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The Protecting Tenants at Foreclosure Act: Changing the Rules of the Game

For tenants without a written lease, a prudent approach for a lender or purchaser would be to provide the 90-day notice to vacate regardless of whether the tenant meets the “bona fide” requirements

In May 2009, as part of the Helping Families Save Their Homes Act of 2009 (Pub. L. 111-22), President Obama signed the Protecting Tenants at Foreclosure Act of 2009 (the “Act”). The Act, which went into effect May 20, 2009, and does not expire until December 31, 2012, substantially alters the treatment of tenants after foreclosure of a residence. The scope of the Act is broad, applying to any residential real property and any person who acquires the property, whether a lender who acquires it via a credit bid or a third party investor at a foreclosure sale.

Lenders, purchasers of foreclosed properties, and residential tenants should be aware of the rights and obligations contained in the Act. Pursuant to the Act, an immediate successor in interest “of any foreclosure on a federally-related mortgage loan or on any dwelling or residential real property” is required to (i) honor the remainder of the term under a “bona fide lease” entered into prior to the notice of foreclosure and (ii) give at least 90 days notice to vacate to a “bona fide tenant” who does not have a lease or has a lease terminable at will.

A “bona fide” lease or tenant is one in which (a) the borrower or his/her child, spouse or parent is not the tenant, (b) the lease or tenancy is the result of an arms-length transaction; and (c) the rent is “not substantially less than fair market rent” or is reduced or subsidized due to federal, state or local subsidy. In the case of a bona fide lease, the successor in interest may terminate the lease, subject to the 90-day notice requirement, only upon the sale of the residence to a purchaser who intends to occupy it as a primary residence (presumably, this applies if the purchaser at the foreclosure sale meets this criteria as well).

By its terms, the Act will only replace state or local law to the extent it offers less protection than the Act. Any state or local laws that provide longer time periods or additional protections for tenants in this situation will remain in effect. Under Arizona law, there are no special protections offered to tenants after a foreclosure sale; lenders or third party purchasers at a foreclosure sale could, in most cases, opt to honor the lease or institute eviction proceedings. As a result, the Act will completely subsume Arizona law on this issue.

Undoubtedly, the passage of the Act will spur a flurry of litigation regarding whether a lease or tenant is “bona fide” – in particular, whether the tenancy or lease is the result of an arms-length transaction and whether the rent is not substantially less than “fair market value” (a particularly difficult determination in today’s market). As a result, for tenants without a written lease, a prudent approach for a lender or purchaser would be to provide the 90-day notice to vacate regardless of whether the tenant meets the “bona fide” requirements. Dependent on the remainder of the term of the lease and how clear it is whether the “bona fide” requirements are met, a cautious approach would dictate honoring the remainder of the lease as well – or, at the very least, calling your attorney to discuss whether the requirements are met.