Q: My wife and I recently purchased a single-family house at a foreclosure sale. The tenants in the house showed us a lease signed a month ago, in which the former owner not only gave them a three-year lease (they had been month-to-month), but at a rent that’s about a third below what a home of this nature would rent for. We’d like to do substantial work on the house, and would need it to be vacant, but the tenants say they are entitled to stay. Who’s right? –Rick R.
A: In the days before the foreclosure crisis, the answer would be rather simple: If the lease was signed after the mortgage was recorded, a foreclosure on the mortgage would usually wipe out the lease. And conversely, a lease signed before the mortgage was recorded would survive the foreclosure (unless the tenant agreed in the lease to waive that survival right as to any subsequent lender).
But those rules, known as "first in time, first in right," changed substantially in May 2009, when President Obama signed the Protecting Tenants at Foreclosure Act. A deceptively short law (it fits easily on one sheet of paper), it provides that leases signed before the "notice of foreclosure" would survive, even if they were entered into after the mortgage was recorded or they predated the mortgage, but the tenant had waived his right to survive.
Until recently, it was unclear what the "notice of foreclosure" meant. Courtesy of the Dodd-Frank Act, signed this fall, we now know that it’s the date of the transfer of title. In California, this is the date of sale, as long as the new owner records the deed within 15 days (if he records later, the notice of foreclosure is the date he records).
So far, it would seem that maybe your tenants have an argument. But maybe not. Congress was concerned that tenants and defaulting owners not be able to game this new rule, by deciding in bad faith to tie up the house for the new owners. Specifically, to take advantage of their right to stay in this situation, tenants must be "bona fide" tenants. They must not be the spouse, parent or child of the defaulting owner; the leasing deal must have been done at "arm’s length," and the rent must not be substantially below fair market value.
Here’s where you may have some ammunition. Tenants who are renting month-to-month don’t usually sign three-year leases unless it’s an extraordinary situation. One wonders whether these tenants can rationally explain their sudden decision to put down roots — did one of them obtain a three-year appointment at a school, or secure a three-year employment contract? Without a good explanation, this lease is beginning to look like an attempt by the former owner to do his tenants a favor by locking them into a lengthy rental. That’s hardly an arm’s-length deal.
The third requirement may help you, too. If the rent for comparable homes in the neighborhood when the lease was signed was one-third higher than the rent specified in the lease, perhaps a judge would conclude that the stated rent is indeed "substantially below fair market rent." To know your chances of prevailing on this point, you’d need to find real estate experts who could substantiate your valuations, but the ultimate decision would be up to a judge.
Dealing with tenants in a post-foreclosure situation is not something most new owners will feel comfortable doing on their own. Unlike a "normal" eviction, which in many states can be done by non-lawyers using court-designed forms, a post-foreclosure eviction is a more protracted process, requiring unique documents written from scratch (or almost). You’ll need the help of an attorney to bring such a lawsuit.
Q: I rent a duplex and recently got a dog. My landlord said that the rental agreement prohibits pets, and showed me his copy. Unfortunately, he’s right, and he won’t let me keep my dog. He gave me a three-day notice to get rid of him or leave … and I chose to leave. But I had already paid rent for that month. Am I entitled to be reimbursed for the days left after I move out? –Kirk S.
A: What a creative notion! Let’s play that one out a bit: Tenant has a month-to-month rental agreement, wants to leave, and doesn’t want to give the legally required notice (typically 30 days), nor pay rent during those days. Solution: Get a dog (or break some other term of the rental agreement), triggering a three-day notice. Tenant moves and then gets the balance of his rent back for that month! Wow, so much for the landlord’s right to be given 30 days’ notice (and 30 days’ worth of rent) when tenants want to terminate monthly rental agreements.
So no, you aren’t entitled to be reimbursed for the balance of the month. You are the one who has broken the rental agreement by getting a dog. Allowing you to benefit from that breach by leaving with less than 30 days’ notice would just not go down well with most judges.
The answer isn’t different for tenants with leases; in fact, the consequences may be even harsher. If you had a lease with six months left, and moved out after being given a three-day notice to cure or quit (get rid of the dog or move out), not only would you not be entitled to reimbursement for any days left in that month, but you might be on the hook for the rent for the entire period left on the lease.
If your state requires landlords to mitigate damages (use reasonable efforts to re-rent when tenants break their leases and move out early), and your landlord is unsuccessful in re-renting your unit, you could conceivably be responsible for the entire rent left on the lease. That you moved out as a result of being handed a three-day notice, and not because you wanted to move, is immaterial.
Janet Portman is an attorney and managing editor at Nolo. She specializes in landlord/tenant law and is co-author of "Every Landlord’s Legal Guide" and "Every Tenant’s Legal Guide." She can be reached at email@example.com.
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