§ 16.6.5.3
Foreclosures
The amount of tax paid on the excludable, yet included,
COD income is an overpayment.362 The debtor can recover the
amount of an overpayment, including any interest allowed
thereon, as a credit or a refund.363 A timely364 written claim
must be filed. The consumer debtor can use Form 1040X, the
amended U.S. individual income tax return to accomplish the
writing requirement.365
16.6.5.3 Preventing Submission of a 1099-C Form
A settlement agreement involving debt forgiveness should
address whether the creditor will submit a 1099-C Form and in
what amount. Settlement agreements should also establish any
basis for excluding the discharged debt from income. For
example, if the consumer will seek to exclude the discharged
debt as qualified principal residence indebtedness, the settlement agreement should specify that the debt is being discharged
because of the taxpayer’s financial condition or because of a
decline in the property value. If the consumer will seek to
discharge the debt as disputed, the settlement agreement should
recite that the debt is disputed and should not contain any
boilerplate language absolving the lender of all wrongdoing.
Practitioners should insist that lenders not report on a 1099-C
any amounts not required to be reported, including particularly
discharged interest, fees, or debt discharged in a bankruptcy.
Creditors should agree to notify taxpayers and their counsel if
the IRS or any other taxing authority challenges the reporting of
the COD income and provide taxpayers copies of any documents generated or provided in response to the inquiry.
Many attorneys representing foreclosing lenders are willing
to be educated on the tax issues in a foreclosure. It is useful to
provide them with a letter that explains why the discharge is not
taxable and why, in the circumstances of your case, there is no
requirement to report the discharged debt to the IRS. Absent
‘‘intentional disregard,’’ the penalty for failure to report is
$50.366 Even that penalty will not be imposed if the failure to
report was due to ‘‘reasonable cause and not willful neglect.’’367 Reasonable cause for not reporting should include a
good faith belief that the debt is disputed and its discharge does
not result in taxable income.
Given the complexity of Form 982 and the lack of pro bono
assistance in completing Form 982, consumers are likely to
incur significant costs in challenging 1099-Cs that are issued
incorrectly or in an inflated amount. Without guidance from
their attorneys, few taxpayers will be aware either of how to
report the discharge of indebtedness income or of the applicable
362 See 26 U.S.C. § 6401(c).
363 See 26 U.S.C. § 6402.
364 The debtor’s claim for credit or refund must generally be filed
within the later of three years from the time the return was filed or
two years from the time the tax was paid. 26 U.S.C. § 6511(a).
365 26 C.F.R. § 301.6402-3(a)(2).
366 26 U.S.C. § 6721(a)(1).
In the case of intentional disregard, the penalty is 10% of the
amount of the discharged debt not reported correctly. 26 U.S.C.
§ 6721(e)(2).
367 26 U.S.C. § 6724(a).
566
exclusions. Consumers who fail to report the discharge of
indebtedness income correctly or fail to claim the applicable
exceptions can incur steep costs, either in penalties or in
overpayment of taxes.
16.7 Rights of Tenants in Possession
Following Foreclosure on Their
Landlord’s Property
16.7.1 Federal Protections
16.7.1.1 Protecting Tenants at Foreclosure Act
In May of 2009, the Protecting Tenants at Foreclosure Act368
went into effect. Originally scheduled to expire in 2012,369 the
sunset provision was later extended to 2014.370 This Act applies
to federally related mortgage loans,371 and provides all ‘‘bona
fide’’ tenants372 in foreclosed residential properties with certain
protections if the lease preceded notice of the foreclosure.373
Federally related mortgage loans are defined as loans made by
federally insured depository lenders (other than for temporary
financing, such as a construction loan) or by creditors who
make or invest more than one million dollars a year in residential secured loans, HUD-related loans, or loans intended to be
sold on the secondary market to Fannie Mae, Ginnie Mae, or
Freddie Mac.374
The Protecting Tenants at Foreclosure Act actually states that
it applies to ‘‘any foreclosure on a federally related mortgage
loan or on any dwelling or residential real property. . . .’’375
According to its plain language, then, the statute applies both to
federally related mortgage loans and to any (other) mortgage on
a dwelling or (other) residential real property. One court sought
to limit this broadly inclusive language by finding that the ‘‘or’’
in the statutory definition was a scrivener’s error. According to
this court, Congress only meant the Act to apply to federally
related mortgages, which the court interpreted as involving
368 Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, §§ 701–704 (2009).
369 Id. § 704.
370 Pub. L. No. 111-203, tit. XIV, § 1484, 124 Stat. 1376, 2204 (2010).
371 Id. § 702(a). The Act states that 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.
372 A bona fide lease or tenancy is defined as one in which ‘‘(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.’’ Pub. L. No. 111-22, § 702(b)
(2009). See also Nott v. Bunson, 2009 WL 3271285 (D. Md. Oct.
9, 2009).
373 See U.S. Bank Nat’l Ass’n v. Hurtado, 899 N.Y.S.2d 806 (N.Y. Dist.
Ct. 2010) (lease entered into with notice of pending foreclosure).
374 12 U.S.C. § 2602(1)(B).
375 12 U.S.C. § 5220(a).
Issues Arising After a Foreclosure Sale
some type of federal subsidy.376 This same judge applied his
limiting interpretation in a second case, citing his first case as
precedent.377 Other courts, however, have had no problem
applying the statute as written, affirming its broad application to
all residential mortgage loans.378
The Act gives such tenants the right to continue occupying
the property through the remaining term of the lease, with the
exception that the lease may be terminated upon the provision
of ninety days’ notice if a buyer intends to occupy the unit as
a primary residence.379 The Act also provides tenants without
leases or with leases that are terminable at will under state law
the right to ninety days’ notice before eviction.380 Nothing in
the new federal law is intended to affect ‘‘any federal- or
State-subsidized tenancy or any State or local law that provides
longer time periods or other additional protections for tenants.’’381 Though this language is clear, the issue was litigated
in Bank of New York Mellon v. De Meo,382 where the lender
gave a five-day notice, then delayed ninety days before proceeding with the eviction. The court held that a five-day notice
of eviction was insufficient notice, even though the lender
enforced the eviction ninety-seven days after the notice was
received. Under the Act, the effective date in the notice must
not be less than ninety days after service of notice upon the
tenant.383
Where a new owner brings an eviction action in state court,
the consumer cannot seek federal court jurisdiction for the case
376 Collado v. Boklari, 892 N.Y.S.2d 731 (N.Y. Dist. Ct. 2009).
377 GMAC Mortgage, L.L.C. v. Taylor, 899 N.Y.S.2d 802 (N.Y. Dist.
Ct. 2009).
