CAVEAT EMPTOR UPON FORECLOSURE:[br]Legislation Makes Foreclosing Parties New Landlords!!!

Over the past year, foreclosing parties throughout California, including lenders, were taken aback by the June 2008 enactment of California Code of Civil Procedure (“CCP”) Section 1161b which required the foreclosing party to give 60-day’s written notice to vacate to all tenants (excluding all trustor/owner-occupants). This law is good for tenants being displaced by the enormity of foreclosures state-wide and a hassle for successors in interest stuck with property they likely never wanted in the first place.

On May 20, 2009, the federal government enacted The Protecting Tenants at Foreclosure Act, Public Law No. 111-22, Sections 701-704 (“Act”), which has the effect of expanding California’s tenant protections under CCP Section 1161b. Section 702 of the Act, the focus of this Legal Alert, is codified by reference in the notes to 12 U.S.C. Section 5220 and supersedes CCP Section 1161b until the Act’s termination on December 31, 2012.

Section 702 provides that, as of May 20, 2009, the foreclosing party of a dwelling or residential real property assumes its interest in the property subject to 1) the requirement that it must provide a 90-days’ notice to vacate to any bona fide tenant, and 2) the rights of any bona fide tenant as of the date of the notice of foreclosure. Bona fide tenants with a lease entered into before the notice of foreclosure have the right to occupy the premises until the end of the lease term, except that a foreclosing party may terminate a lease effective upon the sale of the property to a purchaser who will occupy the premises as a primary residence and subject to the tenant’s receipt of 90-days’ notice to vacate. For bona fide tenants without a lease or with a lease terminable at will under California law, foreclosing parties may terminate the tenancy subject to the tenant’s receipt of a 90-days’ notice to vacate..

As with California law, Section 702 does not affect foreclosing parties termination rights when the tenant is the defaulting trustor/owner-occupant. Section 702 further defines bona fide tenants as not including the children, spouse or parent of the trustor/owner-occupant. In addition, to be a bona fide tenant, the lease or tenancy must be the result of an arms-length transaction and for receipt of rent that is not substantially less than fair market rent or for rent that is reduced by a governmental subsidy.

The Act and Section 702 affects ALL foreclosing parties, including lenders and lien holders, such as property owner associations, and has the effect of turning foreclosing parties into landlords potentially for the long term!

Here are three case examples:

1) Lender forecloses on a single-family home occupied by Tenant. Tenant is the trustor losing its home upon the foreclosure. Tenant desires to stay in the home. Lender desires to evict tenant as soon as possible. What are the parties’ rights? Tenant does not benefit from CCP Section 1161b or Section 702, because Tenant is not a bona fide tenant. Lender may evict Tenant pursuant to California landlord-tenant law with a 3-day notice to quit.

2) Lender forecloses on a single-family home occupied by Tenant. Tenant is a bona fide tenant with a lease that will terminate in 1 ½ years. Tenant desires to stay in the premises until expiration of the lease. Lender desires to evict tenant. What are the parties’ rights? Unless Lender secures a buyer for the property who will occupy the premises as a primary residence, Lender is Tenant’s landlord for 1 ½ years! Tenant and Landlord must each fulfill the obligations under the lease (e.g. Tenant must still pay rent). If Lender finds a buyer who will occupy the premises as a primary residence or, if not, prior to expiration of the lease, Tenant must receive from Lender 90-days’ notice to vacate.

3) Property Association forecloses upon a condominium for the owner’s failure to pay assessment fees. The condominium is occupied by Tenant, a bona fide tenant. Tenant does not have a lease, but desires to stay in the premises. Property Association desires to evict Tenant. What are the parties’ rights? Property Association must give Tenant 90-days’ notice to vacate. If Tenant had a lease, the result would have been the same as Example 2 above, and Property Association would become Tenant’s Landlord!

The Act does not clarify whether the 90-day notice should be written or how the notice should be served. As a precaution, all notices should be written and should be served in compliance with CCP Section 1162.


If you have any questions concerning the content of this Legal Alert, please contact the following from our office, or the attorney with whom you normally consult.

Robert H. Brumfield or Ellen Scott Elliott | 661.864.3800