Lenders involved in foreclosures may very well remember some of the requirements of the “Protecting Tenants at Foreclosure Act,” (“PTFA”), which expired at the end of 2014. It would now be worth dusting off some of those memories, as the PTFA was recently restored and permanently extended by the Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law by President Trump on May 24, 2018.
The goal of the PTFA is to ensure that tenants of a foreclosed property have adequate time to find alternative housing and to provide additional protections to Section 8 tenancies. PTFA’s reach is broad, applying to any foreclosure of a federally related mortgage loan or on any dwelling or residential real property. Thus, the Act encompasses residential property foreclosures, regardless of type or entity involved in the foreclosure, and regardless of whether the tenants are recipients of any type of housing assistance.
Now, fans of George Clooney’s, “Oh Brother, Where Art Thou” may recall his repeated angst by being told he “ain’t bona fide.” Tenants face that same issue if they want to invoke the protections of PTFA, as these protections extend only to “bona fide tenants” with a “bona fide lease.” A lease or tenancy is considered “bona fide” under the PTFA if the tenant 1) is not the mortgagor or the parent, spouse, or child of the mortgagor, 2) the lease or tenancy is the result of an arms-length transaction, and 3) the lease or tenancy requires rent that is not substantially lower than fair market rent or is reduced or subsidized due to a Federal, State or local subsidy.
Should a purchaser of a foreclosed property be able to successfully argue that a bona fide lease or tenancy does not exist, it could conceivably avoid the requirement of PTFA. Otherwise, a purchaser of a foreclosed property must provide a tenant with a 90-day notice to vacate prior to any desired eviction, regardless of whether the tenant is occupying the property pursuant to a lease, and regardless of the type of lease. As well, if the tenant is occupying the property pursuant to any type of bona fide lease, the purchaser must allow the tenant to occupy the property until the end of the lease term. This lease can be terminated after providing the 90-day notice to vacate, only if the purchaser sells the property to a party who will then utilize the property as their primary residence.
If the property is occupied by a Section 8 tenant, a purchaser of the foreclosed property may terminate the Section 8 lease upon a 90-day notice to the tenant, if he/she intends to occupy the premises as a primary residence. Any purchaser acquires the property subject to the Section 8 lease, but with the right to receive the Section 8 payments.
The PTFA is refined in its coverage and does not extend to mortgagors facing foreclosure, tenants facing routine eviction in non-foreclosure properties, tenants with a fraudulent lease, or tenants who enter in lease agreements after a foreclosure sale. Additionally, the PTFA will not override any state tenant protection laws which may be more restrictive (Kentucky does not have one).
Practically speaking, lenders need to consider these requirements when making loans that will be secured by rental property and will also want to be sure that the persons handling their foreclosures have the necessary procedures in place to provide any required notice to protected tenants.