378 Bank of Am. v. Owens, 903 N.Y.S.2d 667 (N.Y. Dist. Ct. 2010).
Even if the Collado court were right that the Act only affects
mortgages which are ‘‘federally related,’’ this definition is much
broader in scope than was understood by the Collado court. The
definition of a federally related mortgage loan is set forth in the Real
Estate Settlement Procedures Act and encompasses virtually all
loans secured by multi-unit residential buildings. 12 U.S.C. § 2602(1)
(B). See § 9.1.2, supra.
379 Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, § 702(a)(2)(A) (2009).
380 Id. § 702(a)(2)(B). Bank of New York Mellon v. De Meo, 227 Ariz.
192 (2011) (holding that a five-day notice of eviction was insufficient notice even though the lender enforced the eviction 97 days
after the notice was received).
In regards to whether the lease is terminable at will, courts use
state law to interpret the intent of the lease. See Joel v. HSBC Bank,
420 Fed. Appx. 928 (11th Cir. 2011) (interpreting 30-day notice
requirement of lease termination to be consistent with Georgia law
requirement of 30-day notice before terminating a tenancy at will).
381 Id. See also GMAC Mortg., L.L.C. v. Taylor, 899 N.Y.S.2d 802
(N.Y. Dist. Ct. 2010) (since the state law applies to all residential
properties and the federal Protecting Tenants at Foreclosure Act
applies solely to residential properties upon which a federally
related loan was foreclosed, the state law ‘‘inherently includes a
larger universe of tenants’’ and grants greater additional protection,
and therefore is not preempted; however, under facts of case, shorter
ten-day notice requirement set forth by state law applied).
382 227 Ariz. 192 (2011).
383 Id. See also Nativi v. Deutsche Bank National Trust Co., 2010 WL
2179885 (N.D. Cal. May 26, 2010); Bank of Am. v. Owens, 903
N.Y.S.2d 667 (N.Y. App. Div. 2010).
§ 16.7.1.1
based upon a Protecting Tenants at Foreclosure Act defense.
Federal jurisdiction cannot be based upon a defense or counterclaim.384
In addition, courts have so far ruled that the Act does not
create a private right of action. Thus, while violation of the Act
can be used to defend an unlawful eviction, these courts have
held that an aggrieved tenant cannot bring an affirmative suit
seeking damages in state or federal court.385
Most decisions involving application of the Act have dealt
with questions concerning who does and does not qualify as a
‘‘bona fide tenant.’’ One of the initial points of controversy
resulted from the statute’s inexact definition of a bona fide
tenant as one who enters into a lease with the owner of the
property prior to the ‘‘notice of foreclosure.’’ The term itself is
vague, and is made more confusing by the differences among
state foreclosure laws. Fortunately, Congress remedied this
problem through one of the provisions of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which clarifies
that ‘‘notice of foreclosure’’ means the date that complete title
to a property transfers via a foreclosure action.386
A critical threshold issue is the burden of proof: it is the
owner who must demonstrate that an apparent tenant (someone
living in the property) is not in fact a bona fide tenant. In Bank
of New York v. Owens, the bank sought to put the onus on the
tenants.387 It sent a questionnaire to tenants requiring them to
respond promptly. For those who failed to do so, the bank
argued it could assume they were not bona fide tenants and
could immediately evict them. The court rejected this position,
stating that occupants are presumed to be bona fide tenants
unless the bank can show otherwise. Another court has followed suit, stating that any allegation of non-bona fide tenant
status must be proved by the new owner.388
To be a bona fide tenant, one must satisfy three elements:
(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
384 Deutsche Bank National Trust Co. v. McNulty, 2011 WL 586970
(D. Nev. Feb. 9, 2011); Fed. Nat’l Mortg. Ass’n v. Elliott, 2010 WL
4627833 (N.D. Tex. Nov. 16, 2010); Deutsche Bank National Trust
Co. v. Doe, 2010 WL 4683923 (D. Conn. Nov. 4, 2010); Shaikh v.
Fannie Mae, 2010 WL 3734851 (M.D. Fla. Aug. 19, 2010), adopted
by 2010 WL 3734849 (M.D. Fla. Sept. 23, 2010); Aurora Loan
Servs., L.L.C. v. Martinez, 2010 WL 1266887 (N.D. Cal. Mar. 29,
2010); U.S. Nat’l Bank Ass’n v. Garcia, 2009 WL 4048851 (C.D.
Cal. Nov. 20, 2009).
385 See, e.g., Deutsche Bank National Trust Co. v. McNulty, 2011 WL
586970 (D. Nev. Feb. 9, 2011); Cohn v. Bank of Am., 2011 WL
98840 (E.D. Cal. Jan. 12, 2011); Nativi v. Deutsche Bank Nat’l
Trust Co., 2010 WL 2179885 (N.D. Cal. May 26, 2010); Logan v.
U.S. Bank, 2010 WL 1444878 (C.D. Cal. Apr. 12, 2010).
386 Pub. L. No. 111-203, § 1484 (2010).
387 903 N.Y.S.2d 667 (Dist. Ct. 2010).
388 Fed. Nat’l Mortg. Ass’n v. Dobson, No. 10-CVG-02140, at *2
(Cleveland Mun. Ct. Mar. 1, 2010), available at http://nhlp.org/
node/1360.
567
§ 16.7.1.2
Foreclosures
unit’s rent is reduced or subsidized due to a Federal, state, or
local subsidy.389
In other words, the tenancy must originate from an arms-length
transaction, with someone other than a close family member,
for a fair market or subsidized rent.
At least two cases have determined that the rent in question
was not equal to fair market value, thus defeating bona fide
tenancy status. In RMS Residential Properties, L.L.C. v.
