Renters get relief from foreclosure

Only 'bona fide' renters are protected

The law protects only a bona fide lease or tenancy, which is defined as a situation that meets three criteria:
  • The renter may not be the former owner of the home or the former owner's spouse, child or parent.
  • The terms of the rental must be at arm's length between the landlord and renter.
  • The rent cannot be substantially less than the fair-market rent, unless the rent is subject to a government reduction or subsidy.

The arm's-length and fair-market rent requirements "are designed to prevent a sweetheart deal" between a defaulting landlord-owner and a renter whom the landlord wanted to protect from eviction after the foreclosure, Portman says. For example, if a landlord and renter signed a two-year lease at a very favorable rent just prior to a foreclosure, that likely wouldn't meet the bona fide requirement.

Broken lease can lead to lawsuit

Renters who have a lease and are evicted may be able to bring a breach-of-contract lawsuit against the former landlord to recoup the costs of their forced move, according to Portman.

"You go to court and say, 'We had a deal, and he didn't deliver,'" Portman says. "The guy may be long gone. But if you get a judgment, that's good for many years and you could probably eventually collect on it."

New law doesn't affect rents, deposits

The new law doesn't pre-empt any state or local laws. Instead, it specifies that it won't affect "the requirements ... of any state or local law that provides longer time periods or other additional protections for tenants."

State laws apply to most landlord-tenant issues that are beyond the scope of federal law. Examples include prepayment of last month's rent and reimbursement of a security deposit. Neither of those issues is mentioned in the new law.

"Many states, including California, protect the tenant at any cost. They say basically that it is up to the buyer and seller, or in this case, the bank and the (former) owner, to figure out how to (handle those sums)," Portman says.

The bottom line is that landlords and renters have new rights and responsibilities in foreclosure situations. While renters may face challenges in their attempts to exercise those rights, knowledge and action can prevail.

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