What are the landlord’s rights/obligations?
What are the tenant’s rights/obligations?
These are the questions that many tenants and landlords are facing today. As in all cases, the answers depend on the facts and your point of view.
From the tenant’s perspective, they have signed a lease1 and are current on the rent. So what happens if the property goes into foreclosure? The answer to that question is easy: a judicial foreclosure and a non-judicial foreclosure will both "foreclose" (i.e., wipe out) all liens and interests in the rental property that are subordinate to the lien being foreclosed, which in almost all cases, includes a residential rental agreement or lease. (But see the "Update," below).
When the landlord purchased the Property, s/he obtained a loan. When s/he obtained the loan, s/he signed a promissory note, which created the debt that is owed to the lender.
The landlord also signed either a "deed of trust" or a "mortgage." Almost everyone refers to a house as having a "mortgage," but the fact is that almost all loans in Arizona are secured by a deed of trust, rather than a mortgage.
Under a deed of trust, if he borrower commits a "default," such as not making the payments, the lender may initiate a Trustee’s Sale, which is a non-judicial foreclosure of the Property. A non-judicial foreclosure means exactly that – the foreclosure may be conducted without going to court and/or getting a judgment. To initiate a non-judicial foreclosure (i.e., a Trustee’s Sale), the beneficiary (the lender) must instruct the trustee to record a Notice of Trustee’s sale with the county recorder and, after posting a notice on the property and sending the borrower various notices (whether actually received or not), the trustee may conduct a Trustee’s Sale of the Property.
Under a mortgage, if the borrower commits a default, the lender may commence foreclosure by filing a lawsuit in superior court and serving the borrower and all other parties with an interest in the property with a Summons & Complaint. If the lender prevails at trial, the judge will issue a judgment of foreclosure and order that the sheriff seize the Property and sell it at auction.
A Trustee’s Sale, pursuant to a non-judicial foreclosure under a deed of trust, may be conducted ninety days after the Notice of Trustee’s Sale is recorded with the county recorder. A judicial foreclosure under a mortgage, proceeds as any regular civil lawsuit. If none of the defendants oppose the foreclosure, the lender may receive a judgment by default in about the same time as conducting a Trustee’s Sale (i.e., ninety days). If, however, one or more defendants opposes the foreclosure action, it may take from four to twelve months to obtain a final judgment and the Sheriff’s sale of the property will occur sometime thereafter.
The reason that a deed of trust is more common than a mortgage is thus revealed. In almost all cases, the property can be sold at a foreclosure sale much sooner under a deed of trust than under a mortgage. In addition, a deed of trust can be foreclosed as a mortgage (i.e., the borrower can elect to file a lawsuit in court rather than conducting a non-judicial sale), but a mortgage cannot be foreclosed as a deed of trust (i.e., a lender holding a mortgage must file a lawsuit and pursue a judicial foreclosure). For these reasons, almost all lenders prefer to use a deed of trust to secure real property.
The shortest time, then, from initial default until the foreclosure auction (either a Trustee’s Sale or a Sheriff’s Sale) is ninety days. But that presumes that the foreclosure process is commenced immediately upon the first default (i.e., failure to make a payment). Many lenders do not even begin foreclosure until a borrower is three or more payments behind. In today’s market, some lenders are waiting even longer (i.e., they already have enough foreclosures on their hands; no need to hurry to the next one). Sorry for the diversion, but an understanding of the process in is important in order to understand the answers to our questions.
Back to the tenant. When is the lease going to end? If the lease is month-to-month, then there is no breach by the landlord. Either the landlord or the tenant may terminate a month-to-month tenancy for any reason (or no reason) by simply sending out a thirty-day notice of termination. (See A.R.S. § 33-1375(B)). To avoid liability (discussed below), the landlord may simply send a notice of termination at the appropriate time before the foreclosure sale.
If the lease will terminate in less than ninety days, there is no possible way that the tenant will lose possession of the rental property before their lease expires. Again, there is no breach by the landlord. Whether or not a foreclosure is pending, a landlord has no obligation to renew or extend any lease, unless the lease expressly gives the tenant an option to extend or renew the lease, which is not common in residential leases.