Naaze,390 a New York court found that a rent of $900 per month
was substantially below the fair market rent (of $1550), and
therefore failed to qualify. Likewise, in Harper v. J.P. Morgan
Chase Bank,391 a Georgia appellate court affirmed the trial
court’s determination that a $1600 rent fell substantially short
of the fair market rent of $2300, thus defeating bona fide
tenancy status.
In sum, the new owner of the property must prove non-bona
fide tenancy status, and it can only do so by reference to the
three elements set forth in the statute. This is well illustrated in
a case out of Massachusetts, PD Realty, L.L.C. v. Azevedo:392
the new owner sought to evict without providing a 90-day
notice on the basis that the apartment did not meet basic health
and safety codes. There was insufficient heating, wiring, and
plumbing, possible overcrowding, and no certificate of occupancy as required by the municipality. Applying the plain
language of the Act, however, the court ruled that none of the
required elements relate to conditions or administrative requirements. As such, the defendants were bona fide tenants subject
to the protection of the Act.
16.7.1.2 Fannie Mae and Freddie Mac Mortgages
In January 2009 both Freddie Mac and Fannie Mae announced programs to rent foreclosed properties on month-tomonth leases.393 Freddie Mac’s ‘‘REO Rental Initiative’’ applies to both tenants and former owners in possession at the
time of the foreclosure. Fannie Mae’s ‘‘National REO Rental
Policy’’ only applies to tenants.
16.7.1.3 FHA-Insured Mortgages
After foreclosure of an FHA-insured mortgage, HUD has the
discretion to accept conveyance of a property occupied by a
389 Helping Families Save Their Homes Act of 2009, Pub. L. No.
111-22, § 702(a)–(b).
390 903 N.Y.S.2d 729 (Dist. Ct. 2010).
391 699 S.E.2d 854 (Ct. App. Ga. 2010).
392 No. 11H84SP000071 (Mass. Hous. Ct. Feb. 3, 2011), available at
www.nclc.org/unreported.
393 Not all tenants and owners will be offered leases and it is not clear
how long the programs will last. The details of Freddie Mac’s
program are available at http://www.homesteps.com/about/
rental.html. The details of Fannie Mae’s program are available at
www.efanniemae.com/is/reprofessionals/index.jsp?from=hp#. In addition, after foreclosure, during the first fifteen days the REO
property is listed for sale, Fannie Mae will only consider offers from
former homeowners, municipalities and other organizations using
public funds to purchase the property.
568
tenant or former homeowner.394 Though HUD generally discourages an occupied conveyance of the property, a tenant or
former homeowner may be allowed to temporarily reside in the
property if they sign a month-to-month lease and pay the fair
market rent, as determined by HUD.395 The tenant and property
must meet additional requirements, including diminished marketability and standards of habitability.396 If the Protecting
Tenants at Foreclosure Act, or state or local law applies, the
tenant will be given the opportunity to remain in the property
under the terms of those laws.397
Tenants and former homeowners will receive a notice sixty
to ninety days before the anticipated date of transfer to HUD
outlining their options if they wish to remain in the property. An
eligible borrower or tenant has twenty days, after the date on
the notice, to notify HUD’s field office of their interest in
remaining in the property.398 Note that this request must be
submitted in writing and any documentation verifying an illness
or injury must be submitted during this period. If a timely
request is not made, the borrower waives his right to remain in
the property and must leave the property before HUD acquires
it.
HUD’s denial of a borrower or tenant’s request to remain in
the property may be appealed.399 Borrowers and tenants have
twenty days to appeal after they receive the field office’s
decision. Though the written decision will include a statement
of reason, it may be difficult for borrowers and tenants to
challenge HUD’s decision. Some of the eligibility requirements
focus on conditions in the mortgage market, such as whether a
multi-unit property is more marketable if occupied, or depend
394 HUD’s occupied conveyance policy is described in 24 C.F.R.
§§ 670–681. See also Dep’t of Hous. & Urban Dev., Mortgagee
Letter 2012-6 (Mar. 16, 2012).
395 See 24 C.F.R. 203.674. In general, the occupant’s total housing costs
(rent plus utility costs) should not exceed thirty-eight percent of his
or her net income.
396 See 24 C.F.R. 203.674. The additional eligibility requirements
include: 1)occupancy of the property is necessary to protect from
vandalism; 2) properties in the area remain unsold in for more than
six months; 3) marketability of multi-unit properties would be
improved; 4) the high cost of eviction or relocation expenses make
eviction impractical; or 5) individual residing in the property suffers
from permanent, temporary, or long-term illness or injury that
would be aggravated by the process of moving from the property.
397 See 77 Fed. Reg. 51, 15379 (Mar. 15, 2012). See also Dep’t of Hous.
& Urban Dev., Mortgagee Letter 2012-6 (Mar. 16, 2012). Under
HUD’s guidelines, lenders are expected to exercise ‘‘reasonable
diligence’’ in prosecuting the foreclosure and acquiring title to and
possession of the property. See 24 C.F.R. 203.356(b). However, the
requirements of the PTFA (or specific requirements under state or
local laws) will be taken into account when the lender is evaluated
for compliance with the reasonable diligence timeframes.
398 In addition to this very restrictive period for a response, HUD’s
policies do not favor continued occupancy by tenants or borrowers.
For example, if an occupant requests to remain in the property due
to an illness, they must provide documentation with an estimated
time that the occupant can move with without severely aggravating
the illness or injury. 24 C.F.R. 203.675(b)(4). HUD may require
more than one medical opinion and may even require examination
by a physician approved by HUD.
399 24 C.F.R. 203.677.
§ 16.7.2.1
Issues Arising After a Foreclosure Sale
on information that only could be provided by the lender (i.e.,
average time HUD’s properties remain unsold in inventory).
Borrowers and tenants are, however, allowed to present documentation and data to challenge HUD’s decision. They may
review all relevant material in HUD’s possession and they may
be represented by advocates, and invite experts to attend the
conference. The decisions of HUD are final and not subject to
further administrative review.
