On August 5, 2015, the Governor of North Carolina signed into law a bill that, among other provisions, resurrects some of the rights enjoyed by tenants under the now-defunct federal Protecting Tenants at Foreclosure Act.  The federal law expired in December 2014, when Congress declined to extend its terms.   The new law comes into effect on October 1, 2015.

North Carolina Session Law 2015-178 makes a number of amendments to Chapter 45 of the North Carolina General Statutes which sets forth North Carolina’s power of sale foreclosure process and Chapter 42 of the North Carolina General Statutes which sets forth North Carolina’s landlord/tenant procedures.  A new section, § 45-21.33A, provides that:

  • A foreclosure sale purchaser who does not intend to occupy the property as a primary residence “shall assume title subject to the rights of any tenant to occupy the premises until the end of the remaining term of the lease or one calendar year from the date the purchaser acquires title, whichever is shorter.”
  • The tenant’s rights are qualified:
    • He may not be the borrower, or child, spouse or parent of the borrower.
    • There must be a written lease, that is not terminable at will, and the rent must be not substantially less than fair market value.
    • If there is an “imminently dangerous condition” (as defined in N.C.G.S. § 42-42(a)(8)) on the premises as of the date of acquisition, then the tenant has no right to continue occupying the premises.
  • The tenant must be provided with at least a 90-day notice to vacate if: (a) the purchaser will occupy the premises as his/her primary residence, (b) the tenant has only an oral lease, or (c) if the lease is terminable at will.

As was the case with the PTFA, it is likely the new law will lead to litigation.  For example, what documents are necessary to prove the existence of a “written lease”, when does the lease term end, and how far below market must the rent be before it qualifies as “substantially less”?  Identifying the tenant, and communicating successfully with him so as to find out the salient facts about the tenancy, will remain as obstacles to compliance with the new law.

The new law provides some additional relief for various interested persons, which would not adversely impact foreclosing lenders:

  • Tenants of borrowers in foreclosure are entitled to terminate their leases early, under certain conditions; and
  • Foreclosure rescue schemes are prohibited, with limited exceptions designed to ensure such transactions are legitimate and not intended to deprive the borrower of his interest in the property.