This article presents the notices to vacate served on occupants whose possessory interest in the property has been eliminated by a foreclosure.
Notice required to remove occupants
A residential income property is encumbered by a recorded trust deed. Tenants occupy the property under rental and lease agreements entered into after the trust deed was recorded.
Payments on the trust deed note are delinquent, causing the lender to initiate a trustee’s foreclosure.
Prior to the foreclosure sale, the lender employs a broker (or appraiser) to inspect the physical condition of the improvements and determine the property’s fair market value for immediate resale.
Based on the broker’s inspection and market review, he advises the lender to:
- complete the foreclosure proceedings;
- evict all tenants;
- renovate the property;
- relet the property to creditworthy tenants at market rates; and
- sell the property.
The lender acquires the property at the trustee’s sale.
To meet the resale objectives recommended by the broker, the lender, now classified as an owner-by-foreclosure, wants the tenants to immediately vacate the property. The property now owned by the lender is referred to as real estate owned, or REO property.
The broker has each tenant served with a 30-day notice to quit due to foreclosure.
Have the tenants been properly notified and thus required to vacate the premises?
Yes! The residential tenants whose unexpired month-to-month rental or lease agreements were junior (in time) to the recording of the trust deed, and thus eliminated by the foreclosure sale, are entitled to 30 days written notice to vacate. [Calif. Code of Civil Procedure §1161a(c)]
After the expiration of the 30-day notice to vacate, a residential tenant under a month-to-month rental or lease agreement who does not vacate the foreclosed property, may be evicted by the owner-by- foreclosure in an unlawful detainer (UD) action. This general rule does not apply to rent controlled or section 8 properties.
Evicting occupants after foreclosure
A rental or lease agreement entered into after a trust deed is recorded is wiped out on completion of a foreclosure sale on the trust deed.
If a prior owner or occupant under a junior rental or lease agreement remains in possession after a foreclosure sale, the new owner-by-foreclosure can serve the appropriate notice to quit due to foreclosure and remove the occupants, residential or nonresidential, in a UD eviction action.
An owner-by-foreclosure is defined as a buyer of real estate which is sold at:
- a sheriff’s sale on a judgment lien;
- a judicial foreclosure sale; or
- a trustee’s foreclosure sale. [CCP §1161a(b)]
An owner-by-foreclosure can evict all occupants remaining in possession of the foreclosed property under a wiped-out lease or month-to-month rental agreement. However, tenants living in Section 8 housing or rent control communities are protected from unqualified termination of their occupancy after a foreclosure sale.
The appropriate period of notice to vacate due to foreclosure depends on whether:
- the property is residential or nonresidential; and
- the occupants are former tenants or former owners.
Length of notice to be given
After a foreclosure sale on a senior trust deed, a residential tenant is entitled to a written notice to quit for a period of no less than his prior tenancy, but no greater than 30 days. Thus, a 30-day notice will always suffice. [CCP §1161a(c)]
For example, if the foreclosed property is a residential hotel where units are let on a weekly basis, the owner-by-foreclosure is required to give each tenant no less than one week’s written notice to vacate the property.
Residential tenants under wiped-out month-to-month rental or lease agreements are entitled to no less than 30 days notice.
Unlike a residential tenant, a nonresidential tenant whose junior lease is wiped-out by a foreclosure is entitled to only a 3- day written notice to quit, regardless of whether the tenant paid rent monthly, quarterly or annually. [CCP §1161a(b)(3)]
A former owner who remains as an occupant is entitled to only a 3-day notice to quit, whether the property is residential or nonresidential. [CCP §1161a(b)(4)]
Thus, to remove a nonresidential tenant or the former owner of a residential or a nonresidential property, the owner-by-foreclosure serves them with a 3-day notice to quit due to foreclosure. On expiration of the three days after service of the notice and the failure of the prior owner or the tenant to vacate, a UD has been established and they can be evicted by court order.