16.7.1.4 Section 8 Tenants
Section 8 tenants are explicitly protected by the Protecting
Tenants at Foreclosure Act. The new owner must honor Section
8 voucher leases and Housing Payment Assistance Payment
Contracts that were entered into prior to the foreclosure.400
Additionally, the Act provides that the fact of foreclosure does
not constitute good cause to terminate the lease of a Section 8
tenant unless the new owner intends to use the unit as a primary
residence and has provided the tenant with the requisite ninety
days’ notice.401
Section 8 tenants are also protected by other federal law that
states that, during the term of the lease, the owner shall not
terminate the tenancy except for serious or repeated violation of
the terms and conditions of the lease, for violation of applicable
law, or for other good cause.402 HUD regulations also specify
that lease termination must be based upon ‘‘good cause.’’403
This federal law preempts state law that would frustrate the
program’s objectives by allowing eviction upon the landlord’s
foreclosure.404 Of course, state law can provide greater protec400
401
402
403
404
Pub. L. No. 111-22, § 703 (2009).
Id.
See 42 U.S.C. § 1437f(o)(7)(C).
See 24 C.F.R. § 982.310(a), (d).
German v. Fed. Home Mortgage Corp., 899 F. Supp. 1155, 1162–
1165 (S.D.N.Y. 1995) (Section 8 notice and cause requirements
apply to successors in interest, even where no payments were
received); Webster Bank v. Occhipinti, 1998 WL 846105 (Conn.
Super. Ct. Nov. 20, 1998) (in allowing tenant’s motion to reopen
strict foreclosure judgment, court found that tenant had asserted a
valid defense to strict foreclosure; tenant argued that the federal
Section 8 program, which permits eviction only under certain
circumstances, preempts state common law, which provides that a
judgment of strict foreclosure automatically extinguishes any prior
tenancies). See also Ayers v. Philadelphia Hous. Auth., 908 F.2d
1184, 1192 (3d Cir. 1990) (federal regulations preempt Pennsylvania statute calling for lease termination upon default); Bristol Sav.
Bank v. Savinelli, 1996 WL 166396 (Conn. Mar. 21, 1996) (citing
EMC Mortgage Corp. v. Smith, Civ. No. 95-04794 (Hous. Ct.
Dep’t, City of Boston, Mass. Jan. 5, 1996) (‘‘the applicable federal
law [for Section 8 tenancy] preempts our common law which
permits tenancies to be terminated automatically via foreclosure.’’)); Fed. Home Loan Mortgage Corp. v. Hobbs, Civ. No.
95-04475 (Hous. Ct. Dep’t, City of Boston, Mass. Dec. 20, 1995)
(termination and notice provisions of Section 8 program preempt
state common law rule that tenancies are automatically terminated
by operation of law by foreclosure).
It should be noted that in 1998, after these cases were decided,
terms of Section 8 leases were modified by 42 U.S.C. § 1437f(o)(7)
which required fixed lease terms. These changes, however do not
undermine the principle that federal rules governing Section 8
tions. Thus, Massachusetts legislation codifies protections for
subsidized tenancies by stating explicitly that foreclosure does
not affect the agreement of a tenant whose rental payment is
subsidized under state or federal law and the foreclosing entity
must assume the lease and rental subsidy contract.405
16.7.2 State Law
16.7.2.1 General
The two key predictors under state law as to whether a tenant
has rights to remain in the foreclosed property are whether the
lease was executed before or after the mortgage and whether a
foreclosure is judicial or non-judicial.406 If a lease was consummated prior to creation of the mortgage, the lease generally
is treated as not extinguished by the foreclosure, in both judicial
and non-judicial foreclosure states.407 This is so because the
foreclosure purchaser acquires no greater interest than the
mortgagor had. The foreclosure purchaser ‘‘steps into the shoes’’
of the foreclosed owner, who had transferred the possessory
interest to the tenant and was not entitled to possession of the
rental property, by virtue of the lease. However, leases may
contain a subordination clause making the lease subordinate to
later mortgages in which case the foreclosure will terminate the
tenancy.408
On the other hand, most courts hold that the non-judicial (or
power of sale) foreclosure of a mortgage extinguishes a tenancy
entered into after execution of the mortgage.409 A notice reevictions preempt state foreclosure law.
405 See Mass. Gen. Laws ch. 186, § 13A.
406 See generally Vicki Been & Allegra Glashausser, Tenants: Innocent
Victims of the Nation’s Foreclosure Crisis, 2 Alb. Gov’t L. Rev. 1
(2009) (discussing tenants’ rights in foreclosure).
407 See e.g., Raiford v. Dep’t of Transp., 424 S.E.2d 789 (Ga. Ct. App.
1992) (foreclosure of security deed and sale of property pursuant to
power of sale do not divest tenant of her leasehold estate when the
lease predates the security deed, as ‘‘first in time is first in rank’’);
Fed. Nat’l Mortgage Ass’n v. Therrian, 678 N.E.2d 193 (Mass. App.
Ct. 1997) (possession under lease given prior to execution of
mortgage of premises is not extinguished by foreclosure of mortgage); Med Ctr. Bank v. Fleetwood, 854 S.W.2d 278 (Tex. App.
1993) (if lease is executed before deed of trust, lease is superior to
deed of trust lien and is not extinguished by foreclosure; purchaser
at foreclosure sale becomes new landlord); 55 Am. Jur. 2d Mortgages §§ 575, 794 (1971).
Also, for an excellent summary of state law on this issue, see
Brief of Appellee, Virginia Mortg. Corp. v. Williams (filed Dec. 22,
1994) (No. 68012), available at www.nclc.org/unreported. See also
Annot., Effect of Foreclosure of Mortgage as Terminating Lease, 14
A.L.R. 658, 664 (1921).
408 See 1 Friedman on Leases § 8.1 (5th ed. 2005); Wright v. Home
Beneficial Life Ins. Co., 270 S.E.2d 400 (Ga. Ct. App. 1980) (where
lease was made ‘‘subject to’’ any future deed to secure debt, lessee
becomes tenant at sufferance and interest is terminable by power of
sale contained in deed).
