Until May of 2009, the recipient of a Public Trustee’s deed (the “PT Deed”) following a foreclosure sale could immediately begin the eviction process of any occupant of a residential property in Colorado. Now, with the passage of the Federal Protecting Tenants at Foreclosure Act (the “Act”), depending on the circumstances, options available to the recipient of a PT Deed for gaining possession of property may be severely curtailed. While short, the Act is not well written. Unfortunately, the many ambiguities contained in the Act will likely be left to the court system to sort out. ( A separate article concerning the ambiguities in the Act will follow soon.)
As written, the Act applies to all foreclosure sales on any dwelling or residential real property after May 20, 2009 if the property is occupied by a tenant with a bona fide tenancy. According to the Act, a tenancy or lease will be considered bona fide if:
- The tenant is not a child, spouse or parent of the debtor;
- The lease or tenancy was formed in an arms length transaction; and
- The lease or tenancy provides for rent that is not substantially less than fair market value.
An initial hurdle for foreclosure bidders is trying to determine whether there is a bona fide lease or tenancy prior to a foreclosure sale. After the Public Trustee issues a deed to a property, the recipient has the right to determine who is living in a property and under what circumstances. Obtaining this information pre-sale may prove to be difficult for potential bidders as the occupants have no duty to cooperate.
Of the above criteria, the first will likely be the easiest to establish. With respect to the remaining two, while the Act does not specify who has the burden to demonstrate the arms length and fair market nature of the lease, experience suggests that the recipient of the PT Deed will need to convince a judge that one of these factors is not present to successfully evict a tenant earlier than the Act allows. Further, the Act’s use of the phrase “not substantially less than fair market” provides an additional hurdle to the recipient of the PT Deed as substantial is left undefined.
If a tenant with a bona fide lease or tenancy occupies a foreclosed property, under the Act, the recipient of a PT Deed cannot start an eviction for a minimum of 90 days (assuming the tenant complies with the terms of the lease post-foreclosure). The Act will likely be interpreted to allow for this minimum 90 day notice to quit a property in only the following three situations:
- The recipient of the PT Deed intends to occupy the property as a primary residence;
- The recipient of the PT Deed provides the required 90 day notice and then sells the property to someone who intends to occupy the property as a primary residence; or
- The tenant or occupant is without a lease or with a lease which can terminate in a shorter period of time under state law.
So, if the property is going to be utilized as a primary residence, or if the tenant has a weekly or monthly rental or a lease set to expire sooner than 90 days, a tenant complying with the terms of a lease must receive a minimum 90 day notice to quit before an eviction action can be filed in court.
Of perhaps greater significance to the foreclosure investor is that if the above minimum 90 day notice criteria do not apply, the Act provides that the recipient of the PT Deed takes the property subject to the lease and the tenant gets to occupy the property for the remainder of the outstanding lease term. There is no language in the Act limiting this duration of time. So, if a tenant has a four year lease on a property and one year has passed as of the date of the foreclosure sale, unless one of the 90 day exceptions apply, the Act seems to provide that the tenant can remain in the property for the remaining three years of the lease.
While not explicit, the Act will likely be interpreted to permit eviction if a tenant fails to comply with the terms of the existing lease post-foreclosure. So, if a tenant fails to pay rent or fails to comply with any other covenant in a written lease, the recipient of the PT Deed can likely initiate the eviction process under Colorado law sooner than the time frames set out in the Act. The Act is also likely to be interpreted to permit any tenant to waive its rights and vacate the property after the foreclosure sale without any further obligations to the recipient of the PT Deed.
For foreclosure investors looking to take possession of a residential property occupied by a bona fide tenant in less than 90 days, “Cash for Keys“ is an option to consider.
The Act expires on December 31, 2012 unless Congress takes action to extend its effective date.
For questions, please contact Mike Smeenk.