Service of notice
A notice to quit due to foreclosure must be served in the same manner as a 3-day notice to pay rent or quit. [CCP §1161a(b)]
An attempt at personal service on the occupant must first be made at both the occupant’s residence and place of business, if known. [CCP §1162(1)]
If the occupant cannot be located for personal service, the server may leave the notice with a person of suitable age and discretion at the occupant’s residence or business address, and mail the notice to the occupant’s residence, called substituted service. [CCP §1162(2)]
Finally, if no person of suitable age or discretion is available at either the occupant’s residence or place of business, the server may post the notice on the leased premises and mail a copy to the premises, called service by nail and mail. [CCP §1162(3)]
The day after the notice is served is day one of the period during which the occupant must vacate. [Calif. Civil Code §10]
UD award of rental value
In an unlawful detainer (UD) action, an owner-by-foreclosure is entitled to recover rent from the occupant in an amount equal to the reasonable rental value of the property for the period that the occupant resides on the property after the foreclosure sale. [CCP §1174(b)]
The secured lender who acquires the premises at the foreclosure sale cannot collect unpaid pre-foreclosure rents in the UD action.
However, any rents which were due and unpaid by a tenant before the foreclosure sale belong to the lender under an assignment of rents provision in the lender’s trust deed. These unpaid rents are collectable in a separate action unrelated to the UD action, called specific performance of the assignment of rents provision.
Since a landlord/tenant relationship does not exist between an owner-by-foreclosure and an occupant, a tenancy does not exist, unless the owner-by-foreclosure and occupant agree that money paid prior to foreclosure is advance rent for continued or future occupancy.
A matter of priority
When a tenant takes possession and records his lease agreement after a trust deed, abstract of judgment or tax lien is recorded, the tenant’s leasehold interest in real estate is junior to these liens. Thus, pre-existing liens have priority and are called senior encumbrances.
All junior liens and junior possessory interests of the owners and tenants in the real estate are extinguished when a lienholder under a senior trust deed, abstract of judgment or tax lien forecloses on the real estate. [Hohn v. Riverside County Flood Control and Water Conservation District (1964) 228 CA2d 605]
On proper notice, the tenant under the wiped-out lease can be evicted. Thus, a junior lease held by a tenant is unenforceable against an owner-by-foreclosure, unless the owner-by-foreclosure makes an attornment election to enforce the lease.
A tenant’s leasehold interest with priority to a lien on the owner’s fee title is not eliminated by the foreclosure of that junior lien.
The owner-by-foreclosure who acquires title at the foreclosure sale of a junior lien takes title subject to the rental or lease agreement and must perform the landlord’s obligations under the agreement.
On occasion, a lender may elect to alter priorities (before a foreclosure sale) under a lender subordination clause in the lease agreement to preserve the terms of the lease if they are advantageous. On subordination, a junior nonresidential lease is given priority over the lender’s previously recorded trust deed lien.
Priority is rarely an issue for leases of residential property since residential leases:
- are typically entered into for periods not exceeding one year; and
- those existing at the time a lender records his trust deed will have likely expired prior to completing a foreclosure.
UD action as a remedy, not a right
When residential income property subject to local rent control ordinances or a Section 8 contract is acquired by an owner-by- foreclosure, the owner-by-foreclosure must comply with the ordinances and Section 8 rules.
Consider a trust deed lender who forecloses on residential rental units by a trustee’s sale and acquires the property at the foreclosure sale. The lender wants to remove the occupants who are former tenants under wiped out rental or lease agreements. The lender intends to renovate the property and resell it.
The lender, now the owner-by-foreclosure, serves each tenant with a statutory 30-day notice to quit due to foreclosure. However, the property is located in a rent control community.
The occupants claim they cannot be evicted by the lender since the rent control ordinance does not permit eviction on a change of ownership. The rent control ordinances limit the circumstances which are cause for a tenant to be evicted. Change of ownership for any reason is not a permitted basis for eviction for a tenant protected by rent control.
The lender claims the tenants can be evicted due to foreclosure since the local ordinance is preempted by state law allowing a tenant to be evicted after a foreclosure sale.
Can the tenants be evicted by the lender since the lender is an owner-by-foreclosure?
No! Residential tenants protected under rent control ordinances cannot be evicted after a foreclosure, except as permitted by local ordinances. The 30-day notice requirement for evicting a residential tenant after a foreclosure sale in a UD action does not preempt the local rent control ordinance.
The UD notice-and-eviction process merely provides a legal remedy for a lender who has grounds to recover possession from the tenants, in lieu of using self-help to remove tenants. Under rent control, it is the ordinance which establishes the grounds for the eviction of a tenant. [Gross v. Superior Court (1985) 171 CA3d 265]
