When an owner defaults on a mortgage, the mortgage holder, often a bank, either becomes the new owner or sells the property at a public sale. If the bank becomes the owner, it may pay a servicing company to handle the property. But don't expect close attention -- these companies are focused on financial matters, not mundane things like maintenance of the property or it's tenants. Some renters find themselves with a new owner even before the foreclosure.

These are great inexpensive Legal "Do It Yourself" Informative type books (written & published by Nolo.com), and will probably answer all your questions and concerns - But, you should consult a Real Estate Attorney for all questions NOT ANSWERED in these eBooks/eGuides or your specific situation.


                                      


                                    

The Owner of my House Isn't Paying Their Mortgage, Do I Still Pay My Rent?
The short answer is, unfortunately YES - However, that might change over the course of the foreclosure process. The lease you signed may have some bearing on this as situation as well. You signed a lease obligating you to the terms and conditions of the lease. Therefore, as long as that specific owner is the LEGAL owner (on property's title) OR if your lease is with a Property Management Company is under management contract with that specific owner you are obligated to pay rent REGARDLESS of whether they are paying the mortgage on the property. Now, once ownership changes (foreclosure, new owner, etc.), a new lease MAY be needed and drawn up with changes to tenancy, lease termination, rental amount or terms & conditions which may affect whether or not you even want to continue leasing. But, your existing lease legally doesn't end when a new owner takes over (see below). Now, what you must do is see if you can get your security deposit(s) back from the leassor, which is very difficult to do but not impossible. The existing owner may be sympathetic and return the deposit without issue, but most you'll have to take them to court to get it back. (CA law says that security deposits on rental properties are supposed to be kept OUTSIDE of personal funds, however, w/owners that doesn't happen very often). Also note, according to CA law, you CANNOT use security deposit funds in lieu of rent payments, so you can't just tell the owner to keep your deposit for the rent. I know it's a harsh reality that many, many renters have fallen victim too, but renters need to protect themselves from the beginning, when you first sign your lease.

A simple solution is have the lease run through a licensed property management company, or have the security deposits held in an escrow account. This forces a 3rd party to hold the security deposits and when the lease terminates for any reason, the security deposit is refunded to the correct parties. Although, if you don't have that already in place then the best solution is to periodically check the property for mortgage default like www.rentaldefault.com (they can pull a default record or legal title ownership for dirt cheap!). And they will tell you whether your home is or could be subject to being taken right out from under you.  

New Owners Means No Maintenance!
Many tenants have no idea that their building has been taken at foreclosure. They continue to pay rent to the former owner, who often pockets the money but is hardly inclined to maintain the building it no longer owns. In the meantime, the new owners simply refuse to be landlords, never making repairs or even paying utility bills. Because the banks are stuck with increasing numbers of foreclosed properties that they can't sell, they remain non-landlords for some time, making life impossible for their tenants until those tenants are evicted.
 

Renters in Foreclosed Properties No Longer Lose Their Leases

Before May 20, 2009, most renters lost their leases upon foreclosure. The rule in most states was that if the mortgage was recorded before the lease was signed, a foreclosure wiped out the lease (this rule is known as "first in time, first in right"). Because most leases last no longer than a year, it was all too common for the mortgage to predate the lease and destroy it upon foreclosure.

These rules changed dramatically on May 20, 2009, when President Obama signed the "Protecting Tenants at Foreclosure Act of 2009." This legislation provided that leases would survive a foreclosure -- meaning the tenant could stay at least until the end of the lease, and that month-to-month tenants would be entitled to 90 days' notice before having to move out (this notice period is longer than any state's non-foreclosure notice period, a real boon to tenants).

An exception was carved out for the buyer who intends to live on the property -- this buyer may terminate a lease with 90 days' notice. Importantly, the law provides that any state legislation that is more generous to tenants will not be preempted by the federal law. These protections apply to Section 8 tenants, too.

Importantly, tenants who live in cities with rent control "just cause" eviction protection are also protected from terminations at the hands of an acquiring bank or new owner. These tenants can rely on their ordinance's list of allowable, or "just causes," for termination. Because a change of ownership, without more, does not justify a termination, the fact that the change occurred through foreclosure will not justify a termination.

Does It Make Sense For New Owners To Evict Tenants?

New owners may want to terminate existing tenants because they believe that vacant properties are easier to sell. Common sense suggests otherwise. In many situations a building full of stable, rent-paying tenants will be more valuable (and command a higher price) than an empty building. Emptied buildings are also prone to vandalism and other deterioration -- after all, no one is on site to monitor their condition. When entire neighborhoods become a wasteland of empty foreclosed multifamily buildings, their value drops even further. It's hard to understand why new owners choose to pay lawyers to start eviction procedures instead of paying a modest fee to a management company to collect rent and manage the property while they wait to sell.

Is "Cash for Keys" A Good Deal?

To encourage tenants to leave quickly and save on the court costs associated with an eviction, banks and sometimes new owners offer tenants a cash payout in exchange for their rapid departure. Thinking that they have little choice, many tenants -- even Section 8, protected tenants -- take the deal. It doesn't help them much as they join the swelling ranks of newly displaced tenants (and former homeowners) who are competing to find an affordable new rental. So, is it a good deal for you? Every situation is different, but if you can secure an acceptable new place and the bank/new owner is willing to give you $$ to vacate early and it's feasible for you, then yes. But DO NOT AGREE to anything (especially in writing) until you have fully weighed your options AND SECURED/SIGNED A NEW LEASE! But, keep in mind a couple of things - 1) Try to work with them in a pleasant fashion because Cash for Keys is NOT required and eventually you WILL have to get out eventually whether they give you Cash For Keys monies or not. 2) Get ANY Cash of Keys agreement in writing and make sure all parties sign the form because it's not fully executed and legal until everybody has signed/agreed. 

What Can a Foreclosed-Upon Tenant Do?
In short, not a lot since tenants don't have ownership of the property. However, thanks to the 2009 federal legislation, most tenants with leases will keep their leases, and month-to-month tenants will have at least 90 days to relocate. Tenants with leases have no legal recourse against their former landlords, because they are in the same position vis a vis the new owner as they were with the old: The lease survives and ends as it would had there been no foreclosure. Similarly, month-to-month tenants always know that they can be terminated with proper notice, and 90 days is longer than any state's termination period.

Also, a lease-holding tenant whose rental has been bought by a buyer who actually intends to occupy the property ends up less fortunate than before the foreclosure -- he may lose his lease with 90 days' notice, a result that probably would not have happened had the owner simply sold the property to a buyer who intended to occupy the property. (Normally, the new owner has to wait until the lease ends, absent a lease clause providing for termination upon sale, though such clauses may not be legal in all situations.)

Suing in Small Claims Court

A lease-holding tenant who has to move out so that new owners may move in might consider suing their former landlord in small claims court. Here's how it works.:

After signing a lease, the landlord is legally bound to deliver the rental for the entire lease term. In legalese, this duty is known as the "covenant of quiet enjoyment." A landlord who defaults on a mortgage, which sets in motion the loss of the lease, violates this covenant, and the tenant can sue for the damages it causes.

Small claims court is a perfect place to bring such a lawsuit. The tenant can sue the original landlord for moving and apartment-searching costs, application fees, and the difference, if any, between the new rent for a comparable rental and the rent under the old lease. Though the former owner is probably not flush with money, the awards in these cases won't be very much, and the court judgment and award will stay on the books for many years. A persistent tenant can probably collect what's owed eventually.
                                                                    

- Ken Smith