Renters Lose in Foreclosures

By: LawInfo

If a homeowner defaults on their mortgage the lender usually forecloses on the home and the homeowner loses it.  What happens to the renters who pay their rent every month but live in homes whose owner has not been paying the mortgage?

If you are a renter in a home or apartment building that is being foreclosed upon you are likely to be evicted.  Do you have the right to stay?  At least for a short time.....    The lender who holds the mortgage, or the new owner if the home is sold at foreclosure, may try to evict you.

If you have a lease how can that lease be thrown out?  It’s a contract; shouldn’t the new owner be required to fulfill the contract?  Each state may vary but it is likely your lease can be canceled for two reasons.  The first may be due to a clause in most leases that cancels it in the event of a foreclosure. The second is a part of property law called “first in time is first in right.”  That means that if you rent a residence which is subject to a mortgage, the mortgage holder’s interest in the property is senior to your interest because it was entered into first.

Apartment building owners are usually required by their lender to include the foreclosure clause in their leases.  Lenders require this clause because it helps protect from an unnecessary risk.  If a building is foreclosed on, the lender must sell it to recoup the loan.  Lenders believe that at a foreclosure sale an empty building will sell for more than one that is occupied by tenants. If the value of a foreclosed property drops it may hinder the restorative effect a foreclosure is supposed to provide. This may leave the borrower “under water,” still owing even though the property has been sold.

Because many tenants of foreclosed buildings are helpless during a foreclosure, some new legal protections were put in place.  Under the Protecting Tenants in Foreclosure Act of 2009, tenants living in foreclosed properties are entitled to a minimum of 90 days notice before eviction.  In some cases, if the tenant has a binding lease for the property, then the tenant may be able to stay until the lease ends.  However, if the new owner of a foreclosed property intends to live in it as their primary residence, then the full lease term does not have to be honored, in which case the tenant will still be entitled to the 90 days notice to vacate. 

The information on this page is meant to provide a general overview of the law. The laws in your state and/or city may deviate significantly from those described here. If you have specific questions related to your situation you should speak with a local attorney.

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