This question is more accurately stated as: When a rental property is managed by a real estate agent/broker, does the agent/broker have a duty to inform the tenant when the agent/broker becomes aware that foreclosure proceedings have been started on the rental property?
The agent/broker is an Arizona real estate "licensee." The licensee owes a fiduciary duty to the owner/landlord, but must also deal fairly with all parties to the transaction, including the tenant. Informing the tenant of an impending foreclosure would appear to violate the licensee’s fiduciary duty to the landlord, but the Commissioner of Real Estate in Arizona has promulgated rules that all licensees must follow. One of those rules, A.A.C. R4-28-1101, requires that a licensee disclose to the other party any information that the party the licensee represents cannot or may not be able to perform. See A.A.C. R4-28-1101(B)(1) ("Any information that the seller or lessor is or may be unable to perform."). Clearly, if the property is foreclosed, the landlord may or may not be able to perform (i.e., continue to give the tenant the exclusive use and control of the rental property).
If a lease exists and the termination date is after the scheduled foreclosure (which may be a Trustee's Sale or a Sheriff’s Sale after a judicial foreclosure), then the lessor cannot perform. Even if we assume that the foreclosure sale may be continued to a later date, then there is still a chance that the lessor may not be able to perform. In both of these situations, under Commissioner's Rule R4-28-1101(B)(1), the licensee MUST disclose. I believe under the Lombardo case, it is even more clear that the licensee MUST disclose under these facts. See Lombardo v. Albu, 199 Ariz. 97, 14 P.3d 288 (2000).
If, however, the lease terminates before the scheduled foreclosure, I don't believe the licensee needs to disclose anything. But if that same lease includes an option (for the tenant) to extend the lease for a period of time that would extend past the scheduled foreclosure sale, then I believe the licensee MUST disclose the scheduled Trustee's Sale.
That answers the questions for fixed term leases and lease with an option to extend.
Oddly enough, a month-to-month agreement may be the hardest situation to analyze. At first glance, it would appear that the lessor (or the tenant) can terminate the rental agreement with only 30 days notice and, therefore, it would appear no notice is needed because tenancy may be terminated for any reason or no reason. So it would appear that no notice of the foreclosure sale is needed because the sale is 90 days away and tenancy can be terminated with only 30 days notice. But these time periods are somewhat deceptive and, at some point, the tenancy will progress to the point where notice is required.
An example may illustrate best. Assume today is January 1. Also assume tenancy is mo/mo and renews automatically on the first of each month, as most mo/mo tenancies do. The licensee discovers a foreclosure sale scheduled for March 20. As of January 1, the sale is 80 days away.
A landlord must give at lease 30 days advance notice of termination and tenancy must terminate at the end of a "periodic period." See ARS 33-1375. The "periodic period" in this example is one month. If the landlord gives the tenant 30 days notice of termination on January 1, then tenancy terminates at the end of February -- NOT February 1, which is 30 days after the notice is served and which many people mistakenly believe is the date the tenants must vacate. To terminate at the end of January, the landlord would have had to terminate tenancy sometime in December.
If the landlord serves notice on any date from January 1 to January 29, then tenancy still terminates at the end of February. The reason January 29 is the last day to terminate tenancy in February is because February (normally) only has 28 days and the statute requires 30 days advance notice. In the above example, the landlord or licensee clearly would NOT have to inform the tenant of the impending March 20 foreclosure sale as long as the landlord gave the tenant a 30 day notice of termination on or before January 29.
If the landlord gives the tenant a 30 day notice of termination on any date from January 29 to February 28, then tenancy terminates at the end of March, which will be after the scheduled sale. On these facts, it would appear that the licensee must inform the tenant of the pending March 20 sale because the landlord may not be able to perform. While that is technically true, the new owner (bank or successful bidder) will not be able to compel the tenant to vacate before the end of March. So, arguably, if the landlord gave the tenant a 30 day notice of termination on or before February 28, then the tenant has not sustained any "real" damages.
If the landlord never gives the tenant notice and the tenant did not know about the foreclosure sale until the date of the sale (or even after), then the landlord clearly cannot perform under the lease (i.e., give the tenant exclusive use and control of the rental unit for another month). It would appear in this case that the licensee MUST give the tenant notice of the foreclosure sale, but if this is a "government related loan," then the May 20, 2009 federal legislation gives the tenant under a "bona fide lease" at least 90 days before the tenant must vacate (90 days is the shortest period of time, even if the lease is only mo/mo and the successful bidder intends to owner-occupy the property). So, arguably, no harm comes to the tenants and, therefore, no notice by the licensee is necessary.
In addition, the Notice of Trustee's Sale is recorded and a judicial foreclosure is filed in the office of the Clerk of the Superior Court. Recorded documents and, arguably, court filed documents, give constructive notice to everyone, including the tenants. Both the landlord and the licensee can make the argument that they are not required to notify the tenant of documents that are of public record. Moreover, the statute for Trustee's Sales and foreclosures requires that the lender notify the occupants of the subject property, so it would appear that notice from the licensee to the tenants would be redundant and, therefore, unnecessary.
The foregoing reveals how complicated this seemingly simple example can become. The short answer to this question (i.e., must the property manager tell the tenant about an upcoming foreclosure sale) is definitely in some cases and maybe in other cases.
