Tuesday, March 20, 2012

What You Need to Know About the "Protecting Tenants at Foreclosure Act"

By Jeffrey Boshes

On May 20, 2009, President Obama signed the Protecting Tenants at Foreclosure Act of 2009[1] ("PTFA" or "Act"), which was amended on July 21, 2010 ("2010 Amendment").[2] The PTFA was enacted to protect residential tenants from being promptly evicted following foreclosures. In many cases, historically, the foreclosing creditor's lien is senior to the tenant's right to possession under the lease, and tenants were evicted because they held junior interests subject to foreclosure. The PTFA subjects any "successor in interest" to existing "bona-fide" leases and provides a 90-day notice requirement before eviction actions can be commenced. As originally enacted, the PTFA was scheduled to expire in 2012, but the sunset date was extended to 2014 by the 2010 Amendment.

The law generally applies to all residential leases. Section 702 of the Act applies to any "federally-related mortgage loan," and additionally to "any dwelling or residential real property."

In Arizona, in the case of non-judicial foreclosures, the law applies to residential leases entered into before a trustee's sale has been concluded. Although the original act applied to leases entered into before "notice of foreclosure," the 2010 Amendment clarified the cut-off date to be "the date on which complete title to the property is transferred to a successor entity or as a result of an order of court or pursuant to the provision in the mortgage, deed of trust, or security deed."

The "successor in interest" must provide a 90-day notice to any "bona fide tenant," which includes month-to-month leases and tenancies at will. Section 702(a)(2)(B). The "successor in interest" often has difficulty determining the nature of the lease relationship between the borrower and the tenant. Foreclosing creditors or purchasers at trustee's sales may not have the benefit of copies of leases.

If it is determined that there is no lease, or that the lease is terminable at will, a 90-day notice to vacate can be issued after the trustee's sale has been conducted. If there is a "bona-fide" oral or written lease, it must be honored for the term of the lease. An exception to that rule is when the "successor in interest" intends to utilize the property as the owner's primary residence. In that event, the owner can send out a 90-day notice to vacate after the trustee's sale has been concluded and need not honor the lease beyond the 90 days.

For the lease to be "bona fide," the tenant cannot be the mortgagor or the child, spouse, or parent of the mortgagor. Additionally, the lease or tenancy must be the result of an arm's length transaction, and rent must not be substantially less than fair market value for the property, except if rent is reduced due to a federal, state or local subsidy. Section 702(b). In a clear case when a "successor in interest" has determined that the lease is not "bona fide," the new owner can proceed without providing the 90-day notice. Otherwise, it would bode well to send out the 90-day notice.

A practice used by lenders is to request that the recipient of the notice provide the "successor in interest" with information about any lease and information about whether the lease is "bona fide," within a certain set time frame (i.e. inquiring if the recipient is the mortgagor, child, spouse or parent of the mortgagor). The notice may also indicate that if the information is not provided by the recipient within a set time frame, the "successor in interest" will presume that there is no "bona fide" lease. Often times, the notice will advise the recipient that rent must continue to be paid, where it is to be paid and that eviction proceedings will commence if rent is not timely paid.

The PTFA does not specify the required mode of service of the notice. It would be beneficial to have the notice hand-delivered, and to secure an acknowledgement of receipt or declaration of the party serving the notice attesting to the hand-delivery. If there is a written lease with a notice provision, notice served in accordance with the notice provision should be acceptable. Mailing or posting notice may be sufficient when expressly provided for by law, such as when a summons and complaint is served in a special detainer action. See A.R.S. § 33-1377(B) and Rule 18(h), Arizona Rules of Procedure for Eviction Actions. However, the PTFA has no provision for mailing or posting of notices.

The PTFA does not have a specific remedy provision. If the "successor in interest" commences an eviction proceeding without sending out a 90-day notice or during the 90-day time frame after sending out the notice, tenants may appear and affirmatively defend based upon a violation of the PTFA.

In Bank of New York Mellon v. De Meo, 227 Ariz. 192, 254 P.3d 1138 (App. 2011), the Arizona Court of Appeals reversed the trial court and dismissed an eviction proceeding commenced by the Bank, which acquired title at a trustee's sale. The Bank sent out a traditional five-day demand for possession following the trustee's sale, but did not provide the 90-day notice required by PTFA. The Bank argued that it provided the 90-day notice orally to the tenant before commencing the eviction action. The Court refused to find that the oral 90-day notice was effective. Id. at 195, ¶ 15, n. 4, 254 P.2d at 1141. The Bank also argued that it should be deemed to have complied with PTFA, because it waited 97 days after sending out the five-day demand for possession before filing a forcible entry and detainer action. Id. at 193, ¶ 5, 254 P.2d at 1139. The Court refused to accept that logic and dismissed the action, holding that the required 90-day notice must be sent. Id. at 195, ¶ 15, 254 P.2d at 1141.

The PTFA does not reach the issue of whether the "successor in interest" must wait until the end of the 90-day time frame to commence an eviction proceeding, if the tenant fails to pay rent. Presumably, tenants who are not paying rent also are not taking the time to defend eviction actions. In some cases, tenants may have difficulty determining to whom the rent should be paid, if there has been a resale of the property following the trustee's sale. Consideration of special circumstances may be appropriate before proceeding with an eviction action during the 90-day time frame, if the tenant has failed to pay rent.

Each case that a business or individual may face is unique and may require legal advice. If you would like additional information regarding the content of this article, please contact the author, Jeffrey P. Boshes.

[1][1] Title VII, Section 701-704 of the Helping Families Save Their Homes Act of 2009.

[2][2] Section 1484 of the Dodd-Frank Wall Street and Consumer Protection Act.