How should a renter deal with foreclosure?

November 19, 2007 10:46 AM

What do renters do when their landlord's property goes through a foreclosure?

I saw this post on the Consumerist and want to see what the hive has to say. How is someone renting a place affected by their landlord's lender foreclosing on the property?

Do they stop paying rent to the landlord?

Do they have any chance at getting their deposit back?

Will they get evicted when the foreclosure finalizes?

Will they be notified of the foreclosure ahead of time?

Should they get an attorney?


FYI, I live in California, but I'm just speculating so feel free to respond with info about your state as well.

posted by rezaman to law & government (8 comments total)

The NYT has a good article...
posted by KokuRyu at 10:48 AM on November 19, 2007

IAAL, but not your lawyer, this is not legal advice but rather a general statement of what happens in the foreclosure cases handled by my firm. This is not, for the most part, my practise area, either. Also, this is Illinois foreclosure law, not California

The law is changing in Illinois in January, but as of right now, if you are talking about a single-family home, rented by the owner, tenants get notice (as occupants) and get evicted by the time the foreclosure is complete and the judicial sale of the property is held. The order of possession, which grants the mortgage-holder rights to the property, is just that: an order of possession and the leaseholder almost always must vacate. The exception to this is usually large commercial properties.[fn1]

Until the tenants vacate, they are required to continue paying rent, otherwise, they are in breach of their lease contract, which is not part of the Note and Mortgage being foreclosed. Generally rents are paid to the to the landlord, but they may be given to the mortgage-holder to cure a deficiency between the amount owed under default and the amount earned at judicial sale. Whether rents are collected from the mortgagee as part of the judgment or through a court-appointed receiver during pendancy of the foreclosure depends on circumstances of the case. Notice is required in any foreclosure action (and will continue to be required in Illinois) to any person with an interest in the property, which includes tenants. The foreclosure, order of possession (a mortgagee who does not use the home as his primary residence does not retain possession rights during the foreclosure proceedings) and judicial, generally speaking, have absolutely no bearing on the security deposit. It was paid to the landlord, who is supposed to be holding it in a separate secure, interest-bearing account and he is responsible for refunding it within the time proscribed by statute or instead providing an itemized list of acceptable uses to which it was applied in lieu of returning it. The mortgage-holder will not receive any of those funds as part of its judgment of default and foreclosure and has nothing to do with it. Security deposits of renters also, generally speaking, do not create liens against real property.

There would probably not be much point to getting an attorney for purposes of the foreclosure and I would be surprised if a tenant would be able to enforce a lease and remain a tenant after a bank forecloses and goes to sale. For purposes of getting the security deposit back, an attorney would probably be overkill. Most landlord-tenant courts are geared toward self-help and if the owner is unable to cure default on the mortgage, he's unlikely to have any money for returning deposits. Blood from stones, as they say.

[fn1] Foreclosure on large commercial properties, whether huge multi-unit apartment buildings or office buildings, rarely affects the tenants.
posted by crush-onastick at 11:08 AM on November 19, 2007 [1 favorite]

I almost went through this in MA, we moved for other reasons before the foreclosure finalized, but what we were told was that in MA, your lease is good no matter what, so you don't have to move and you won't get evicted, whomever buys/takes over the property has to honor your lease. We were never told anything about when foreclosures were going down, except when the people showed up to put up notice signs in our yard, and they told us when things were happening. Often, whomever takes over the property will work with you to get you to move out, but you don't have to. I'm not sure who you'd end up paying rent to if you stayed, but probably the bank that foreclosed, and then to whomever bought it at auction. Your deposit is probably gone, mostly because if the landlord is being foreclosed upon, they probably are going to file bankruptcy (a good way to stall foreclosures), and then you can sue to get your deposit back, but you will only be paid after all the insured loans (ie. that house you used to live in) are paid off, which will be years and years.

As far as getting an attorney, that depends entirely on where you are and what the other people are trying to do.

Now granted, MA law is very protective of the renters, not that landlords, other places (like IN) are not, and those people I think get evicted when the place is foreclosed on, but I'm not sure of that.
posted by JonahBlack at 11:11 AM on November 19, 2007

In CT, our tiny landlord declared bankruptcy. I'm not sure if the property was foreclosed on--I was a kid at the time--but we got to live in the unit rent-free until we bought it at the bank auction. On preview, maybe the bank just screwed up by not collecting rent.
posted by phoenixy at 11:33 AM on November 19, 2007

JonahBlack you are correct sir. IN posts a notice on the property and tenants are required to be out of the property by the sheriff sale date.

rezaman - Try this link. Or this one.
posted by curlyelk at 1:20 PM on November 19, 2007

Just went through this last year (in California). We never talked to a lawyer, but we did talk to a couple of property managers and legal advice groups. We never got a definitive answer from anyone -- it was like this weird crack in the system we had slipped into, and nobody could give us a good answer.

