Most property managers of single family homes, condominiums or other rental units will at some point in their career cross paths with an owner that has a property go into foreclosure. Such a situation may cause the tenant, the owner and the property manager significant stress.  However, understanding what legal rights the tenant will have in a foreclosure situation should alleviate this stress in most cases for all involved.    

Legal History

Prior to 2009, laws in many states allowed tenants of foreclosed homes to be immediately evicted when the foreclosing bank or purchaser at auction acquired title to a foreclosed home.  This resulted in many ugly situations. First, as the United States economy entered a recession, more and more tenants of foreclosed homes were evicted. The nastiest part to all of this was that many tenants were shocked to learn that the house was in foreclosure and did not even think eviction was a possibility, sometimes arriving home from work to find the locks changed and all their personal property removed to the street, even when they had paid the rent!   In response to this, Congress passed the Protecting Tenants at Foreclosure Act in 2009, which law created notice requirements to the tenant if the foreclosure was finalized.   However, this federal law expired on December 31, 2014, despite legislative attempts to permanently extend the law, and for a time, there was no law taking the place of the federal law, and a return to the prior legal landscape had seemingly occurred.  

Effective June 2, 2015, a new Florida law went into effect dealing with termination of a rental agreement upon foreclosure, offering limited protections to the tenant under foreclosure in the form of a 30-day notice requirement from the new titleholder.  However, this Florida law was subsequently repealed when the original federal law was reinstated in June of 2018.         

Tenant Protections under the Current Law

The Protecting Tenants at Foreclosure Act requires the foreclosing bank or purchaser at auction to honor the existing lease upon obtaining title, or in the case of a purchaser at auction actually planning to move into the property, to provide the tenant with at least 90 days’ written notice.   The purchaser at auction will often be the lending bank or an investor not looking to move in, so the tenant’s full remaining lease interest would need to be honored in those cases, or if the lease has expired or is set to expire in less than 90 days, the bank or investor would need to provide at least 90 days’ notice.   

In order for the tenant to qualify for these rights, the lease must be an arms-length transaction between the tenant and the owner.   Also, the rental rate under the lease must not be substantially below market value, and the tenant cannot be a child, spouse or parent of the owner.   

Can the Tenant Break the Lease?  

The tenant will often be served with the foreclosure lawsuit and other subsequent court documents filed in the foreclosure proceeding and may be spooked.  However, as long as the owner remains the titleholder, the tenant needs to pay rent and honor the lease.  The owner in foreclosure can evict the tenant for defaulting on the lease terms.   Unlike the “old days”, the tenant’s tenancy interest continues to be protected by law.   Therefore, the tenant does not have a right to stop paying rent or terminate the lease early simply by virtue of the foreclosure action being filed.           

What Must the Prior Owner Do?  

Upon title changing under a foreclosure action, the prior owner (or its managing agent) must turn over all security deposit and advance rent to the new titleholder with an accurate accounting.    The foreclosing bank may sometimes indicate no interest in receiving deposit or other escrow money.  After title changes, if the bank clearly disclaims in writing its interest in the security deposit or other escrow money, that money should be returned to the tenant, not the prior owner.    The foreclosing bank may often present the tenant with a cash for keys offer after acquiring title, but the tenant is not obligated to take the bank up on its offer.      

An owner under foreclosure pressure may sometimes turn the deed over to the lender prior to a foreclosure being finalized, and in that situation, the bank would acquire the property subject to the existing tenancy interest.   Similarly, if a “short sale” occurs prior to a foreclosure action being finalized, the new titleholder will acquire the property subject to the existing lease interest, as would be the case with any ‘normal” sale.  

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