If the lease termination date is somewhere between ninety days and six months away, then "potentially" there is a problem. And if the lease termination date is more than six months away and/or the lease gives the tenant the option to extend or renew the lease, then the landlord will be in breach of contract if the foreclosure sale occurs.
When a landlord and tenant sign a lease, the tenant agrees (among other things) to pay a specified amount of rent each month (or some other specified period) and to stay for a certain length of time (i.e., six months, one-year, three-years, etc.). In return, the landlord agrees to rent the subject property to the tenant at that specified rent (i.e., no rent increases during the term of the lease) and for a certain length of time. The landlord’s failure to make the loan payments on the rental property is not a breach of contract, at least not to the tenant; it is a breach of contract under the promissory note and deed of trust or mortgage that the landlord signed with the lender. Rarely, if ever, is there a provision in the lease that requires the landlord to keep the loan payments on the rental property current during the term of the lease. If there was, then the landlord would be in breach of contract as soon as the landlord failed to make a required payment. Likewise, there is no statute that requires the landlord to keep loan payments current on the rental property during the lease term. If there was, then the landlord would be in violation of the law as soon as the landlord failed to make a payment. Consequently, the landlord will only be in breach of contract if the rental property is foreclosed during the rental term and the tenant is forced to move out before the end of the lease term. In that instance, then the landlord has failed to provide the tenant with the subject property for the agreed upon period. This, by definition, is a breach of contract by the landlord. The tenant may then sue the landlord for all damages that result from the breach of contract, which may also include the tenant’s moving expenses.
If, however, the lender begins the foreclosure process on the subject property, but the landlord makes up the back payments and averts the foreclosure, then there has been no breach of contract by the landlord. Likewise, if the landlord’s solution to avert the foreclosure is to sell the property to someone else, as long as the foreclosure is averted for any reason (i.e., the sale paid off the foreclosing lender, the new buyer assumed the existing loan and brought it current, the lender extended the foreclosure sale date, etc.), then the landlord has not breached the lease contract. Keep in mind, however, that when someone buys real property that is subject to an existing lease, the buyer takes the property subject to the existing lease, which means that the new buyer is bound by the terms of the existing lease and must allow the tenant to remain in the property until the end of the lease term.
But we are not done yet. What if the landlord "knew" the property was going into foreclosure when he signed the lease? What if it is his intent to keep all the money that the tenants pay to him and not make any loan payments to the lender until the lender forecloses on the property? Again, the specific facts will determine the answer. The extremes will be easy, so let’s start there. If the lease is month-to-month and the landlord provides adequate advance notice to the tenant before the foreclosure sale, then there is no breach by the landlord. On the other hand, if the landlord signed a ten-year lease, then it would be clear that the landlord intended to defraud the tenant. In that case, the tenant would be able to sue the landlord for breach of contract and fraud. The gray area in the middle is less clear. If the landlord signed a six-month, one-year, or other specified length lease with a tenant, knowing that he never intended to make a payment during the term of the lease, but with the expectation that the lender would not foreclose before the end of the lease term, then answer is less clear. Intent is not an element in a breach of contract claim. Therefore, if the tenant is forced to move before the end of the lease term, then the landlord is in breach of contract. Whether the landlord is also liable for fraud will turn on whether his expectation that the lender would not foreclose before the end of the lease term was "reasonable."
Can I stop making the rent payments? That is a question I hear frequently. Many lawyers are telling tenants to stop making the rent payments when a property goes into foreclosure. I believe that to be bad advice. Yes, I recognize that the tenant may argue that the landlord’s failure to make the payments and the impending foreclosure is an "anticipatory breach of contract" by the landlord. But I also know that every landlord will argue that they are experiencing some "financial difficulties," which are now being compounded by the tenant’s actual breach (not anticipatory breach) of failing to pay the rent. My opinion is that most judges will find the "actual breach" to be more compelling than the "anticipatory breach." Which means that the tenant will be in breach of contract, will be evicted and may be liable for rent until the end of the lease term. And this may be true even if the rental property is actually foreclosed because the landlord will claim that the tenant’s failure to pay the rent was the reason the landlord could not pull the rental property out of foreclosure. Bottom line for the tenants is you are better off paying rent. If the foreclosure sale actually takes place, then the landlord is in breach of contract if you are forced to leave the rental property before the end of your lease term. You can sue the landlord for breach of contract and, under appropriate facts, for fraud, but keep in mind that if the landlord lost the property to foreclosure, s/he may have other financial problems and may be on the verge of bankruptcy.
