The economic downturn has resulted in a record number of foreclosures. Residential rental properties clearly have not been immune from foreclosure actions. When such properties are the subject of foreclosure actions, both the owner of the property and the party foreclosing on the property are required to provide certain notifications to the tenants of those properties. Failure to abide by these notice requirements can jeopardize the enforceability of a lease and create unnecessary complications in a foreclosure proceeding. Careful compliance with these notice requirements can avoid such issues.

First, Wisconsin law requires an owner of residential rental property that is the subject of a foreclosure action to notify prospective tenants—but not existing tenants—that the property is subject to a foreclosure action. See Wis. Stat. § 704.35. This notice must state that a foreclosure action has been commenced against the rental property, whether a judgment has been entered in that action, and the date on which the redemption period expires. This notice must be in writing and signed by the tenant. The notice should be included within the lease ultimately signed by the prospective tenant, but the lease should include a separate signature line for the tenant to sign confirming receipt of the notice. Therefore, the tenant likely would need to sign the lease in two locations—one confirming agreement to the terms of the lease and one confirming receipt of the required notice. Failure to include the notice and procure the tenant's signature in the lease leads to a severe sanction: the tenant can void the lease at any time.

Second, a party that commences a foreclosure action relating to a residential rental property must provide a series of notices to tenants who are in possession of rental units on the property. Thus, the foreclosure plaintiff must provide notice to the tenants within a certain prescribed time frame that the foreclosure action has been filed, that a judgment of foreclosure has been entered, and that a confirmation of sale has been scheduled. See Wis. Stat. § 846.35. These notices must be given in a certain manner as set forth in the statute. Failure to provide such notices subjects the foreclosure plaintiff to a claim by the tenant for up to $250 in damages, plus reasonable attorneys' fees.

The same statute that requires foreclosure plaintiffs to provide these notices also grants further protections to residential rental property tenants. Generally, a residential tenant may retain possession of his or her rental unit for up to two months following the confirmation of the sheriff's sale of the foreclosed property. Moreover, under certain circumstances, a tenant may withhold the payment of rent for the final month of its possession of the rental property. These protections, enacted in 2009, extend the time in which the foreclosed property is essentially unavailable to the foreclosure plaintiff. Whereas, under prior law, a foreclosure plaintiff could take full possession of foreclosed property—even residential rental property— immediately after the sheriff's sale had been confirmed, the foreclosure plaintiff now may have to wait two to three months before taking possession of the property.

Compliance with the notice requirements attendant to foreclosures of residential rental property is important to ensure that (i) the property owner can reliably continue to obtain any economic benefit it can obtain from the residential rental property and (ii) the foreclosure plaintiff does not unexpectedly become subject to a damage claim for failure to provide proper notice. The failure to give the required notices, or improperly expediting the removal of tenants before their statutory right to possession has expired, may lead to significant, but entirely avoidable, consequences.