409 See Burke v. Willard, 137 N.E. 744 (Mass. 1923) (following nonjudicial foreclosure there is no privity between the mortgage holder
and the tenant of the mortgagor). See also Harry B. Hyde, The Real
Estate Lease As a Credit Instrument, 20 Bus. Law 359, 388 (1965);
Banks v. E. Sav. Bank, 8 A.3d 1239 (D.C. 2010) (citing D.C. Code
569
§ 16.7.2.2
Foreclosures
quirement in some non-judicial foreclosure states may allow
tenants to remain in their units for specified periods of time,410
and the new owner remains subject to state prohibitions on
self-help eviction.411
In judicial foreclosure states, if the lease is executed after the
mortgage, a minority of courts hold that a foreclosure action
extinguishes the tenancy, irrespective of whether the tenant is
made a party to the foreclosure action.412 But the majority view
§ 42-522 (2001) (a mortgage foreclosure sale of property extinguishes any subordinate leases with the mortgagor, and the tenants
who remain on the property stand as tenants-at-will in relation to the
new owner).
410 For example, in Massachusetts, a tenancy at will survives foreclosure, a lease tenancy is deemed to be a tenancy at will postforeclosure, and a Section 8 lease survives foreclosure. As a result,
the ordinary notice rules for tenants at will and Section 8 tenants
(generally thirty days) apply to any eviction post-foreclosure. See
Mass. Gen. Laws ch. 186, §§ 13, 13A. See also Minn. Stat.
§ 504B.285 (requires that tenants be given two months’ written
notice to vacate no sooner than one month after the redemption or
termination period expires); N.C. Gen. Stat. § 45-21.29 (allows
thirty-day notice before order of possession may be issued for
properties with at least fifteen units, and notice of ten days for
smaller properties, after which sheriff is authorized to remove
tenants); Tex. Prop. Code Ann. § 24.005(b) (West) (which entitles
tenant to thirty days’ notice to vacate where the tenant has paid rent
to prior owner or new owner following a request do so).
411 See, e.g., Bank of New York v. Allen, Docket No. 08-SP-0959
(Boston, Mass. Hous. Ct. 2008) (jury verdict for $54,000 based on
constructive eviction arising from utility shut-off); Greelish v. Wood,
914 A.2d 1211 (N.H. 2006).
412 See Lake v. Avalanche Invs., Inc., 940 So. 2d 1023 (Ala. Civ. App.
2006) (decedent’s alleged adopted minor children were not necessary parties in ejectment action brought by purchaser of home at
mortgage foreclosure sale; even assuming purchaser shared ownership of the home as tenant in common with decedent’s adopted
children, a tenant in common could seek to recover entire tract of
property from non-title holders and eject them; any possessory
interest that alleged adopted children had in the property was
independent of interests of occupants named as defendants in
ejectment action, and adopted children could assert any claims they
might have in a separate action); Balt v. J.S. Funding Corp., 646
N.Y.S.2d 50 (App. Div. 1996) (tenant not indispensable party to a
foreclosure action; failure to name tenant does not render foreclosure judgment defective); Dir. of Veterans’ Affairs v. Martin, 898
P.2d 230 (Or. Ct. App. 1995) (mortgage holder not required to name
tenant as party to foreclosure action; mortgage holder’s ejectment
action against tenant provided sufficient opportunity to vindicate
tenants’ rights). See also Grant S. Nelson & Dale A. Whitman, Real
Estate Finance Law § 7.12 (4th ed. 2002).
In Flushing Sav. Bank v. 509 Rogers L.L.C., 928 N.Y.S.2d 618
(2011), tenants of a church moved to vacate a foreclosure judgment
and sale against the mortgagor because the tenants did not receive
notice. The relevant state statute at the time only required notice to
the mortgagor for residential property consisting of owner-occupied
one-to-four-family dwellings. The court noted that: ‘‘Tenants of a
property are necessary parties to a foreclosure action but are not
indispensable parties, and the failure to name a tenant does not
render the judgment of foreclosure and sale defective. The failure to
join necessary parties simply leaves those parties’ interest unaffected by the judgment and sale.’’ Therefore, the failure to join a
tenant as a party does not cut off the tenancy. However, since this
case, the foreclosure statute has been amended to now also require
notice to tenants of one-to-four family dwellings.
570
is that foreclosure does not extinguish the tenancy if the foreclosing party is on notice of the tenancy, unless the tenant is
made a party to the foreclosure.413
Notice of the tenancy may be either actual or constructive.
Even if a lease is not recorded (most residential leases are not),
the mortgage holder may be deemed to be on notice because the
possession is apparent, or susceptible to ascertainment on reasonable inspection.414 Thus, when a tenant lives at the property,
the lender may be on constructive notice of the tenant’s interest
in the property, and may be under duty to investigate to
ascertain the tenant’s claims. If the property is an occupied
apartment building with multiple units, the nature of the property alone puts the lender on notice that there are tenants in
possession of the property.
The majority rule that requires that tenants be made parties to
the foreclosure provides tenants with at least a limited opportunity to defend their interests in the property. The tenant can
assert in the foreclosure action any equities which he may have
against the former landlord, such as a claim for improvements,
or a claim for money damages,415 or for prepaid rent tendered
to the landlord prior to the foreclosure.416
16.7.2.2 State ‘‘Good Cause’’ Eviction Statutes
A few states and localities have enacted statutory provisions
which limit the grounds on which tenants may be evicted,
notwithstanding the expiration of the tenant’s lease.417 These
413 See Tappin v. Homecomings Fin. Network, Inc., 830 A.2d 711
(Conn. 2003) (purchaser of property at foreclosure sale could not
eject tenant who was not joined as a party to foreclosure action and
who took possession after lis pendens was filed, construing Conn.
Gen. Stat. § 49-22(a)); Citizens Bank & Trust v. Bros. Constr. &
Mfg., 859 P.2d 394 (Kan. Ct. App. 1993) (bank which has knowledge that lessee is in possession of real estate on which it has a
mortgage must join lessee in foreclosure action to foreclose interests
of lessee); Grady v. Utica Mut. Ins. Co., 419 N.Y.S.2d 565, 571
(1979) (judgment of foreclosure not conclusive as to nonparties);
Empire Sav. Bank v. Towers Co., 387 N.Y.S.2d 138 (1976) (tenant
who is not made a party is not affected by judgment of foreclosure);
Davis v. Boyajian, Inc., 229 N.E.2d 116 (Ohio C.P. Stark County
1967) (foreclosure could not terminate rights of lessees without
making them parties to foreclosure suit).
