Monday, August 24, 2009

Predatory Leasing No. 2: Investors May Not Evict Post-Foreclosure Tenants

Atlanta, GA. The "Helping Families Save Their Homes Act of 2009," brings with it the curious anomaly that the ability to evict a post-foreclosure tenant turns on the status of the post foreclosure purchaser – not the tenant. I usually write on Georgia law, however, this aspect of landlord-tenant law affects every single post-foreclosure tenancy in the United States (assuming that the underlying mortgage has some federally insured component).

Most Banks are now aware that post-foreclosure tenants will be required to be given a 90‑day Notice to Quit. [1] However, few of them know that the status of whether a tenant may be successfully evicted post foreclosure turns on the status of the purchaser not the status of the tenant.

In my previous article on this matter, “Coming Attractions: Predatory Leasing,” [2] I pointed out the obvious change in Georgia law (and obviously the law of all States) that post-foreclosure tenants are not subject to summary eviction but must be given a 90‑day Notice to Quit.

A more careful review of Section 701 of "Protecting Tenants at Foreclosure Act," reveals that not only are tenants under a bona fide lease protected for the entire term of the lease and must be given 90 days Notice to Quit if an eviction is filed, they are (strangely) protected by the status of the purchaser. Whether a tenant may be evicted post-foreclosure turns on the status of the purchaser. That is, one must look to the phrase "sale of the unit to a purchaser who will occupy the unit as a primary residence," [3] to determine whether movant has standing to evict a post-foreclosure tenant. This is a bizarre twist in landlord-tenant law and may be a doorway to endless mischief in post-foreclosure evictions.

Consider the following fact patterns post foreclosure. Almost always a Bank will own the Note in the first mortgage foreclosure. Assume: The Bank goes to the stairs, bids in the property, takes back the residential home under a first mortgage foreclosure. The Bank then places the residential home on its REO list and holds the home in inventory for resale. If a bona fide tenant with a lease occupies that residence, the Bank may not evict that tenant prior to the termination of the lease. If, however, the Bank sells its REO property to Mr. and Ms. Homebuyer, [4] the Bank may file an eviction proceeding against the tenant and terminate the lease. Ninety days is still required as Notice post sale. It also appears that the start date for the filing of a post-in-time foreclosure begins on the day that the Bank CLOSES the sale of the house as opposed to the date it merely signs a contract to purchase. [5]

Consider the same fact pattern, except the Bank sells the property to an investor. Assume that in a first mortgage foreclosure, the Bank sells the residential home on the courthouse steps to itself. It then places the home in its REO inventory and begins to look for a buyer. It finds a buyer who happens to be a hard money lender investor as opposed to Mr. and Ms. Homebuyer. The Bank closes on a sale with the hard money lender, but it is now PROHIBITED from filing an eviction against the tenant. Thus, the status of the purchaser as opposed to the status of the tenant in the sale transaction itself determines whether the REO Bank may file an eviction. This is a truly bizarre anomaly in landlord tenant law.

Because federal law preempts all State laws and all eviction laws this anomaly runs through the eviction process of all 50 States.

In Georgia, eviction is a summary proceeding brought by a landlord against a tenant holding over, against a tenant at will or a tenant at sufferance. [6] Trespassers are generally evicted by the police. In the summary eviction proceeding in Georgia, a landlord moves that he has possession of the property or a right to own possession of the property and that the individual or individuals occupying the property are in a landlord-tenant relationship with him. The landlord then shows that due to some default on behalf of the tenant (usually non‑payment) the landlord is entitled to summary possession of the premises. The summary proceeding in Georgia limits the scope of the proceeding and the evidence that may be introduced. The tenant may challenge that he is not in a landlord relationship with the landlord or that he is not in default for non‑payment or some other default term of the lease or that no money is owed or that he is no longer a tenant. The tenant may not raise other issues. [7]

Under this new federal preemption of State landlord-tenant law, a tenant will now be able to inquire concerning whether the property was mortgaged under an FHA or government-insured loan, whether the foreclosure was properly completed, whether the Bank that bought the property at foreclosure has "in fact" sold the property to a new owner and, more specifically, whether that new owner intends to use the property for residential purposes. If a tenant, post foreclosure, may show as a matter of fact that the purchaser, post foreclosure, does not intend to use or occupy the property for "residential" purposes, the tenant will be entitled as a matter of federal preemption to summarily dismiss the eviction proceedings. That is, the landlord no longer has “standing” to evict that tenant.

