On May 20, 2009, U.S. Senate Bill 96, the “Helping Families Save Their Homes Act of 2009” was signed into law by President Obama.  The Act contains the “Protecting Tenants at Foreclosure Act of 2009,” which has a significant impact on the time frames and procedures of many post-foreclosure evictions.

Previously, once the purchaser of a foreclosed property took title, the purchaser could take immediate action when allowed by state law, to evict any occupant.  Congress felt that innocent renters who may have been faithfully paying rent to the mortgagor, and who were unaware of the foreclosure, were entitled to more advance notice before being subject to an eviction.   Hence, Congress enacted the new federal law to give some relief to renters who qualify as “bona fide tenants” under the terms of the Act.

What Kind of Properties Are Subject to the Act?
The Act applies to properties acquired through foreclosure on a “federally-related mortgage loan” (presumably regardless of the type of property); or on any dwelling or residential real property.  In other words, the only properties not covered by the Act are non-residential properties that were not foreclosed on through a federally-related mortgage loan.

Who is a Bona Fide Tenant?
The Act defines a bona fide tenant as a person in possession of the property with or without a lease, provided:

• The occupant is not the mortgagor or the child, spouse, or parent of the mortgagor;
• The lease or tenancy was the result of an arms-length transaction; and
• The lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property or the unit’s rent is reduced or subsidized due to a Federal, State or local subsidy.  

Rights of a Bona Fide Tenant
Unlike state law, the new law states that the party acquiring title to the property through a foreclosure sale, or as a successor-in-interest, takes the property subject to the rights of a “bona fide tenant,” if any. 

A bona fide tenant without a lease or with a lease terminable at-will under state law, is entitled to a 90-day notice before eviction proceedings may be commenced.

If the bona fide tenant is in possession under a lease that was entered into prior to the date of the “foreclosure notice,” (which most likely means the date of lis pendens in the foreclosure), then they may not be evicted until the term of the lease ends.  The only exception is that the lease may be terminated upon the sale of the property to a purchaser who will occupy the property as a primary residence, although a 90-day notice must still be delivered prior to commencing the eviction. 

Presumably, the bona fide tenant would be required to pay rent accruing from the date the purchaser’s right to the title became vested, and the tenancy may be terminated immediately should s/he fail to pay rent as required.  If the purchaser demands or collects rent, it is likely that they will have all obligations of a landlord under the lease.  We cannot predict whether the courts will interpret the new law such that the purchaser will be saddled with those obligations, even if they do not demand or collect rent.  

How to Determine Whether There is a Bona Fide Tenant
Prior to proceeding with an eviction action, it is necessary to determine whether the occupant qualifies as a bona fide tenant under the Act.  If you have any information regarding tenancy, please provide WWR with the details in conjunction with your eviction referral.  If there is no information regarding tenancy, we will deliver a letter to the occupant advising that s/he may claim bona fide tenancy by sending us a copy of any lease; copies of cancelled checks or other evidence of the most recent rent payments; and copies of any documentation showing any reduced or subsidized rent due to Federal, State, or local subsidy. 

A Proactive Approach
WWR’s letter to the occupant will indicate that if we do not receive the requested documentation within a three-day period, we will assume s/he is not a bona fide tenant and will proceed with the eviction action without delay, as allowed by state law.  In other words, we will put the burden on the occupant to establish bona fide tenancy.

If it is already known that s/he is a bona fide tenant, or if the occupant delivers adequate documentation showing as much, WWR will delay or withdraw the eviction action and provide the required 90-day notice, if applicable, before commencing a new eviction action.  We will also consult with you regarding your rights to collect rent.

As an additional service, if during the pendency of the foreclosure case, we learn that the property may be occupied by a bona fide tenant, we will advise you so that you will have that information to determine whether to bid at the Sheriff’s Sale, and if so, how high.

The More Conservative Approach
What happens if an eviction is commenced in good faith based on the occupant’s failure to deliver adequate documentation showing bona fide tenancy, but is subsequently able to produce such documentation while the eviction is still pending?  The law does not expressly impose any liability beyond having the pending eviction action dismissed and being required to recommence it after serving the required notice to the bona fide tenant.   Therefore, although we cannot guaranty that there will be no other repercussions, we are advocating the “proactive approach” described above.

Nevertheless, you may want to have us serve a 90-day notice and delay the commencement of the eviction during that period unless it has been conclusively determined that the occupant is not a bona fide tenant.  We will implement the proactive approach, unless you give us instructions to follow a more conservative approach.

Receivership
If you have information indicating that the property is occupied by a tenant, please consult with WWR as to the pros and cons of filing a Motion to Appoint a Receiver while the foreclosure is pending.  Although there is a cost for receivership, a receiver can collect rent while the foreclosure is pending and evict the tenant for failure to pay rent, leaving the property unoccupied.

Termination of the New Law
The “Protecting Tenants at Foreclosure Act of 2009” contains a “sunset” provision, which provides that the requirement under the Act shall terminate on December 31, 2012.

If you have any questions on this information, please contact Mr. Larry R. Rothenberg, Esq. Larry Rothenberg is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan. Larry can be reached at (216) 685-1135 or via e-mail at lrothenberg@weltman.com.

Client Advisory is published by Weltman, Weinberg & Reis Co., L.P.A., an organization providing comprehensive creditor representation.  The information contained in this advisory is a summary of legal information and is not intended to constitute legal advice on specific matters or create an attorney-client relationship.  Contact any of our offices or visit our website at realestatedefaultgroup.com for more real estate related information, company facts and attorney profiles. (c)2009