414 See Citizens Bank & Trust v. Bros. Constr. & Mfg., 859 P.2d 394
(Kan. Ct. App. 1993) (knowledge that lessee is in possession of real
estate requires bank to join lessee in foreclosure action to foreclose
interests of lessee); Freiden v. W. Bank & Trust Co., 50 N.E.2d 369
(Ohio Ct. App. 1943) (those signs which may be seen or ascertained
on careful inspection constitute constructive notice). See, e.g., Applegate Apartments L.P. v. Commercial Coin Laundry Sys., 657 N.E.2d
1172 (Ill. App. Ct. 1995) (because foreclosing lender failed to name
tenant whose possession was open and apparent, purchaser at
foreclosure sale took subject to tenant’s lease).
415 See Krochta v. Green, 467 N.Y.S.2d 995, 997 (City Ct. 1983) (where
tenant was not made a party to foreclosure action, her right to
damages to offset rent overcharge survived foreclosure).
416 See Dundee Naval Stores Co. v. McDowell, 33, 61 So. 108, 113
(Fla. 1913) (lessee has right to recoupment for surplus rent tendered).
417 See, e.g., D.C. Code Ann. § 42-3505.1; 735 Ill. Comp. Stat. 5/151701 (amended to allow tenants to remain in their apartments for
§ 16.7.2.3
Issues Arising After a Foreclosure Sale
statutes are referred to as ‘‘good cause’’ eviction statutes.
Typically, permissible reasons for eviction include failure to
pay rent, breach of a lease, or the commission of an illegal act
in the rental unit. The foreclosure and sale of the property
usually does not constitute good cause for eviction. Courts in
these jurisdictions have held that the eviction restrictions apply
to purchasers at foreclosure sales. Thus, in order to evict a
tenant the purchaser must establish one of the grounds for
eviction specified in the statute.418 The protections offered by
states with ‘‘good cause’’ eviction statutes are only as good as
the statutory definition of ‘‘good cause.’’ In New Hampshire,
N.H. Rev. Stat. § 540:2, for example, includes a category of
‘‘other good cause’’ which includes, but is not limited to, any
legitimate business or economic reason.
‘‘Good cause’’ eviction statutes apply even though the new
owner has not accepted or demanded rent, or in any way
established a landlord/tenant relationship with the tenant.419 In
120 days after order of possession has been filed, or until the end of
their lease); N.H. Rev. Stat. § 540:12; N.J. Stat. Ann. §§ 2A:18-61.1
and 2A:50-70 (West); New York City Rent and Eviction Regulations, 9 N.Y. Comp. Codes R. & Regs. §§ 2200.1–2200.17; New
York City Rent Stabilization Code, 9 N.Y. Comp. Codes R. & Regs.
§§ 2520.1–2520.13.
Additionally many localities have useful municipal ‘‘good cause’’
ordinances. See, e.g., San Francisco Admin. Code § 37.9(a). Absent
a ‘‘good cause’’ eviction statute, a tenant can generally be evicted
for any reason or no reason, the only restrictions being those
contained in the lease. For more comprehensive discussion of the
impact of foreclosure on tenants in New York, Massachusetts and
New Jersey, see Raun Rasmussen, The Impact of Foreclosure
Proceedings on Residential Tenants, 28 Clearinghouse Rev. 494
(1994).
418 See Gross v. Super. Ct., 217 Cal. Rptr. 284 (Ct. App. 1985)
(purchaser of property at foreclosure proceeding, as successor to
landlord, was subject to rent-stabilization ordinance, which limited
the grounds for eviction); Admin. of Veterans Affairs v. Valentine,
490 A.2d 1165 (D.C. 1985) (statutory eviction restrictions protect
tenant of defaulting landlord); Boston Rent Equity Bd. v. Dime Sav.
Bank, 611 N.E.2d 245 (Mass. 1993) (foreclosing mortgage holder
that purchased property from rent board at foreclosure sale had to
obtain certificate of eviction before it could recover possession);
Greelish v. Wood, 914 A.2d 1211 (N.H. 2006) (affirming that ‘‘good
cause’’ statute applies to post-foreclosure tenancies); Chase Manhattan Bank v. Josephson, 638 A.2d 1301 (N.J. 1994) (New Jersey
Anti-Eviction Act applies to foreclosing mortgage holders, protecting tenants from eviction irrespective of whether tenancy was
established before or after execution of mortgage); United Institutional Servicing Corp. v. Santiago, 310 N.Y.S.2d 733 (Civ. Ct. 1970)
(foreclosure sale did not strip tenants of protection under eviction
statute); Banks v. E. Sav. Bank, 8 A.3d 1239 (D.C. 2010) (holding
tenant’s alleged violation of pre-foreclosure lease was not a basis for
eviction and also stating statutory eviction provisions protect the
tenant of a defaulting mortgagor who remains in her previously
rented apartment after a foreclosure sale). But see Vt. Tenants, Inc.
v. Vt. Hous. Fin. Agency, 742 A.2d 745 (Vt. 1999) (state statute
which governed landlord-tenant issues did not apply to eviction of
tenant following strict foreclosure).
