The U.S. Congress enacted the Protecting Tenants at Foreclosure Act (PTFA) in 2009 which provides new and unprecedented rights to tenants in the case of a foreclosure. Pursuant to the PTFA, if certain qualifications are met, the tenant can keep possession of the property following a foreclosure by the landlord’s creditor. In order for the PTFA to apply, four conditions must be met:
1. the lease must have been executed prior to the notice of trustee’s sale;
2. the defaulting borrower can not be the same person as the tenant;
3. the lease must be an “arm’s length agreement”; and
4. the least must require “fair market rent.”
Until recently, the “notice of trustee’s sale” was understood to mean the 90-day notice the lender is required to provide the borrower before proceeding with the foreclosure. Thus, in order for the PTFA to apply, the tenant had to sign a lease at least 90 days before the trustee’s sale.
But pursuant to the Dodd Frank Wall Street Reform and Consumer Protection Act (the Dodd Frank Act), the 90-day notice requirement has been eliminated. Indeed, pursuant to Section 1414(1)(B) of the Dodd Frank Act, in order to qualify as a bona fide lease, the tenant must only show that the lease was entered into before title transfers from the original borrower to “a successor entity or person” – in other words, the lease has to be executed anytime prior to the date of the trustee’s sale. This arguably means that an opportunistic borrower could enter into a lease with a new tenant the morning of the trustee’s sale and require the new owner to honor the lease following the foreclosure. Thus, if the defaulting borrower and a new tenant enter into a five-year lease hours before the trustee’s sale, the new owner may be stuck renting the property to the tenant the remainder of the lease term.
Thank you to legal sleuth Chris Stovall, Esq. for uncovering this provision in the Dodd Frank Act.