Except in the case of disputed commercial evictions, residential evictions tend to move through dispossessory court like subway trains moving through stations. They clip along one after another with little evidence, little delay and little time spent by the judiciary resolving each claim. As a litigator, I can envision possible “circus” by a tenant who intends to challenge a post-foreclosure eviction against the Bank. It would appear that under federal preemption, a tenant would be legitimately allowed to conduct discovery against the Bank for the purpose of determining whether a sale occurred, to whom that sale was made, the date of sale, the transfer of title. And, it would appear, that the tenant would be entitled (as a matter of law) to depose the new owners for the purpose of determining, factually, whether they intend to hold the property for investment purposes or occupy it for residential purposes. If a tenant can show, as a matter of fact, that the subsequent purchaser intends to hold the property for investment purposes as opposed to occupying the property as an owner occupier, the tenant would be entitled to a summary dismissal of the eviction proceedings. Only by significantly questioning the subsequent purchaser, would the tenant be able to ferret out whether the purchaser was a hard money lender, an investor or the subsequent protected class of Mr. and Ms. Homeowner.

There would appear to be no downstream remedy for the purchaser if the Bank is unsuccessful in evicting the tenant. Unless some clause is inserted in the purchase and sale contract, the "investor" purchaser would simply be “up a creek” with a property it could not occupy and it would be stuck with that tenant until the conclusion of lease.

No one has focused on the monetary differential associated with the post-foreclosure lease. The reason that property goes to foreclosure is that the occupant cannot pay the $3,000.00 or $4,000.00 a month necessary to own the property under the first and second mortgage. Given that the average market rent may very well be between $1,200.00 and $1,500.00 a month, the post-in-time REO Bank and/or hard money lender will be losing effectively $2,500.00 a month for every month that post-foreclosure tenant occupies the property. Thus, there is a significant incentive for tenants to “game the system” and obtain lengthy leases on property that is heading to foreclosure. The tenants must, have a bona fide lease in place, before the Notice of foreclosure arrives.

Perhaps the federal courts will determine the ultimate meaning of whether this is a “due process” deprivation of a post-in-time purchaser, because the ability to maintain an eviction is based on the purchaser's status. If we never get a significant Federal Circuit opinion on this anomaly it will be because this law sunsets on December 31, 2012.

Until then, I expect we will see some unusual appeals coming out of use to be ordinary landlord tenant disputes.

Hugh Wood
Atlanta, GA


Georgia does not refer to it as a Notice to Quit, but by whatever name, it is still a Notice to Surrender the Premises.





This title may be cited as the "Protecting Tenants at Foreclosure Act of 2009".


(a) IN GENERAL.-In the case of any foreclosure on a federally-related mortgage loan or on any dwelling or residential real property after the date of enactment of this title, any immediate successor in interest in such property pursuant to the foreclosure shall assume such interest subject to-
(1) the provision, by such successor in interest of a notice to vacate to any bona fide tenant at least 90 days before the effective date of such notice; and
(2) the rights of any bona fide tenant, as of the date of such notice of foreclosure-
(A) under any bona fide lease entered into before the notice of foreclosure to occupy the premises until the end of the remaining term of the lease, except that a successor in interest may terminate a lease effective on the date of sale of the unit to a purchaser who will occupy the unit as a primary residence, subject to the receipt by the tenant of the 90 day notice under paragraph (1); or
(B) without a lease or with a lease terminable at will under State law, subject to the receipt by the tenant of the 90 day notice under subsection (1),
except that nothing under this section shall affect the requirements for termination of any Federal- or State-subsidized tenancy or of any State or local law that provides longer time periods or other additional protections for tenants.
(b) BONA FIDE LEASE OR TENANCY.-For purposes of this section, a lease or tenancy shall be considered bona fide only if-
(1) the mortgagor or the child, spouse, or parent of the mortgagor under the contract is not the tenant;
(2) the lease or tenancy was the result of an arms-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 due to a Federal, State, or local subsidy.
(c) DEFINITION.-For purposes of this section, the term "federally-related mortgage loan" has the same meaning as in section 3 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2602).


