Bona Fide Lease of Illegally Converted Garage May Survive Foreclosure of Real Property Through End of Lease Term

Even a lease of an illegally converted garage is protected from foreclosure through the end of the lease term under the federal Protecting Tenants Against Foreclosure Act of 2009 (“PTFA”), except where the purchaser of the foreclosed property intends to occupy the property as his or her primary residence, according to a recent appeals court decision  (Nativi v. Deutsche Bank National Trust Company (January 23, 2014, H037715) — Cal.Rptr.3d —-, Cal.App. 6 Dist.).

Deutsche Bank National Trust Company (“Bank”) was the beneficiary under a deed of trust for property in Sunnyvale, California (“Property”), which included a single family home and an illegally converted two-bedroom garage unit.  In June 2007, Rosario and Jose Roberto Perez Nativi (the "Nativis") began leasing the converted garage unit from the former owner, Daisy Cazzali, on an annual basis, the most recent commencing June 1, 2009.  After Cazzali defaulted on the note for the Property, the Bank obtained title to the Property by purchasing it at a nonjudicial foreclosure sale on August 6, 2009. 

When the Jose Nativi returned home in mid-September 2009, he discovered their belongings had been discarded from the garage unit and placed in the back yard.  The people living in the main house, who the Nativis did not recognize, called the police and the police told the Nativis to leave.   

The Nativis brought a lawsuit against the Bank asserting that the PTFA created a landlord-tenant relationship through the end of their lease term.  The trial court granted summary judgment in favor of the Bank on the ground that, under California law, the foreclosure sale extinguished the lease and therefore the Bank “did not step into the shoes of the landlord.”  It further found that the PTFA only required the Bank to give the Nativis a 90-day notice to vacate the premises and that the Bank did not have a duty to help them recover possession of the garage unit.  The court also concluded that the Nativis could not establish that the Bank excluded them from the property or put their belongings in the backyard.

The court of appeal disagreed, holding that “the PTFA causes a bona fide lease for a term to survive foreclosure through the end of the lease term subject to the limited authority of the immediate successor in interest to terminate the lease, with proper notice, upon sale to a purchaser who intends to occupy the unit as a primary residence.”  It further found the PTFA “impliedly overrides state laws that provide less protection but expressly allows states to retain the authority to enact greater protections.”  Accordingly, “[b]ona fide tenancies for a term that continue by operation of the PTFA remain protected by California law.”  The court rejected the argument that the PTFA did not apply because the garage unit was illegal.

The court of appeal further found that “the PTFA’s protection of bona fide tenancies for a term would be empty if it did not impliedly impose a legal duty on immediate successors in interest in foreclosed properties to make reasonable efforts to identify all bona fide tenants and determine whether they are entitled to continue as tenants under a bona fide lease for the remainder of the lease’s term.”  This may include the duty to request a copy of a lease from persons who live on the premises or claim to be tenants.  The court further concluded that if a successor in interest fails to reasonably identify a person as a bona fide residential tenant and then unreasonably fails to inform or misinforms a third-party about the tenant’s right to occupy the leased premises, the successor’s omission or conduct “ may, under particular circumstances, constitute a ‘contributing factor’ to that third-party’s interference with the bona fide tenant’s possession and quiet enjoyment and render that interference attributable to the successor in interest.”

Based on these findings, the court of appeal held that the trial court erred in granting summary judgment in favor of the Bank.

What This Means To You

This case is a good example of the additional risks involved in lending against real property which may become occupied for personal residential use.  Whether it be single family homes or multi-tenant housing, these properties carry the additional risk that, in the event of default and subsequent foreclosure, the lender may be further delayed from acquiring possession of the property.  The PTFA is scheduled to expire at the end of 2014, and it is unclear at this point whether this law will be extended beyond that date.


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Mark E. Ellinghouse | 916.321.4500

Jon E. Goetz | 805.786.4302