Why collect rent when you can have an empty worthless building?

January 14, 2009 8:04 AM

How come renters need protection against foreclosure?

I keep seeing news reports about legislation to keep renters from being displaced when the landlord goes belly up. Doesn't their lease do this already? What's the advantage to the bank of kicking out the renters while they try to sell the building?

posted by nax to Grab Bag (10 answers total)

Being a landlord is a hassle not all banks find profitable.
posted by These Premises Are Alarmed at 8:10 AM on January 14, 2009

At least in Michigan, once the foreclosure is finalized and the ownership is transferred to the new owner, the new owner doesn't have to honor the terms of the lease. In a typical sale, the new owner does have to maintain the lease.

The advantage to kicking out the renters (I think) is that it's usually easier to sell a building that no one is living in. Plus, most banks don't want to get into the business of being landlords.
posted by overglow at 8:16 AM on January 14, 2009

As a practical matter, banks do not want to deal with tenants anymore than they want the building. Most foreclosure statutes currently protect tenants to a certain extent, and, in my experience in the foreclosure courts, it's not usually the mortgage-holder who screws the tenants, but the landlords, who take the rent and run without keeping tenants informed about foreclosure proceedings. Eviction courts, as well, have fairly standard protection procedures for occupants (people who do not have a judgment against them) in place for enforcing orders of possession entered in a foreclosure proceeding.

States which don't have those provisions need them because tenants are rarely informed and the time between service of the notice of foreclosure and the actual order approving the sale of a foreclosure property can be anywhere from mere months to years.

A lease, of course, is between the parties who signed it, not with the bank and/or purchaser of the property at a foreclosure sale. Mortgageholders do not have copies of leases or any other information about tenants, and although most foreclosure statutes include provisions for naming and notifying unknown occupants, people are surprisingly reluctant to get involved when the sheriff tacks a notice of foreclosure to a door.
posted by crush-onastick at 8:18 AM on January 14, 2009 [1 favorite]

This is really a state by state difference. For example, in MA, your lease does protect you, if your apartment is sold or foreclosed upon, the new owners, be it the bank or what not, have to honor the lease (I know from personal experience unfortunately). This does make it a bit more difficult to sell, because you have to have people buy it who want to have tenants in there. On the other hand, IN and apparently MI, this protection doesn't exist, your apartment can be sold right out from under you.

It all depends on whether the state has decided to side with renters or landlords in terms of amount of protection, and is one of the more important reasons to know your local rental law if you are renting.
posted by katers890 at 9:25 AM on January 14, 2009

My husband buys foreclosures to rehab and maintain as rentals. He would never buy one with tenants in place, although that may not be the norm. It is somewhat complicated to evict a tenant, and he would never take on that responsibility for a tenant he had not initially vetted. Just too much left to chance.
posted by raisingsand at 9:32 AM on January 14, 2009

It seems to me that if you live in a state/city with strong renters' rights laws, and are facing foreclosure, you could have a very effective way of keeping your house: simply rent it to your cousin/friend/child, possibly at a steep discount, and with very lenient terms allowing roommates etc. The bank will foreclose, but will be unable to evict you, and all you have to do is continue paying the rent that you set for yourself.

I wonder if we'll see more of this, especially in places like San Francisco?
posted by alexei at 10:54 AM on January 14, 2009

Doesn't their lease do this already?

For the term of the lease, sure. But as a life-long renter, I much prefer the situation after the lease expires, when you enter month-to-month territory. I can then leave with just thirty days notice -- but alternatively, if the landlord wants me to leave, he only needs to give me thirty days notice to vacate.

But in some places, residential leases are renewed every lease period (like in NYC where the usual period is one year). So each year, you must commit to another year.
posted by Rash at 1:42 PM on January 14, 2009

Doesn't their lease do this already?

Generally, no. Foreclosure is not the same as a property sale and the foreclosing entitty has no requirements to respect agreements entered into by the foreclosed-on entity.

Consider that if they did, you could just quit-claim the property to your brother-in-law the day before the foreclosure finalizes and sign a 10-year lease with him. Sure, he wouldn't get to keep the place, but you'd get to stay. (Oh, I see that up there already.) So, no.

Only a few states offer tenants specific protections in foreclosure. For the most part, a tenancy is considered a "junior" claim to the property. Some states do require that tenants be parties to the foreclosure proceeding itself, but since it is possible to move to include parties at any time prior to the final sale, this isn't much more a bar.

A spreadsheet by state. [google cache, YMMV, xls here].
posted by dhartung at 10:55 PM on January 14, 2009

Response by poster: Fascinating. As usual, the honest person paying for the possible abuses by the dishonest, at both ends. Thanks all.
posted by nax at 3:10 AM on January 15, 2009 [1 favorite]

In San Francisco, at least, the banks are legally bound to respect tenancy agreements, meaning that they have no legal way of evicting them. An article.
posted by alexei at 2:28 AM on January 16, 2009