Tenant’s Rights in Foreclosures

Tenant’s Rights in Foreclosures

English: Foreclosure signs, Mortgage crisis,English: Foreclosure signs, Mortgage crisis, (Photo credit: Wikipedia)

With the downturn of the economy, and the burst of the housing bubble, large numbers of landlords find themselves unable to meet their mortgage payments and their rental property goes into foreclosure. If you a a tenant, with a valid lease on the foreclosed property, what rights do you have?

The “Protecting Tenants at Foreclosure Act of 2009” provides federal law on the matter of tenants’ rights at foreclosure and is applicable until December 31, 2014 at which point it will expire.  There is also North Carolina state law which applies in specific circumstances to tenants’ rights at foreclosure. 

When there is foreclosure of a residential property, such as a home or apartment complex, there are several protections in place for the tenant of the property.  Federal law allows the tenant to remain in the residence through the remainder of the lease term even though the property has been foreclosed and sold.  There are two exceptions to this general rule.  First, if the purchaser of the foreclosed property will use the property as his primary residence, he may terminate the lease after providing a ninety (90) days notice to the tenant.  This would require the tenant to be off of the property ninety (90) days after the notice is provided to him.  The second exception applies when there is no lease between the tenant and the owner of the foreclosed property or the lease is described as being terminable at the will of either party, meaning that at any point during the tenancy either party (landlord or tenant) can choose to end the lease.  As with the first exception, when there is no lease or the lease is terminable at will, the purchaser of the property must give ninety (90) days notice to the tenant prior to terminating the tenancy. 

The above exceptions apply so long as three requirements are satisfied.  The mortgagor (former owner of the property) or his child, spouse, or parent cannot be the tenant on the foreclosed property.  The lease for the property must have been created by a transaction in which both parties were acting independently and have no relationship to each other.  Lastly, the rent being paid for the tenancy of the property cannot be significantly less than the fair market rental value for the property.  If these requirements are satisfied then the lease or tenancy is considered bona fide, meaning it was made in good faith without deceit or fraud.

Furthermore, the federal law speaks directly about tenants of Section 8 housing rights at foreclosure.  Section 8 provides housing assistance to low income families by paying a portion of rent and utility bills, allowing the families to obtain an adequate place to live.  If the tenant is a Section 8 tenant as described in the United States Housing Act of 1937 (42 U.S.C. 1437f(o)(7)), the tenant may only be evicted if the purchaser of the property will occupy the property as his primary residence.  Again, it is required that the tenant must be given ninety (90) days notice before eviction can take place.

 In addition to the federal law regarding a tenant’s right at foreclosure, North Carolina General Statute § 42-45.2 applies when the lease or tenancy is not bona fide as described above or the tenancy is not a result of Section 8 housing.

 When North Carolina law applies to a tenant’s rights at foreclosure, it is necessary to know if the residential property contains less than fifteen (15) rental units or fifteen (15) or more rental units.  If the property contains less than fifteen (15) units, the tenant can, upon notice of foreclosure sale, terminate his lease by giving the landlord written notice of termination at least ten (10) days after the notice of sale.  Also, if the property contains less than fifteen (15) rental units and the tenant does not terminate his lease, the tenant must be given ten (10) days notice prior to eviction.  Alternatively, if the property contains fifteen (15) or more rental units, tenants must be given thirty (30) days notice prior to eviction.

In most circumstances it is likely that the federal “Protecting Tenants at Foreclosure Act of 2009” will apply giving tenants the option to remain on the property until the end of their lease term or providing ninety (90) days notice when either of the two exceptions apply.  The North Carolina statute which provides less notice to tenants prior to eviction will only apply when the federal law is not applicable because the tenancy or lease is not bona fide or there is not a Section 8 tenancy.

–Bradley A. Coxe is a practicing attorney in Wilmington, NC with Hodges & Coxe PC who specializes in Personal Injury, Medical Malpractice, Homeowner's Associations, Contract and Real Estate disputes and all forms of Civil Litigation.  Please contact him at (910) 772-1678. 

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