IT'S THE LAW: Mortgage foreclosure can evict tenant

Q: I rent a home from my landlord. I was served with a summons and complaint in a mortgage foreclosure case in which I was named as “unknown tenant.” Can I be evicted by the foreclosing mortgage holder?

A: A tenant is often a victim in a mortgage foreclosure. The tenant pays the landlord, but the landlord does not pay the mortgage holder. The mortgage holder forecloses and in most cases seeks to get rid of the tenant as well as the property owner.

Property ownership is often referred to as bundle of sticks. A tenant buys some of those sticks from the owner and has right of occupancy and use, as defined in his or her lease.

A tenant’s rights and opportunities in a mortgage foreclosure are based in large part on the terms and date of the lease. Florida’s Residential Landlord Tenant Act provides tenant protection in areas like maintenance, notice landlord eviction proceedings. The act does not provide any protection from mortgage foreclosure.

Because the tenant holds some of the ownership “sticks,” a foreclosing mortgage holder generally sues the tenant as well as the owner so that the foreclosure includes all of the ownership interest. That usually means the tenant will lose all his ownership rights under the lease if the foreclosure is completed. However, completion of foreclosure can take months.

In a mortgage foreclosure, the mortgage holder first must get a judgment confirming that the property owner is in default and the amount then due under the mortgage. The foreclosure judgment determines the total amount due to the mortgage holder and includes a provision that if the amount is not paid the property will be sold by the Clerk of Courts to the highest bidder.

Sale date is no less than 21 and no more than 35 days after judgment date, to allow for publication of sale notice in the newspaper.

The foreclosure judgment and sale ends all ownership interests that are inferior to the mortgage being foreclosed and that have been joined in the lawsuit. The tenant’s interest is inferior to the mortgage if the lease was entered after the owner entered the mortgage. If the lease predates the mortgage, the tenant has an interest superior to that of the mortgage holder. For that reason, most commercial lenders require that tenants in apartment buildings, shopping centers and the like sign subordination agreements making their lease hold interest inferior to that of the mortgage. Almost all leases in commercial properties have clauses making the lease hold interest subordinate to any mortgage placed on the property.

Perhaps the biggest foreclosure negative from the tenant’s perspective is that tenant’s security deposit is held by the property owner and obtaining a refund of the deposit may be difficult. If the tenant’s interest is foreclosed, the new owner will not be obligated to abide by terms of the lease or deposit. A purchaser outside of foreclosure would be obligated by the lease and deposit requirements, since the purchaser would take subject to the ownership sticks held by the tenant. A foreclosing mortgage holder does not take subject to those sticks.

Another negative is that you may have to move out of the property prior to natural termination of your lease, if the lender so requires. If that is not an attractive option, you might want to contact the lender and negotiate lease terms for occupancy after the foreclosure sale. Some lenders are happy to have a tenant taking care of the property and paying rent. Most lenders will not sign long term leases, since they plan on selling the property as quickly as possible.

One possible positive is that many landlords in foreclosure will not pursue a tenant who does not pay rent. Hence, you may be able to get your security deposit back by stopping rent payments. There is no guarantee in this regard, as the landlord can still evict you for failure to pay rent as long as the landlord is the property.

Another risk you need to be careful about is the foreclosing mortgage holder may ask you to pay rent to the mortgage holder. Your lease is with the owner, not the lender. If you pay the mortgage holder, the property owner might evict you for failure to pay rent to the proper party. Paying rent to the wrong party is not generally a good defense to eviction.

Suing the landlord for damages is another option, although landlords in foreclosure may not be a ready source of money if you win your lawsuit. The facts and circumstances of each case will affect the outcome.

A tenant in a mortgage foreclosure is caught between the proverbial rock and hard place. Good legal advice can minimize your damages and might even help turn your problem into an opportunity. I suggest you meet with an experienced attorney as soon as possible for advice concerning your case.

William G. Morris is an attorney with offices at 247 North Collier Boulevard. His practice covers a broad range of subjects, including civil litigation, real estate, business and corporate law, estate planning and probate, domestic relations and contracts. He writes this column periodically with respect to legal matters that frequently affect non-lawyers. The information contained in this column is not intended as legal advice and, of necessity, is generalized. For questions about specific circumstances, the reader should consult a qualified attorney.

© 2009 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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Comments » 2

Tenant317 writes:

I moved into a townhouse in August. The landlord stopped mortgage payments, association payments and property tax payments in October.
At what point does the landlord violate their lease agreement for failure to pay their mortgage? We were told we weren't going to be getting our security deposit back even though it should be in a non-interest bearing account, and that in lieu of the security deposit we could live out our last month for free. They've not paid the mortgage for 5 months now and are declaring bankruptcy AND going into foreclosure any day now, but they still seem to think we owe them rent. What are my rights/options and whats the name of the website I can check to see when foreclosure proceedings have been filed?

ToddR#222763 writes:

By asking these questions now, you are doing the right thing at the right time. There are many different and absolutely helpful steps you can take to keep yourself informed and lessen the likelihood you'll fall prey to an unscrupulous landlord. At this point, I personally would not pay this landlord any rent. Although, there are essentially several things you can do to arm yourself in this environment; I articulate two (2) below.

First, definitely pay for a service to check if a landlord is in foreclosure still. Although, I believe there a limit to which you should pay, and not all services are accurate or even promising, nevertheless you should consider some type of notification service. One service I know that is accurate & relatively inexpensive is Tenant Protection Services ( *** Landlords typically will pay $35 for a tenant credit report. It is proactive and a small fee for a tenant to pay $15 for a one-time report or $25 for a year (of monthly reports) to find out if a potential landlord is in foreclosure or once in the property to be notified if it falls into foreclosure at some point after signing a lease.

Second, I would negotiate with the landlord (on your next deal) at the outset and put some terms into any lease or month-to-month rental. Now, be aware that there is no guarantee that a landlord will agree, and if you are bidding on a rental that has multiple offers to rent, you could be out of luck inserting your favorable terms. I would suggest that you make it a covenant of the lease contract that the landlord makes all mortgage, property tax, HOA dues, & insurance payments. So, if your landlord doesn’t comply with those covenants or obligations, you may be able to forego your obligation to pay rent if you made the landlord’s obligation to pay the mortgage (or taxes) an affirmative covenant of the lease, the breach of which could then relieve you of the obligation to pay rent until the landlord’s default is cured.

If you follow all this and complete your due diligence, you will greatly reduce the chances you’ll have to sue your lessor for your deposit or rents or be surprised one day when the sheriff or the bank rep comes knocking your door, because they won’t; you’ll have already been noticed weeks or months beforehand. All the best.

Todd Rubinstein is a licensed California Real Estate Broker affiliated with Coldwell Banker Residential & Commercial Brokerage specializing in Single Family, Multi-Family, Probate, Trust, Conservatorship, Trustee Sale Investor & REO (Bank or Lender Owned) transactions. Also, a licensed California Attorney he once prosecuted some of LA County’s finest, and currently provides advice on a myriad of legal issues, including but not limited to Real Estate, Criminal Defense, Family law and Landlord/Tenant rights and obligations as well as Condo and HOA law.

*** disclosure – I know of the accuracy, because I have an affiliation to the service.

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