Tenants should also know that there is a process that follows any foreclosure sale. Whether by Trustee’s Sale or by Sheriff’s Sale, the successful bidder (or the bank, if no one bids) is not immediately entitled to possession. The new owner must first serve the occupant(s) with a five day demand for possession. If the occupant does not move, then the new owner must file a forcible detainer action (i.e., an eviction action) to remove the occupants. The hearing will be set approximately five days after the lawsuit is filed. If the occupants do not appear at the hearing (and even if they do), the court will enter a judgment in favor of the new owner and a "writ of restitution" can be issued five days later. That is the date that the Sheriff or constable will show up at the door and escort all occupants out of the property and deliver possession of the property to the new owner. So, from the foreclosure sale to the date the Sheriff shows up is about fifteen days. Not a lot of time, but certainly "some" amount of time to find substitute housing.
UPDATE:This post was originally posted on September 4, 2008. On May 20, 2009, the President of the United States signed a new federal law -- "Helping Families Save Their Homes Act of 2009." Part of the new law enacts protection for tenants with leases at the time of the foreclosure, provided the loan that is being foreclosed is a "federally related" home loan. The law protects "bona-fide tenants," which is defined in the new legislation as: (1) the lease had to be signed before the notice of foreclosure was issued, (2) the defaulting borrower cannot be the tenant under the lease, (3) the lease must be an "arm's length" transaction, and (4) the rent must be "fair market value rent."
If the foreclosed is a "federally related" home loan and the tenant is a "bona-fide tenant," then the purchaser at the foreclosure auction takes the property "subject to" the existing lease, which means the new owner must honor the terms of the existing lease. If the new owner intends to owner occupy the property, then the lease can be terminated, but the new owner must provide at least ninety (90) days notice of termination. And that is true (i.e., 90 days notice) even if the existing lease is only a month-to-month tenancy. In short, prior law provided that a foreclosure foreclosed a lease and the tenant had only a couple weeks after the foreclosure sale to vacate, but the new (federal) law now provides that the minimum notice to be given is ninety days and the tenant may be able to stay until the end of the lease term, provided: (1) the loan being foreclosed is "federally related" and (2) the tenant is a "bona-fide" tenant.
Well, I'm on month to month, and I've recieved the notice of a trustee sale. I have just made an rental application with a different prop mgr for a house. What can I do if the current landlord gives a lousy reference because he's tiffed that I'm moving out? I've been a good renter for 3 years. Also, what's the chances I'll get my deposit ( $1900) back? The deposit isn't in the brokers trust account, according to the previous lease agreement , the landord holds it and the landlord is also Lic. realtor. Do I have to go thru small claims to get any of the deposit back, and just how many photos should I take when moving out?
Response by Carlton C. Casler: Very important -- give a written 30 day notice of termination and make sure the notice is (1) timely and (2) properly served. Take twice as many photos as you think you need of the rental after you have completely moved out and cleaned the property. Ideally, the photos should be taken at the time you do the move-out inspection with the owner or property manager present. If the owner gives false information to someone (i.e., a bad tenant reference, if there is no basis for the bad reference), then you have a claim against him/her for defamation. If there is no damage and the property is clean when you leave, you should get your deposit back. If not, you can go to small claims (up to $2,500) or to civil justice court (up to $10,000), both of which are located in the same courthouse. You can sue the landlord for the amount "wrongfully withheld," which may be all or only a part of your $1,900, and you are also entitled to an additional amount equal to twice the amount wrongfully withheld, plus your attorney's fees and court costs. If the owner, who is also a real estate agent, does not pay the judgment you receive, you can file a claim with the real estate recovery fund (contact the Arizona Department of Real Estate to file the claim).
