Question: I am currently negotiating a residential lease in California. My landlord is likely to default very shortly, so I am asking for below-market rent. Will this lease remain intact after foreclosure?

Answer:

Before the federal Protecting Tenants at Foreclosure Act (PTFA) was passed, any landlord/tenant relationship under the rental agreement or lease which was junior to a foreclosed lien was wiped out at the foreclosure sale. The new landlord was able to serve a 30-day notice to quit due to foreclosure to remove the tenant from the premises.

If an occupant under a junior rental or lease agreement remained in possession after receiving the 30-day notice to quit due to foreclosure, the new owner-by-foreclosure could evict the residential occupants through an unlawful detainer (UD) action.

However, this process changed in 2009 under the PTFA. Under the PTFA, any bona fide lease entered into prior to the notice of foreclosure remains intact when the owner-by-foreclosure (OBF) purchases the property to be used for any purpose other than as a primary residence.

Related article:

Residential tenants, foreclosure and possession

A lease or tenancy shall be considered bona fide “only if the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property.” [12 United States Code 5220]

Thus, if the below-market rent in your scenario is substantially less than fair market, it will likely not stand up to an OBF’s challenge of PTFA protections.

Editor’s note — No guidelines currently exist to determine what is considered “substantially” below market.

However, if the OBF intends to occupy the property as his primary residence, or sells the property to an owner-occupant, the OBF is required to serve a tenant with at least 90 days’ notice to vacate before the tenant’s right to possession is terminated.

If the tenant has not vacated within 90 days after the notice to vacate is served, the OBF can file a UD action to have the tenant removed.

The PTFA protections expire December 31, 2014. However, California Assembly Bill 2610, would, if passed, extend similar protections in California through December 31, 2019.