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Tenants in Foreclosure

Tenants in Foreclosure: New Laws and Updates

Generic TimelineFederal LawState Law and updates

Generic Timeline***Timeline varies with different foreclosure agreements and

processes***

Month 1 minus 4-6 weeks`

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7

Notice of Sheriff Sale *given to occupant*Landlord must notify prospective tenant of foreclosure in writing (MN Stat. 504B.151)

Sheriff SaleProperty sold at auction to highest bidder

Redemption

Landlord in possession

Redemption

Landlord in possession

Redemption

Landlord in possession

Redemption

Landlord in possession

Redemption

Landlord in possession*tenant can use security deposit as rent for last month of the redemption period (MN Stat. 504B.178)

End of redempt-ionTenant must get notice to vacate from new owner under Federal or State law

Federal Law (2009-2014)

In 2009 Congress created protections for tenants whose landlords are in foreclosure. Pub. L. No. 111-22, § 702-04 123 Stat 1632, 1660-62 (May 20, 2009).

While the protections expired on December 31, 2014, they still are relevant since Minn. Stat. § 504B.285, Subd. 1a was based on it.

Federal Law (2009-2014)

All qualified tenants (not a child, spouse, or parent of the mortgagor; arms-length transaction; rent that is not substantially less than fair market rent for the property) would receive a 90 day notice from the successor in interest, normally the bank.

The foreclosing bank was not a successor until the redemption period ends, so it is a 90 day notice on top of the redemption period.

Federal Law (2009-2014)

Tenants who started a term lease before the foreclosure notice would get to keep the lease until it expires, unless the successor sold to a third party who would occupy the premises, and gave the 90 day notice.

Since the successor could not sell until it became an owner at the end of the redemption period, the tenant would get a 90 day notice on top of the redemption period at a minimum, and longer if the lease is longer (i.e. two year lease) and there was no sale to a person who would occupy the premises.

Federal Law (2009-2014)

Foreclosure was not good cause for Section 8 voucher eviction, and did not end the Section 8 lease and contract.

The successor in interest would pick up the Section 8 voucher contract rights and obligations.

However, if a new owner was going to occupy the unit, the new owner could give the 90 day notice before becoming the owner, to be effective when becoming an owner.

If the new owner did not occupy the property, the owner could not end the lease with a 90 day notice.

State Law

1. Post-Foreclosure Notice2. Landlord in Foreclosure Notice to New

Tenant3. Lender’s Notice of Tenant’s Rights4. Utilities5. Security Deposit6. Mandatory Expungement

Post-Foreclosure Notice

The purchaser can not terminate a tenancy which preceded the mortgage. See Claflin v. Commercial State Bank of Two Harbors, 487 N.W.2d 242 (Minn. 1992) (actual and open possession of property was sufficient to put mortgage lender on inquiry notice of possible rights in property).

For tenancies which postdate the mortgage, the Minnesota Legislature enacted several changes to the relative rights of landlord, tenants, and bank from 2008 to 2013.

Post-Foreclosure Notice

The current statute, Minn. Stat. § 504B.285, Subd. 1a, provides:

Subd. 1a.Grounds when the person holding over is a tenant in a foreclosed residential property.

(a) With respect to residential real property or a dwelling where the person holding the residential real property or dwelling after the expiration of the time for redemption on foreclosure of a mortgage was a tenant during the redemption period under a lease of any duration, and the lease began after the date the mortgage was executed, but prior to the expiration of the time for redemption, the immediate successor in interest must provide at least 90 days' written notice to vacate, given no sooner than the date of the expiration of the time for redemption, and effective no sooner than 90 days after the date of the expiration of the time for redemption, provided that the tenant pays the rent and abides by all terms of the lease.

Post-Foreclosure Notice

(b) With respect to residential real property or a dwelling where the term of a bona fide lease extends more than 90 days beyond the date of the expiration of the time for redemption, the immediate successor in interest must allow the tenant to occupy the premises until the end of the remaining term of the lease, and provide at least 90 days' written notice to vacate, effective no sooner than the date the lease expires, provided that the tenant pays the rent and abides by all terms of the lease, except if the immediate successor in interest or an immediate subsequent bona fide purchaser will occupy the unit as the primary residence, the immediate successor in interest must provide at least 90 days' written notice to vacate, given no sooner than the date of the expiration of the time for redemption, effective no sooner than 90 days after the date of the expiration of the time for redemption, provided that the tenant pays the rent and abides by all terms of the lease.

Post-Foreclosure Notice

For purposes of this section, a "bona fide lease" means:

(1) the mortgagor or the child, spouse, or parent of the mortgagor is not the tenant;

(2) the lease or tenancy was the result of an arm's-length transaction; and

(3) the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property or the unit's rent is reduced or subsidized by a federal, state, or local subsidy.

Post-Foreclosure Notice

(c) With respect to residential real property or a dwelling involving a tenancy subject to section 8 of the United States Housing Act of 1937, as amended, where the term of the lease extends more than 90 days beyond the date of the expiration of the time for redemption, the immediate successor in interest must allow the tenant to occupy the premises until the end of the remaining term of the lease and provide at least 90 days' written notice to vacate, effective no sooner than the date the lease expires, provided that the tenant pays the rent and abides by all terms of the lease, except if the immediate successor in interest will occupy the unit as the primary residence, the immediate successor in interest must provide at least 90 days' written notice to vacate, given no sooner than the date of the expiration of the time for redemption, effective no sooner than 90 days after the date of the expiration of the time for redemption, provided that the tenant pays the rent and abides by all terms of the lease.