Posted by: jean novak | December 16, 2009 at 08:42 PM
I am renting a home that is now in foreclosure. I moved in June 2009 and have recently found out the owner put the house up for short sale in May 2009. The owner promises the short sale will go through to investers. Am I obligated to stay in this property if it sells by short sale before the forclosure date? Do I have to finish out the term of the lease with the new owner? Has the contract been broken by the landlord?
Response by Carlton C. Casler: Yes, yes and no. Forget the "short sale" concept for a minute. The owner of rental property (residential or commercial) can sell the rental property anytime. The lease remains valid after the sale and is binding upon the tenant and the new owner. A "short sale" is an agreement by the lender to allow sale of the subject property for less than the amount owed; it is an agreement between the lender and the owner/borrower and does not impact the tenant in any way. Consequently, a "short sale" is merely a sale of the rental property and the lease remains binding on the tenant and the new owner. The only exception would be language in the rental agreement that allowed the landlord or tenant to terminate the lease upon sale, which is rare. Selling the property via a regular sale or a "short sale" is not a breach by the landlord and, therefore, on the facts you presented, the landlord has not breached the lease agreement. If the property is foreclosed and the tenant is forced to vacate the rental unit before the end of the lease term, then the landlord is probably in breach of the lease, but the final determination will depend on the specific terms of the lease.
Posted by: Foxy D | October 20, 2009 at 04:52 PM
Do I have to show the home to buyers while my landlord is foreclosing and we are still living here? We had a realtor come by and said he was taking over the home and was selling it now. No one notified us he was coming or who he was, he won't give us a card, he said he will have us out in 2 weeks, and he has more than one buyer lined up to look at home in the day. He also said we were served a 5 day notice to vacate but the landlord gave him the 5 day notice instead of us. I can't handle showing to this many people and trying to work and have a family and keep the home is show ready condition. Thanks
Response by Carlton C. Casler: Do I have to show the home to buyers while my landlord is foreclosing and we are still living here? We had a realtor come by and said he was taking over the home and was selling it now. No one notified us he was coming or who he was, he won't give us a card, he said he will have us out in 2 weeks, and he has more than one buyer lined up to look at home in the day. He also said we were served a 5 day notice to vacate but the landlord gave him the 5 day notice instead of us. I can't handle showing to this many people and trying to work and have a family and keep the home is show ready condition. Thanks
Yes, you must allow the owner/landlord to show the home to prospective buyers and that is true whether or not the home is currently in foreclosure. To show or inspect, however, the owner/landlord must give you two days advance notice and may only show or inspect at "reasonable" times. (See ARS 33-1343).
You did not give me enough information to comment on the 5-Day Notice you received. If you did not pay the rent, then the 5-Day Notice was appropriate. If you committed a non-monetary default, then a 5-Day Notice is only appropriate if the violation affects health & safety. To avoid being evicted for the latter, simply cure the default stated in the notice. (See ARS 33-1368).
You should contact the landlord/owner directly to determine if the real estate agent is acting on behalf of the owner. You should also find out if the agent's authority relates only to selling the property or whether the agent is also authorized to receive payment of the rent and/or notices from you regarding any problems with the property.
Posted by: Elizabeth | September 19, 2009 at 07:18 AM
So basically what you are saying is that even after we have received a notarized document stating a "Notice of Trustee's Sale" with the date of sale being 3 months from the date written we still have to make make our monthly payments. Does this mean that we should wait until the date of sale to confirm the foreclosure (as stated above the lendee has the opportunity to become current with what they owe before their date of sale)? If so, does this mean we should wait until the eviction notice or should we stop renal payments sooner?
Response by Carlton C. Casler: The AAR February 2008 Residential Lease Agreement includes a provision (starting on Line 206):
"Trustee's Sales Notice: Landlord shall not allow the premises to become the subject of a trustee's sale. Tenant shall notify Landlord immediately upon receipt of any notice of trustee's sale. Tenant acknowledges that pursuant to law, Tenant's rights under this Agreement may be terminated in the event of a trustee's sale."
