What happens when a landlord’s property goes into foreclosure?

Federal law gives some rights and protection to a tenant in the event that their rental unit is foreclosed upon. The “Protecting Tenants at Foreclosure Act” requires that when a home goes into foreclosure, tenants who have a written lease can continue to occupy the home until the end of the lease period, or 90 days, whichever is longer. The only exception would be if the new owner intends to move in and occupy the home as their primary residence. In that case, a 90 day notice to move would apply. Those tenants with a month-to-month lease, or no lease at all, have to be given at least 90 days notice to move. Additionally, in cases where state law provides more protection than the federal law, the state law applies.

You should be aware however, even if a foreclosure action has already been filed, as long as the landlord remains the owner of record that (is still on the title to the property); a tenant must continue paying rent to them. In some jurisdictions, a tenant may be able to pay their rent to the local clerk of courts, who will deposit the money into a special account. Therefore, a tenant must be careful to find out just when title to the property passes at auction or otherwise. Former landlords have been known to try and continue to collect rent even after they no longer own the property. As a lawful occupant of a property in foreclosure, a tenant should be notified by the mortgage lender as to the sale/transfer date of the property. After this time, the landlord will no longer be the legal owner. A tenant should then be informed where to send their rental payments by the new owner.

One bright spot in all of this is that sometimes an incentive can be negotiated between a new owner and a tenant so that the tenant agrees to move out prior to the end of their lease, or 90, which ever applies. This incentive is known as “Cash for Keys”. Basically, the owner will pay a tenant to leave the property early in exchange for a cash payment. The amount and timing of the payment can be worked out on a case-by-case basis.

Note:  Regarding the return of any security deposit when a property is foreclosed on, unfortunately there may not be much that a tenant can do. Typically, in such a situation, a tenant’s only legal recourse is to sue the landlord in small claims court. Yet, even though they may successfully win a judgment, actually getting the money that they are owed may be much more difficult.