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From Commercial Lender to Residential Landlord: The Protecting Tenants at Foreclosure Act
Author: Michael P. Menton
On May 20, 2009, the United States Congress enacted the Protecting Tenants at Foreclosure Act (APTA@) which grants specific rights to residential tenants affected by foreclosure. The PTA is federal law that acts as a minimum requirement for foreclosing lenders with any additional state requirements left unaffected. Congress, in the midst of the recent Aforeclosure crisis,@ sought to enact the PTA to protect unsuspecting/innocent tenants by imposing restrictions on a foreclosing lender=s ability to evict a holdover tenant upon foreclosure. As noble a cause as it may have been, the PTA has resulted in significant post-foreclosure obstacles to lenders.
Requirements under PTA
Prior to the enactment of PTA, a residential tenant occupying a foreclosed property could be required to vacate the property on 30 days notice, under Texas law. If the tenant failed to vacate upon the expiration of 30 days, the foreclosing lender could then proceed with an eviction action. Under the PTA, a foreclosing lender is now required to provide a residential tenant remaining in the foreclosed property a minimum of 90 days to vacate. The PTA further mandates that a foreclosing lender takes title to a foreclosed property subject to an existing lease. In short, a foreclosing lender Asteps into the shoes@ of the prior landlord/borrower and assumes all of the rights, duties, and obligations under the existing lease. Therefore, if a foreclosed property is occupied by a residential tenant who is under a lease that is protected by the PTA, the lender must honor that lease for its term. Although the tenant under the existing lease must continue to make monthly rental payments, this results in a clear obstacle to the foreclosing lender=s ability to market and sell the property. The PTA allows such a property to be sold to an Ainvestor@ who agrees to honor the existing lease or to an Aend user@ (owner-occupant). A sale to an Ainvestor@ or Aend user,@ however, does not relieve the foreclosing lender of the duty to give the tenant 90 days notice to vacate.
Not all residential tenants or leases are protected under the PTA. There are situations in which the occupant of a foreclosed property does not rise to the level of a Atenant@ under the PTA and is therefore is not entitled to its protections. These occupants include, but may not be limited to, the child, spouse, or parent of the defaulting borrower. Moreover, not all leases will actually qualify as a Alease@ protected under the PTA if: (1) the lease was not negotiated at arms-length; (2) the lease is not for fair-market rent; or (3) the lease was not entered into prior to foreclosure. These situations, however, are highly fact intensive and need to be addressed on a case by case basis to ensure that the foreclosing lender is not only protecting its rights against opportunistic Atenants,@ but also complying with the PTA as to not violate the rights of protected tenants under legitimate leases. Although it may be eloquently asserted at times, it is important to note that the PTA does not provide protections to the owner/borrower on which the lender has foreclosed.
Real Effects of PTA on Foreclosing Lenders
In the higher-end Aspec@ house market, it is not uncommon for the tenant to pre-pay lease payments for up to a year. This in turn causes substantial economic issues for a foreclosing lender. For example, a lender forecloses on a property in June 2011 that is under a written lease term from January 2011 through December 2011 and the tenant has already pre-paid rent for one year to the defaulting borrower/landlord per the terms of the lease. As a result, the lender is forced to allow the tenant (assuming the tenant is not otherwise in default under the lease) to remain in the property Arent free@ for six months. To add insult to injury, the lease terms may require that the landlord is responsible for yard maintenance and water. Now, a commercial lender has essentially been transformed into a residential landlord with no rent stream and yet saddled with maintenance expenses and obligations.
Minimizing the Impact of PTA
Many foreclosing lenders have discovered that Acash for keys@ provides a clean, cost-effective means of obtaining a vacant property in order to prepare and market the property for sale prior to the expiration of 90 days. Although the pre-paid tenant in the above example is not likely to accept a Acash for keys@ deal, many tenants under a month-to month lease or an expired lease are all too happy to hand over the keys for a reasonable sum (this sum should be determined by the foreclosing lender via a cost/benefit analysis based on factors unique to the specific case). To a foreclosing lender, the idea of passing out money to an occupant of property already owned by the lender may be of little attraction, but given the requirements under the PTA and the possibility of a quick sale to a third-party, Acash for keys@ can provide a sensible solution to the post-foreclosure problems created by the statute.
Prior to foreclosure, lenders should be aware of the status of the property and whether it is occupied by a residential tenant who will be protected under the PTA (often, commercial builders will lease properties that they are unable to sell without notifying the lender). Many times copies of any leases can be obtained by request to the borrower or borrower=s counsel. Knowing the terms of a lease in connection with a property prior to foreclosure can provide invaluable information to a foreclosing lender and may even affect the liquidation strategy depending on the terms and whether rent has been pre-paid as in the above example.
There are numerous nuances to the PTA and an infinite number of directions a case can take upon foreclosure of a property that involves a residential tenant. This article is aimed merely to provide a general overview of the statute=s requirements and a sample of its effects. As with all situations involving a new area of law, there are many legal issues that may arise at different stages of the foreclosure process involving property with residential tenants, and each and every issue requires examination and analysis to ensure that the foreclosing lender=s rights are maintained and the tenant=s rights are protected within the confines of the law.