms. Simply sue your ex-landlord and they can be held accountable for the economic consequences of his or her failure to deliver the property as provided in the lease.
Almost all leases contain a "covenant of quiet enjoyment", which is a material term of the contract, and a landlord who causes a tenant eviction by defaulting on his mortgage is in violation of this covenant. Small claims court is the best place to do this, and you can try to recoup economic loses such as:
- Moving expenses
- Apartment searching costs
- The difference between your new and old rent
- Application fees
- Other reasonable costs associated with relocating
Be aware though, that the landlord is not likely to be bursting with available cash. A judgment against your landlord is good for a long time, however, and if you pursue it diligently, you may eventually be able to recover your costs.