Post-Foreclosure Notice

There are a couple of scenarios where tenants have defenses against an eviction filed by the successor in ownership of the property following expiration of the foreclosure redemption period:

1. The lease began after the date the mortgage was executed and prior to the expiration of the redemption period: The immediate successor in interest must provide at least 90 days’ written notice to vacate, given no sooner than the expiration of the redemption period, and effective no sooner than 90 days from the expiration of the redemption period.

Post-Foreclosure Notice

2. The tenant has a bona fide lease that extends more than 90 days beyond the date the redemption period expires: If the tenant is not a child, spouse, or parent of the mortgagor, the lease resulted from an arms-length transaction, the rent is not substantially less than fair market rent, and there is no new owner who will occupy the property as a primary residence, the tenant can stay until the end of the lease term.

Different Rules for Contract for Deed Cancelation

Prior to August 1, 2008, termination of the tenancy of a tenant renting from a owner following cancellation of a contract for deed or a mortgage foreclosure required one month written notice. Minn. Stat. § 504B.285 (formerly § 566.03), subd. 1.

In 1992, the statute was amended to clarify when notice to vacate must be provided to a tenant whose tenancy is being terminated due to an contract for deed cancellation or mortgage foreclosure.

The change specified that the tenant must be given one month's written notice (1) to vacate no sooner than one month after the date the redemption or termination period expires, or (2) to vacate no later than the date when the redemption or termination period expires.

If the second option requiring the earlier vacate date is chosen, the notice must state that the sender of the notice will hold the tenant harmless if the tenant breaches the lease by vacating before the end of the redemption period and the mortgage is subsequently redeemed.

Different Rules for Contract for Deed Cancelation

In Broszko v. Principal Mutual Life Ins. Co., 533 N.W.2d 656 (Minn. Ct. App. 1995), the Court held that persons who began occupying foreclosed property beginning late in the redemption period were not tenants of the bank at the end of the redemption period.

The Court stated that the mortgagor does not have the power to create a tenancy in the redemption period which extends beyond the redemption period, after which any tenant of the mortgagor becomes a trespasser.

The Court noted that the person did not have a lease, did not pay rent for the last half year, knew foreclosure was taking place and they would have to move, knew the end of the redemption period, was served with process by substitute service, did not attend the hearing, then later contacted the bank's attorney to ask when she had to lease, giving the bank its first notice of her presence on the property, and did not attempt to reopen the unlawful detainer action, but rather sued after execution of the writ of restitution.

The broad holding limits application of the statute to persons who began renting from the mortgagor before the foreclosure sale, giving no protection to the large number of persons who rent from mortgagors during the redemption period.

Different Rules for Contract for Deed Cancelation

In 2008, the Legislature amended the statute to overrule Broszko and require a longer notice. Minn. Stat. § 504B.285 now provides:

Subd. 1b.Grounds when the person holding over is a tenant in a property subject to a contract for deed.

The person entitled to the premises may recover possession by eviction when any person holds over real property after termination of contract to convey the property, provided that if the person holding the real property after the expiration of the time for termination was a tenant during the termination period under a lease of any duration and the lease began after the date the contract for deed was executed but prior to the expiration of the time for termination, and the person has received:

Different Rules for Contract for Deed Cancelation

(1) at least two months' written notice to vacate no sooner than one month after the expiration of the time for termination, provided that the tenant pays the rent and abides by all terms of the lease; or

(2) at least two months' written notice to vacate no later than the date of the expiration of the time for termination, which notice shall also state that the sender will hold the tenant harmless for breaching the lease by vacating the premises if the contract is reinstated.

Landlord Notice to Tenant

Minn. Stat. § 504B.151.Landlord must provide written notice to

prospective tenants about foreclosure or contract for deed cancellation.

Landlord can only make lease for the shorter of: 2 months or the remaining time of redemption or cancellation period.

Landlord Notice to Tenant: Example

Tenant signs a year-long lease and moves into a property only to find there are only 2 months left of the redemption period although Landlord never told tenant about foreclosure.

In addition to the $500 statutory penalty for violations, tenants should argue that a violation of the disclosure requirement renders the lease illegal and void, entitling tenant to a full abatement of rents illegally obtained. Hwang v. _____, No. 19WS-CV-09-1876 (Minn. Dist. Ct. 1st Dist. Jan. 26, 2010) (action dismissed and expungement granted where landlord failed to disclose mortgage foreclosure to a prospective tenant), posted at http://povertylaw.homestead.com/ResidentialUnlawfulDetainer.html

Lender Notice of Tenant’s Rights

Minn. Stat. § 580.042.Foreclosing lender is supposed to give this

notice to tenants in a foreclosed property.Foreclosing lender usually only serves a

notice of the sheriff’s sale on whoever is at the foreclosed property.

Utilities: Minn. Stat. § 504B.215

Water Give notice to

Landlord Can pay current

charges Not responsible for

arrears, late fees Not subject to deposit.

Gas & Electric Give notice to

Landlord Service must be

restored for at least one billing period

If less than 5-unit building, tenant can put account in own name

Security Deposit: Minn. Stat. § 504B.178, subd. 8

Tenant may use security deposit for rent in the last month of a contract for deed cancellation period or mortgage foreclosure redemption period.

Mandatory Expungement

Minn. Stat. § 484.014, subd. 3.Expungement shall be granted for tenant of

foreclosed property if: Redemption period is over and tenant vacated before

the eviction action started; OR Tenant lived at property during redemption period

and did not receive notice to vacate before eviction action.

Questions

Lawrence McDonoughPro Bono CounselDorsey and Whitney, LLPSuite 150050 South Sixth StreetMinneapolis, MN 55402-1498612-492-6795McDonough.Lawrence@Dorsey.comhttp://dorsey.com/