Stites & Harbison, PLLC

In response to the striking rise in the number of foreclosures occurring throughout the United States, on May 20, 2009, President Obama signed into law a measure designed to delay the eviction of tenants residing in residential properties following a foreclosure sale. The Protecting Tenants at Foreclosure Act of 2009 (the "Foreclosure Act") amends in part the Help Families Save Their Homes Act of 2009. Under the Foreclosure Act, residential tenants have the right to occupy the property after foreclosure for not less than ninety days. The Foreclosure Act went into effect immediately and, pursuant to a sunset clause, will expire at the end of 2012.

The protections afforded to a tenant living in a foreclosed residential property will depend on the terms of the tenancy prior to the foreclosure sale and the relationship between the tenant and the mortgagor. If a ‘bona fide tenant’ is occupying the property under a ‘bona fide lease’ that was entered into prior to the notice of foreclosure, the tenant may occupy the dwelling until the end of the remaining term of the lease. A lease is considered bona fide under the Foreclosure Act where (i) the tenant is a ‘bona fide tenant,’ (ii) the lease is the result of an arms-length transaction, and (iii) the rent is not substantially less than fair market value. Under the Foreclosure Act, a tenant is a bona fide tenant if he or she is not the mortgagor or the parent, child, or spouse of the mortgagor.

If the purchaser at the foreclosure sale (the "Purchaser") intends to use the property as a primary residence, the lease may be terminated ninety days after notice to vacate is given to the tenant by the Purchaser. If the lease term expires in fewer than ninety days after notice is given, the tenant may continue to occupy the property until the expiration of the ninety days. Bona fide tenants living in property either pursuant to a bona fide lease that is terminable at will, or without a lease, may occupy the property for ninety days after notice to vacate is given to the tenant by the Purchaser.

The intent of the Foreclosure Act is to provide some protection to an innocent tenant who would otherwise suffer from the effects of the acts or omissions of his or her landlord which gave rise to the foreclosure. The burdens of such protections encumber the Purchaser, however, not the defaulting landlord/mortgagor. The Purchaser must now investigate whether there is a tenant occupying the property, the relationship of the tenant to the mortgagor, if the tenant is inhabiting the property pursuant to a lease, and must provide a notice to vacate to all bona fide tenants.

The Foreclosure Act further obligates the Purchaser to engage in actions not traditionally contemplated by purchasers of foreclosed property. Once the factual investigation is complete, and the rights of the tenant have been established, the Purchaser must then either provide notice to vacate or become a de facto landlord for the duration of the bona fide lease. From a practical standpoint, either option forces the Purchaser into actively monitoring the property and tenants for the duration of the occupancy, thereby imposing additional administrative costs that were not likely contemplated at the time of purchase.

Beyond the time and expense associated with monitoring the property, the Foreclosure Act essentially deprives the Purchaser of the right to immediately use and enjoy the property. Significantly, this divestiture of the Purchaser’s basic property rights could last well beyond ninety days: the Foreclosure Act does not put a cap on the term of a bona fide lease not terminable at will under state law. Moreover, the Foreclosure Act does not require a tenant to pay rent to the Purchaser during the ninety day notice to vacate period or during the remainder of the term of a bona fide lease. The Foreclosure Act thus effectively confers property to the tenant, albeit temporarily, without providing consideration to the Purchaser for the loss of the use and enjoyment of the property.

The Purchaser is not without options to ameliorate the effects of the Foreclosure Act.  While the Foreclosure Act bestows the right to a tenant to occupy the property after the foreclosure sale, the Purchaser could simply present the tenant with incentives to not exercise that right.  For example, the Purchaser could compensate the tenant or provide assistance in finding or arranging for alternative living arrangements in exchange for the tenant vacating the property in a shorter time frame.  Once the tenant voluntarily vacates the property the Purchaser would no longer be hindered by the restrictions of the Foreclosure Act.

Allison A. Wiemer is an Associate in the Nashville office where her practice focuses on bankruptcy and creditors' rights matters.

B. Walker Entwistle is an Associate in the Atlanta office where his practice also focuses on bankrtupcy & creditors rights along with business litigation, real estate and corporate matters.