If financial disaster happens to your landlord, you need to protect your rights. There are several different laws and legal relationships that come into play during a foreclosure. The first principle has to do with your relationship with your old landlord. If you find out that the bank intends to foreclose on the property, the most important thing is to keep paying your rent. The landlord is the owner of the property until the bank takes legal possession through the foreclosure, and you can be evicted if you stop paying your rent.
Once the bank takes possession after the foreclosure, you still have rights. The bank is now the new legal owner and is your new landlord. You must now pay your monthly rent to the bank. The bank, as your landlord, is responsible for any maintenance issues and for returning your security deposit at the end of your lease – even if the old landlord did not transfer the security deposit. If you fail to pay your rent after the foreclosure, the bank can evict you.
Before 2009 renters could be evicted when the landlord’s property was foreclosed on and ownership transferred to the lender. That’s because your lease is between you and the original owner/landlord, and does not involve the lender. To combat this injustice, Congress passed the Protecting Tenants at Foreclosure Act, which allows tenants to stay after a property has been foreclosed as long as you have a valid lease and are paying your rent regularly. Even renters on a month-to-month lease get 90 days to leave. There is an exception for buyers of the foreclosed property who intend to make the property their residence. In this situation the tenant must vacate within 90 days after notice of eviction.
While the Protecting Tenants at Foreclosure Act was intended to shield tenants, the defaulting landlord also receives some protection. Since the Act places tenants in the same position with the new owner as they were with the old, the tenant generally has no recourse against a defaulting landlord. The lease survives just as there been no foreclosure. In some cases the lender will want the tenant to vacate and offer a cash buyout to leave. Many tenants believe they have no choice and accept the cash buyout.
Once the property has been through foreclosure, the landlord-tenant relationship with the old owner is severed. Many landlords who lose property through foreclosure often file bankruptcy, which discharges most landlord-tenant claims. If your landlord is facing foreclosure, protect your legal rights. An experienced bankruptcy attorney can assess your situation and help you preserve your rights during your landlord’s financial difficulties.