419 See Robinson v. First Nat’l Bank of Chicago, 765 A.2d 543 (D.C.
2001) (occupant of home who was tenant of prior owner was
entitled to intervene in bank’s action after foreclosure for possession
of premises brought against prior owner; court must determine
whether she is a tenant under the RHA (the good cause eviction
Administrator of Veterans Affairs v. Valentine,420 the VA argued
that it was not a ‘‘landlord,’’ that there was no contractual
relationship between it and the tenant, and therefore it was not
bound by the eviction control statute. The D.C. Court of
Appeals, however, found that the VA fit within the statutory
definition of ‘‘landlord’’ because it was the owner of the
property. According to the court, the terms ‘‘landlord’’ and
‘‘tenant’’ in the eviction statute should be interpreted with
reference to their ordinary meaning and in accordance with the
purpose of the statute, to protect renters from evictions, rather
than solely in accordance with technical precepts of real property law.421
Other state courts have reached similar conclusions. In Chase
Manhattan Bank v. Josephson,422 the New Jersey Supreme
Court held that ‘‘the [Anti-Eviction] Act protects tenants from
eviction by foreclosing mortgage holders irrespective of whether
their tenancy was established before or after the execution of
the mortgage.’’423 A Connecticut statute which prohibits the
eviction of tenants in buildings of five or more units who are
over 62, blind, or physically disabled except for good cause,
was held to take precedence over another statutory provision
which authorized a mortgage holder to obtain possession of
foreclosed property from a mortgagor’s tenants in possession.424
16.7.2.3 Other State Statutes Offers Protections to
Tenants
Recent legislative action in states including California,425
Illinois,426 and North Carolina427 has expanded the notice pe-
420
421
422
423
424
425
426
427
statute) and whether she has any right to prevent eviction); Boston
Rent Equity Bd. v. Dime Sav. Bank, 611 N.E.2d 245 (Mass. 1993)
(determination of tenancy or contractual agreement is not controlling as to whether rent control law requires certificate of eviction);
Long Branch Banking Co. v. Howland, 32 A.2d 860 (N.J. Ch. Ct.
1943) (eviction restrictions apply even though technically there was
no landlord/tenant relationship); City of New York v. Utsey, 714
N.Y.S.2d 410 (Sup. Ct. 2000) (city which acquired apartment
building in tax foreclosure and which acquiesced in continued
occupancy by ‘‘squatters’’ was required to serve thirty day notice to
quit prior to seeking possession, as squatters’ occupancy had ripened into tenancy at will).
490 A.2d 1165 (D.C. 1985).
Id. See also Bank v. E. Sav. Bank, 8 A.3d 1239 (D.C. 2010) (where
D.C. Court of Appeals cited statute, ordinary meaning, and public
policy justification for identifying a tenancy at will as an ‘‘interest
in real property’’ under the lis pendens statute).
638 A.2d 1301 (N.J. 1994).
Id. at 1314.
First Fed. Bank v. Whitney Dev. Corp., 677 A.2d 1363 (Conn.
1996) (in construing Conn. Gen. Stat. § 47A-23c, the court considered the remedial purpose of the statute).
See Cal. Code Civ. Proc. § 1161(b) (tenant or subtenant in possession of a rental housing unit at the time the property is sold in
foreclosure shall be given sixty days’ written notice to quit before
being removed; law remains in effect until January 1, 2013).
See 735 Ill. Comp. Stat. 5/15-1701 (now allows tenants to remain in
their apartments for 120 days after order of possession has been
filed or until the end of their lease).
See N.C. Gen. Stat. § 45-21.29 (increases notice period before order
571
§ 16.7.2.4
Foreclosures
riod for tenants in post-foreclosure evictions. In addition, various legislative measures in states including Missouri,428 New
Jersey,429 New York,430 Virginia,431 and Wisconsin432 have
been passed to provide various protections for tenants. A
Montana statute provides minimal protection for tenants remaining in possession for ten days after foreclosure; they will
be considered tenants at will, requiring a thirty-day notice
thereafter.433
428
429
430
431
432
433
572
of possession may be issued for properties with fifteen or more units
to thirty days).
See Mo. Rev. Stat. § 534.030 (new owner of property must give
tenant notice that foreclosure sale has occurred; if owner seeks
possession, tenant has ten business days from the date of notice to
vacate the premises before owner may bring an unlawful detainer
action or any other action seeking possession; content of notice is
specified in statute).
See N.J. Stat. Ann. § 2A:50-70 (in event of foreclosure sale, tenant
is entitled to notice within ten business days after transfer of title;
notice must be in English and Spanish, and form and content of
notice are specified in statute; notice provides that new owner may
not evict tenant without ‘‘good cause’’); violation may result in
damages of $2000 plus attorney fees and costs). See also N.J. Stat.
Ann. § 2A:50-71 (new owner of foreclosed property may not make
any communications to induce tenant to vacate property except
through ‘‘bona fide monetary offer’’ and may not take actions to
place pressure on tenant, during pendency of foreclosure or within
one year of transfer of title, to accept any offer to vacate property).
N.Y. Real Prop. Acts. Law § 1305 (tenants must be given written
notice that they are entitled to remain in premises for the greater of
ninety days from date of notice or remainder of lease). See also
GMAC Mortg., L.L.C. v. Taylor, 899 N.Y.S.2d 802 (N.Y. Dist. Ct.
2010) (since the state law applies to all residential properties and the
federal Protecting Tenants at Foreclosure Act applies solely to
residential properties upon which a federally related loan was
foreclosed, the state law ‘‘inherently includes a larger universe of
tenants’’ and grants greater additional protection, and therefore is
not preempted; however, under facts of case, shorter ten day notice
requirement set forth by state law applied).
Va. Code Ann. § 55-225.10 (landlord must give written notice to
tenant of mortgage default, notice of acceleration, or foreclosure
sale within five business days after written notice from the lender is
received by the landlord).
Wis. Stat. § 846.35 (party bringing foreclosure action must provide
tenant with (1)notice no later than five days after action is filed that
foreclosure has commenced, (2)notice no later than five days after
judgment of foreclosure is entered that such judgment has been
made, and (3) notice of the date on which the redemption period
ends; violation of notice provisions may result in damages of $250
plus reasonable attorney fees; also, tenant may retain possession for
up to two months after end of month in which sale of property is
confirmed). See also Wis. Stat. § 704.35 (landlord must give tenant
notice that foreclosure action has commenced and, if judgment has
been entered, notice of date on which redemption period ends).
See Mont. Code Ann. §§ 71-1-319 (tenants except those prior to
trust indenture shall be deemed tenants at will ten days following
sale), 70-27-104 (requires thirty-day notice before a tenancy at will
may be terminated); Rocky Mountain Bank v. Stuart, 928 P.2d 243
(Mont. 1996) (holding that right to notice can be waived by
agreement to vacate after ten days).