If your lease has this provision, then you can give your landlord a "10 Day Notice of Materal Noncompliance" for allowing a trustee's sale to commence. If he does not cure the default within ten days, then you may terminate and vacate, but you cannot remain and simply stop paying rent.
If your lease does not have this provision, then you must pay rent until the trustee's sale occurs. The landlord's position will likely be that s/he is using the rent to try to catch up with the payments and nonpayment of rent has only compounded his/her financial problems. Although the landlord may be in breach of contract with the landlord's lender (i.e., failure to make the monthly payment), absent the foregoing language, the landlord is not in breach of the lease until the foreclosure sale actually occurs. Most judges will not even hear evidence about the rental property going into foreclosure because it (normally) does not relate to the issue of nonpayment of rent. Bottom Line: Absent the foregoing provision, you should pay the rent; failure to do so will almost certainly result in eviction.
Lastly, is the new Trustee (which is the lawyer representing the lender as stated in the "Substitution of Trustee" notice that we received) required and/or allowed to give us the status of our landlord's defaulted loan?
Posted by: Ryan | May 17, 2009 at 11:17 PM
I am in a rental and the house is being foreclosed on. But since January of this year, the landlord has said that he is trying to get a loan modification. Is it possible for a rental or investment property to get a loan modification? My husband works as a collector that does mortgages.He knows how the loan modification works, but he thinks you can't get a modification on a rental property. Are we safe to stay in the house and keep paying rent? Our lease is up at the end of June.
Answer by Carlton Casler: Yes, it is possible for a rental or investment property to get a loan modification. Your lease ends in June 2009. Check the public records (county recorder's office) to see if a "Notice of Trustee's Sale" has been recorded. Then check the public records (superior court for your county) to see if a judicial foreclosure has been filed by the lender against the owner of the rental property. If a notice has not been recorded or a judicial foreclosure has not been filed, then it is IMPOSSIBLE for a trustee's sale to be completed and VERY UNLIKELY that a judicial foreclosure can be completed before the end of June 2009. If, however, you stop paying rent, the owner can have you evicted within three weeks. It is safer for you to pay rent (i.e., unlikely any type of foreclosure will be completed before June 2009) than it is to not pay rent (which WILL likely result in eviction).
Posted by: Lindsay Roberson | April 07, 2009 at 04:35 PM
Thanks for sharing your views between tenant and landlord. I've learned a lot. As we all know, each one of us has a right. We need to know our positions so we would be able to fight for them, if need arises.
-Audrey
Posted by: Aurora Colorado real estate | March 19, 2009 at 03:32 AM
I am a renter occupant of a foreclosed property. Auction sale was the 18th of September and the property did not sell and it went back to the lender. I talked to the trustee office before sale and the gentleman told me there was a new law that prohibited an eviction for 60 days. Have you heard of this. I need info because I am having a hard time finding a new place to live. I am on section 8. Help!!! How much time do I have. I am afraid to call the lender.
Thanks Susan
Answer by Carlton Casler: There is no "law" that prohibits eviction for sixty days. Because of the current economic crisis, however, many lenders are slow to begin eviction after a trustee's sale. Also, for a while, Fannie Mae (FNMA), Ginnie Mae (GNMA) and Freddie Mac (FHLMC) were postponing foreclosures and also postponing evictions after a foreclosure. Generally, the process is as follows: the lender begins foreclosure; the property is sold at the foreclosure auction or, if no bids exceed the lender's credit bid, then the lender becomes the owner of the property; the owner of the property must then give the occupants (who may the prior owner or a tenant) a five day demand for possession; if the occupants do not vacate within the five days, then the owner must file a forcible detainer action (i.e., an eviction action) to remove the occupants. The process from service of the five day demand for possession to the date the owner receives a Writ of Restitution (which authorizes the constable or sheriff to forcibly remove all occupants) will take about three weeks.
Posted by: Susan Harvey | September 22, 2008 at 01:22 PM