The owner of a residential income property is in default on a loan secured by a trust deed encumbering the property. While he is in negotiations with the lender to modify the loan’s payment schedule and cure the default, he enters into a two-year lease agreement with a tenant, who takes possession of the property.
Shortly after the tenant takes possession, the negotiations with the lender break down, prompting the lender to record a Notice of Default (NOD) and commence a trustee’s foreclosure on the property. The property is sold at a trustee’s sale several months later, and the high bidder takes title to the property as the new owner, called an owner-by-foreclosure (OBF).
The OBF is a speculator who intends to fix up the property and resell it for a profit. The OBF has read state law controlling the rights of tenants in possession at the time of the trustee’s sale and knows the tenant’s lease has been wiped out by the foreclosure sale. He believes he can terminate the tenancy (at sufferance) rights held by the tenant by serving the tenant with a 60-day notice to vacate due to the foreclosure sale. His real estate agent who is handling the resale marketing of the property advises the OBF to serve the tenant with a 90-day notice to vacate since:
- the OBF acquired the property through a trustee’s sale; and
- the OBF’s resale of the property will be to a buyer who will occupy the property as his primary residence and the sale will be set to close on or after the 90-day notice expires.
The OBF ignores his agent’s advice and serves the tenant with the 60-day notice to vacate as required by state law for evictions. [Calif. Code of Civil Procedure 1161b(a)]
60 days pass following the service of the notice on the tenant, but the tenant remains in possession. Can the OBF file an unlawful detainer (UD) action against the tenant and obtain a court order to evict him?
No! An OBF is required to serve a bona fide residential tenant occupying the property at the time of the foreclosure sale with at least 90 days’ notice before the tenant’s right to possession is terminated. If the tenant has not vacated 90 days after the notice is served and, in the case of an unexpired lease, the property has been resold to a buyer who intends to occupy the property as his primary residence when the tenant vacates, the OBF can file a UD action to have the tenant removed. [Pub Law 111-22 §702(a)(1)]
The requisite 90-day notice to vacate
Due to the housing bubble implosion following the Millennium Boom, California suffers from an enormous volume of foreclosure property as homeowners are either unable or unwilling to pay the large mortgages on their comparatively valueless properties. While defaulting homeowners are forced to suffer through this mortgaged real estate Dark Age, the OBF must deal with another party thrown into this tangle of fast changing legal procedures: tenants, and their expanding rent control rights.
Historically, OBFs needed only to serve residential tenants with a 30-day notice to vacate when they acquired a property at a trustee’s sale or a judicial foreclosure sale. In 2008, California expanded the 30-day prior notice period to 60 days for a limited period of time. [CCP 1161a(c); §1161b]
Editor’s Note — California’s 30-day notice period was extended to a 60 days in 2008, and was scheduled to return to 30 days on January 1, 2013. However, since the federal 90-day notice period pre-empts the state notice periods, the 90-day federal notice period will continue to control until it expires on December 31, 2014. [CCP §1161a; §1161b; Dodd-Frank Wall Street Reform and Consumer Protection Act §1484(2)]
However, that is California’s rent control law. Since May 20, 2009, federal residential rent control provides tenants with additional benefits, thus pre-empting less beneficial state rent control laws governing the termination of a residential tenant’s possession of property following an OBF’s acquisition at a trustee’s sale. [Pub L 111-22 §701, §702, §703]
Until the federal rent control law expires on December 31, 2014, OBFs who purchase properties at trustee’s sales for investment purposes may only terminate a residential tenancy by serving the tenant with a 90-day notice to vacate, unless the tenant holds an unexpired lease agreement enforceable under federal rent control for a longer remaining term. [Dodd-Frank Wall Street Reform and Consumer Protection Act §1484(2)]
Thus, an OBF cannot use a 90-day notice to vacate to avoid:
- a bona fide lease agreement held by the existing tenant, entered into prior to the foreclosing lender recording of an NOD, granting the tenant the right to possession for a period running beyond a 90-day notice period.
- an existing Section 8 or state housing assistance payment contract which subsidizes the tenant’s rent; or
- state or local rent control codes or ordinances that provide the residential tenant with a greater time period for occupancy or other tenant benefits such as relocation money. [Pub Law 111-22 §702(a)(2); Pub Law 111-22 §703(2)]
A bona fide lease is a lease agreement between the tenant and the prior owner which meets all of the following criteria:
- the lease agreement is an arm’s length lease agreement, meaning the tenant is not a parent, spouse or child of the prior owner; and
- the lease agreement calls for payment of a fair market rent.
The OBF rights on his resale to a buyer-occupant
On acquiring title to a residential property, the uses an OBF may intend for the property include:
- occupy the property himself as his principal residence;
- operate the property as an income producing investment; or
- resell the property at the earliest opportunity, such as is the case with lender real estate owned (REO) resales and speculators flipping the property. [For more information regarding lenders acting as landlord, see November 2008 first tuesday article, The Involuntary Landlords: a guideline for foreclosing lenders.]
Considering that property purchased at a trustee’s sale comes coupled with unusually high risks of loss — no title insurance, no disclosures and sparse due diligence investigation into the property’s condition — most OBFs are not looking to occupy the property themselves. However, in the event the OBF does wish to use the property he acquires as his primary residence, he must first allow the tenant’s lease to expire before the tenant can be forced to move.
If the OBF intends to resell the property to a purchaser who will occupy the property as his primary residence but a tenant occupies the property under an unexpired lease agreement with more than 90 days to run, the OBF can terminate the existing lease by serving the tenant with a minimum 90-day notice to vacate but not effective until the close of the resale escrow to the occupying purchaser. [Pub L 111-22 §702 (a)(2)(A)]
For an OBF selling the property to a buyer who will occupy the property as his primary residence, the 90-day notice to vacate is sufficient notice regardless of:
- an existing rental agreement – a periodic tenancy – between the tenant and prior owner;
- an existing lease agreement the remaining term of which will expire prior to the running of a 90 day notice to vacate;
- an existing lease agreement between the tenant and the prior owner with a remaining term expiring after a 90-day notice period would have passed (but not before the close of the resale escrow to the buyer-occupant); and
- occupancy of the property by a tenant under a Section 8, state or local housing assistance program. [Pub L 111-22 §702 (a)(2); Pub L 111-22 §703 (1)(2)]
If the tenant remains in possession of the property past the 90-day period and, in the case of an unexpired lease, until the close of the resale escrow to a buyer-occupant, he can be evicted through a UD action. [Pub L 111-22 §702 (a); CCP §1161(5)]