Here's what happened:
We came home one day to a notice of foreclosure taped to the door. The auction was happening in about 30 days. We called the landlord -- he made excuses, and told us he'd get it sorted out. He never did, and eventually stopped returning our calls.

We called the mortgage company -- they wanted nothing to do with us. They said they didn't deal with tenants at all. That was all we could get out of them, even after several tries.

Interpretations of the law ranged from, "You'll have to vacate within 24 hours of the auction close" to "The new owner must honor your lease." Real helpful. My own interpretation was that we would be owe 30 days notice (just based on my reading of the law, with no legal training).

We decided to just move out before the auction, so we didn't have to deal with getting evicted (if it would have happened). We (probably) would have continued to pay rent, but the auction was happening before our next check was due. The landlord had said he would refund the rent we had already paid, but, of course, never did.

We notified our landlord that we would be leaving on the day of the auction, and that we expected our full deposit back. We never did get it. We talked to more legal advisers, and they couldn't even tell us for sure who to sue for the deposit. We ended up trying to take the landlord to small claims, but we could never get him served properly (which is a whole other story).

Eventually, we just withdrew the case. The guy hadn't paid his property taxes, much less his mortgage, so even with a judgment in our favor, getting the money back would have been like squeezing blood from a stone.

(On preview - crush-onastick beat me to it)

I sometimes wonder what would have happened if we hadn't just left. I doubt the place got sold at the auction, so would the mortgage company just have continued to ignore us?

(Happily, we ended up in a condo that is much nicer AND cheaper than where we were, so it all worked out for the best.)
posted by natabat at 1:49 PM on November 19, 2007

So, the tenants are meant to keep paying rent to the landlord, who will usually turn around at the end and say 'sorry, no money for your deposit'? If I were the tenant, what would happen to me if I said I was going to pay an amount of rent equal to my deposit into an escrow account? (I realise that in some of the anecdotes above there was no time to do this between finding out about the foreclosure and leaving)
posted by jacalata at 6:12 PM on November 19, 2007

jacalata: your lease is a contract between you and the landlord and it calls for you to pay a sum of money to your landlord for the privilege of living in property (usually owned by the landlord). Most leases are for a sum of money that earns you the right to live in the place for a year, and you are permitted the convenience of paying it in monthly installments. That's why, generally, you can't just walk away from a lease. You don't owe $100 a month for twelve months; you owe the landlord $1200. He's just letting you pay it monthly.

You cannot simply put the money into an escrow instead of paying the landlord because those are not the terms of the lease contract and one party to a contract does not get to chance the terms, unilaterally, just because he feels like it, no matter how rational the change is, no matter if it benefits both parties. When you pay into escrow, instead of making your rent check payable as the lease (your contract) provides, you have renegotiated the terms, and you can't do that without the other party's agreement. That is not, generally speaking, how contracts work. Practically speaking, of course, if your landlord is in default and the property is in subject to a foreclosure proceeding, you're probably going to be evicted anyway, so there's no real difference between not paying your landlord at all and paying into escrow instead. No matter how it shakes down, you're most likely going to have to move. The change in Illinois law is going to make it a longer process to evict tenants, but as I understand it, it is not going to require full enforcement of the existing lease against the buyer of the foreclosed property. Note: none of this is legal advice. If you rent a place that is being foreclosed, I have no suggestions for what actions you should or can take. I am not anyone's lawyer around here.

The really crappy thing about standard form contracts (like most leases) is that they do have provisions which let the landlord change certain terms without renegotiating the lease, but I've never seen one which lets a tenant change the terms. The great myth of contract formation in the American legal system is that a contract formed between parties with unequal bargaining power is unenforceable. Most of the contracts we Americans-as-consumers enter into for services offer absolutely no meaningful opportunity for the consumer to negotiate terms, and yet remain enforceable against the consumer. That's the societal price for, e.g., generally affordable cell phones.

Now, landlord-tenant law is a little more forgiving, a little more flexible. It is a greater social good to protect the tenant, who has no bargaining power. People losing their place to live without warning or recourse burdens the community more than does someone who loses his cell phone services because he didn't uphold his part of an unevenly negotiated contract. Therefore, municipalities, states, and a fair number of public interest professionals have done what they can to inject some flexibility into the enforcement of leases and bargaining-power on the part of tenants.

This very situation--tenants who pay rent through the entire period of default on the mortgage, then get evicted, lose deposits and suffer other hardships--is part of what was behind the changes to the Illinois laws taking effect in January. I would think paying escrow instead of the landlord during the pendancy of a foreclosure makes sense, but foreclosure can be extremely swift when it involves a property which is not the primary residence of the mortgagee and in the end, it might not be worth the effort.
posted by crush-onastick at 8:09 PM on November 19, 2007