16.7.2.4 Redemption or Purchase by Group of
Tenants
In certain states, tenants also have the right to redeem the
property by paying the mortgage debt prior to the foreclosure or
by paying the foreclosure sale price after the sale when state
law provides a statutory right of redemption.434 While this right
may appear at first to be of little value to most tenants, a group
of tenants working together with a community group or government housing agency may be able to use the redemption
right as a means to obtain mortgage financing to purchase the
property.
16.7.3 Rights of Tenants If Their Landlord
Files Bankruptcy
In many cases involving foreclosure on a landlord, the
landlord files bankruptcy in an effort to retain the property.
Most such cases are filed under chapter 7 or 11. Residential
property may be transferred away from the current landlord
during or immediately after the bankruptcy process. In some
situations the transfer will be voluntary and in others required
by the court.
A variety of steps may be taken to protect tenants’ rights in
the bankruptcy process. The Bankruptcy Code includes special
protections for tenants when their landlords seek to terminate
leases in the bankruptcy process.435 Federal bankruptcy courts
have held that the landlord in bankruptcy cannot compel a sale
where adequate protection of a tenant’s interest can only be
achieved through continued possession of the lease premises.436
A substantial discussion of tenants’ rights as creditors in the
bankruptcy process is contained in National Consumer Law
Center, Consumer Bankruptcy Law and Practice Chapter 17.437
434 Accord Countrywide Home Loans, Inc. v. Williams, 867 N.Y.S.2d
16 (N.Y. Dist. Ct. 2008) (table). See, e.g., 6280 Ridge Realty L.L.C.
v. Goldman, 701 N.Y.S.2d 69 (1999) (tenant has an equitable right
to redeem his landlord’s mortgage, which is not extinguished if
mortgage holder omits tenant as a party in foreclosure action). See
also Comment, The Effect of a Mortgage Foreclosure on a Lease
Executed Subsequent to the Mortgage, 17 Wash. L. Rev. 37, 47
(1942); Tiffany & Jones, The Law of Real Property § 1534, at 612
(3d ed. 1939). See also Davis v. Cole, 747 N.Y.S.2d 722 (N.Y. App.
Div. 2002) (stating to terminate possessory and redemption rights of
proprietary tenants following foreclosure sale of cooperative building, purchaser at foreclosure sale may bring either a reforeclosure
proceeding or a strict foreclosure proceeding).
435 See 11 U.S.C. § 365(h) (if a trustee rejects an unexpired lease of real
property under which the debtor is the lessor and if the term of such
lease has commenced, the lessee may retain its rights under such
lease).
436 See, e.g., In re Independence Vill. Inc., 52 B.R. 715, 734 (Bankr.
E.D. Mich. 1983) (sale of life care facility did not permit avoidance
of residents’ possessory interests as protected by 11 U.S.C. § 365(h)
as well as state law that states that a tenant cannot be forced to
surrender leased premises where there is no provision in the lease
allowing for payments).
437 (9th ed. 2009).
Issues Arising After a Foreclosure Sale
16.8 Former Owners in Possession of
Property Following Foreclosure
Unless the sale is set aside, the right of a former homeowner
to possess the property terminates with the foreclosure sale,438
ratification,439 or at the expiration of the redemption period.440
Procedures will vary depending on whether it was a judicial or
non-judicial foreclosure. Often the purchaser at the foreclosure
sale (who will often be the lender) will bring an eviction action
against the former homeowner and obtain a judgment. In some
states, the same summary process that is used to evict tenants
will be used to evict the former homeowner.441 Other states
have established a separate procedure for ejecting the former
homeowner442 and may also allow the purchaser to use self-
438 See, e.g., Murphy v. Countrywide Home Loans, Inc., 199 S.W.3d
441 (Tex. App. 2006) (occupant of property holding over after
execution of deed is considered a permissive tenant whose right to
possession is inferior to the party holding title).
439 See, e.g., Laney v. State, 842 A.2d 773 (Md. 2004) (foreclosure, sale
and ratification cause the mortgagor to lose the right of possession
in the property).
440 See Broszko v. Principal Mut. Life Ins. Co., 533 N.W.2d 656 (Minn.
Ct. App. 1995) (mortgagor of foreclosed property retains the right
to possess property until the end of redemption period).
441 See Attorney General v. Dime Sav. Bank of New York, 596 N.E.2d
1013 (Mass. 1992) (no reason to distinguish between holdover
mortgagors or tenants).
442 See, e.g., Empire Properties v. Hardy, 873 A.2d 1187 (Md. 2005).
§ 16.8
help to gain possession of the property.443 In some states the
former homeowners forfeit their right of redemption if they do
not turn over possession of the property.444 When a former
homeowner wishes to challenge the propriety of a foreclosure
sale, the proper procedure may be to seek to set aside the
foreclosure and not to use that as a defense in an action to evict
the former homeowner.445
Additionally, purchasers must use the correct procedure to
evict former homeowners from the property. In Attorney General v. Dime Sav. Bank of New York,446 for example, the
Supreme Judicial Court of Massachusetts ruled that a lender
who forecloses on real property by sale may not bring a trespass
action against a holdover tenant or mortgagor in possession of
the foreclosed property. Instead, it must employ summary
process. Similarly, the Maryland Court of Appeals, in Empire
Properties v. Hardy,447 overruled attempts by a purchaser to use
a forcible entry and detainer action, where the state motion for
possession rule dictated the proper judicial procedure the purchaser should pursue to gain possession of the property.
443 Laney v. State, 842 A.2d 773 (Md. 2004) (the right of peaceable
self-help is a viable mechanism for title owner to obtain possession
of property from holdover mortgagor).
444 See Jones v. Clausell, 859 So. 2d 1134 (Ala. Ct. App. 2002).
445 See Vines v. LaSalle Bank Nat’l Ass’n, 691 S.E.2d 242 (Ga. Ct.
App. 2010); Jackman v. LaSalle Bank, N.A., 683 S.E.2d 925 (Ga.
Ct. App. 2009).
446 See Attorney General v. Dime Sav. Bank of New York, 596 N.E.2d
1013 (Mass. 1992).
447 873 A.2d 1187 (Md. 2005).
573