Many people remain unaware of tenant rights, particularly in the event of a foreclosure. In an effort to protect tenants from short-notice evictions due to the rising number of foreclosures, President Obama signed the Protecting Tenants at Foreclosure Act of 2009, effective May 20, 2009. In July 2010, the Act was amended to clarify certain provisions and to extend its application through the end of 2014.
The Act applies to foreclosures on any residential real property and any "federally-related mortgage loan." It provides that any immediate successor-in-interest in the subject property, whether the foreclosing lender or a third-party purchaser, assumes its interest subject to the rights of a bona fide tenant under a bona fide lease entered into before the date on which title to the property is transferred to the successor. The successor must provide any tenant a 90-day notice to vacate before they may be evicted. However, a "bona fide" tenant must be permitted to stay in the property until the end of the remaining term of the lease, subject to two exceptions. The successor may terminate the lease: (1) when the property is sold to a purchaser who will occupy the unit as a primary residence or (2) if the lease is terminable at will under state law.
A lease or tenancy is "bona fide" only if three requirements are satisfied: (1) the mortgagor or the child, spouse or parent of the mortgagor under the contract is not the tenant; (2) the lease was the result of an arms-length transaction and (3) the lease requires the receipt of rent that is not substantially less than fair market rent for the property. Factual disputes regarding these requirements will surely arise. Lenders and third-party purchasers should factor the additional requirements and potential delays associated with a bona fide tenant into their foreclosure sale bids and time tables and consult counsel if questions arise.