Section 8(o)(7) of the United States Housing Act of 1937 (42 U.S.C. 1437f(o)(7)) is amended-
(1) by inserting before the semicolon in subparagraph (C) the following: "and in the case of an owner who is an immediate successor in interest pursuant to foreclosure during the term of the lease vacating the property prior to sale shall not constitute other good cause, except that the owner may terminate the tenancy effective on the date of transfer of the unit to the owner if the owner-
"(i) will occupy the unit as a primary residence; and
"(ii) has provided the tenant a notice to vacate at least 90 days before the effective date of such notice."; and
(2) by inserting at the end of subparagraph (F) the following: "In the case of any foreclosure on any federally-related mortgage loan (as that term is defined in section 3 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2602)) or on any residential real property in which a recipient of assistance under this subsection resides, the immediate successor in interest in such property pursuant to the foreclosure shall assume such interest subject to the lease between the prior owner and the tenant and to the housing assistance payments contract between the prior owner and the public housing agency for the occupied unit, except that this provision and the provisions related to foreclosure in subparagraph (C) shall not shall not affect any State or local law that provides longer time periods or other additional protections for tenants.".


This title, and any amendments made by this title are repealed, and the requirements under this title shall terminate, on December 31, 2012.


Its just an analogy. Don’t get all politically correct. It has to be “residential,” and I use the English convention, “he,” because it simplifies the sentences.


This is going to make it more difficult for Banks to sell REO properties because not only are the homeowners going to negotiate on price and terms they now know that they will be required to wait in excess of 90 days (perhaps six months) to simply take possession of the residential home. This delay is not going to encourage the sale of REO property.


OCGA § 44-7-50. Demand For Possession; Procedure Upon A Tenant's Refusal; Concurrent Issuance Of Federal Lease Termination Notice.
(a) In all cases where a tenant holds possession of lands or tenements over and beyond the term for which they were rented or leased to the tenant or fails to pay the rent when it becomes due and in all cases where lands or tenements are held and occupied by any tenant at will or sufferance, whether under contract of rent or not, when the owner of the lands or tenements desires possession of the lands or tenements, the owner may, individually or by an agent, attorney in fact, or attorney at law, demand the possession of the property so rented, leased, held, or occupied. If the tenant refuses or fails to deliver possession when so demanded, the owner or the agent, attorney at law, or attorney in fact of the owner may immediately go before the judge of the superior court, the judge of the state court, or the clerk or deputy clerk of either court, or the judge or the clerk or deputy clerk of any other court with jurisdiction over the subject matter, or a magistrate in the district where the land lies and make an affidavit under oath to the facts. The affidavit may likewise be made before a notary public, subject to the same requirements for judicial approval specified in Code Section 18-4-61, relating to garnishment affidavits.


Although the defense of lack of landlord-tenant relationship is a
proper defense to a dispossessory action, Thomas v. Wells Fargo Credit Corp., 200 Ga.App. 592, 594(3), 409 S.E.2d 71 (1991), "[c]laimed defects in the landlord's title to premises cannot be raised as a defense to a proceeding for possession under [OCGA § 44-7-50 et seq.]." McKinney v. South Boston Savings Bank, 156 Ga.App. 114(2), 274 S.E.2d 34 (1980).

In a joint answer to the petition, Truett admitted that he leased the property from CSX in 1977, and Bridges admitted that CSX attempted to transfer the property to the city. Bridges now asserts that the assignment was not made in accordance with law and disputes [210 Ga.App. 699] CSX's title and its authority to convey anything to plaintiff city. His challenge to the existence of a landlord-tenant relationship is predicated on an attack of the validity of CSX's original title to the land, but the law precludes him from disputing his landlord's title "while he is in actual physical occupation, while he is performing any active or passive act or taking any position whereby he expressly or impliedly recognizes his landlord's title, or while he is taking any position that is inconsistent with the position that the landlord's title is defective." OCGA § 44-7-9. "[A] landlord is authorized to file a complaint for the ejectment of his tenant alleging, not that the landlord has a presently enforceable legal title to the land, but, that the landlord has a presently enforceable lease contract with the tenant, and, that the tenant has breached said contract so as to entitle the landlord to possession." Ingold, Inc. v. Adair, 247 Ga. 155, 156, 274 S.E.2d 560 (1981). Since Bridges may not do indirectly what the law prohibits him from doing directly, he cannot defend the dispossessory action by challenging plaintiff's title. Bridges v. City of Moultrie, 210 Ga.App. 697, 437 S.E.2d 368, 370 (1993).

Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084
twitter: USALawyer_
Phone: 404-633-4100

Fax: 404-633-0068


Anonymous said...

The PTFA's language states "Immediate successor in interest". What is the basis of you stating that the subsequent owner is also held to this act?

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