Federal Protections for Tenants in Foreclosure

By Erich M. Paetsch, Litigation & Creditors’ Rights & Bankruptcy Attorney

During the Great Recession, legislative efforts at the state and federal level altered the foreclosure process in response to record foreclosure activity. In some cases, legislation was temporary in nature while other changes continue to impact lenders today.  The Protecting Tenants at Foreclosure Act (“PTFA”) was federal legislation that took effect in May 2009 but terminated at the end of 2014. However, on May 24, 2018, President Trump quietly signed into law a permanent extension of the PTFA. The requirements of the PTFA became effective on June 25, 2018. [1]

The PTFA is intended to provide federal protection for tenants entering real property leases that are later subject to a property foreclosure action. The PTFA is restricted to the scope and reach of the federal government. Therefore, it only applies to “federally-related mortgages” which is practically interpreted to mean a loan secured by residential property. It is possible commercial loans might fall within the definition of a federally related mortgage but such situations are rare and should be considered in consultation with counsel.

The PTFA’s primary impact is to provide additional time to tenants after a foreclosure to vacate the foreclosed property. For lender’s this means that any bona fide tenants must receive at least ninety-days’ notice before the tenant must vacate the property. If the term of lease is longer, the tenant might be entitled to occupy the property for the remainder of the lease term. The PTFA permits a ninety-day termination of a longer lease, but that right is only available if the purchaser at foreclosure will occupy the property as a primary residence. To address this reality, some lenders offered so-called “cash for keys” to obtain possession and not just legal title to the foreclosed property earlier than the PTFA requires.

The PTFA does provide some protection to lenders. For example, both the tenant and the lease must be bona fide meaning that: (a) the tenant should have a written lease signed before any foreclosure process was started; (b) the tenant must be an independent third party; and (c) rent must fairly reflects market rates. Identifying tenants in property subject to the PTFA at the outset of the foreclosure allows lenders to more easily determine if a bona fide tenancy exists.

The language and provisions of the PTFA were and remain straight forward. However, challenges in interpretation and application arise when the PTFA is considered with Oregon law. Determining the type of notice required varies depending on the nature of the tenancy and whether the PTFA overrides state law.  For example, in a non-judicial foreclosure action under ORS 86.782(6)(c), Oregon law requires a 60 or 30-day notice period. However, the PTFA, requires a 90-day notice so a 90-day notice must be given because of the “supremacy” of federal law. Where the PTFA does not apply because, for example, the tenancy is not bona fide, state law would still require at least 30 days written notice. ORS 86.782(6)(b).  A lender can help shorten the time frames by providing the 30 days’ notice not earlier than 30 days before the initial foreclosure sale date

The overlap and interpretation challenges are not limited to non-judicial foreclosure proceedings. In a judicial foreclosure, for example, a tenant under an unexpired lease is entitled to continue occupancy through the redemption period. ORS 18.946. However, if the redemption period is shortened by a lender, the tenant will be entitled to at least 90-days’ notice under the PTFA.

A significant concern for many lenders acquiring title to occupied residential property following foreclosure is avoiding becoming a landlord subject to the provisions of the Oregon Residential Landlord and Tenant Act (“ORLTA”). A broad statutory scheme, ORLTA can result in significant claims against lenders who become landlords following foreclosure for habitability and other violations. The PTFA does not clearly resolve whether ORLTA or similar habitability obligations apply to a lender as the successor to the landlord after foreclosure. The PTFA makes clear that a lender as the foreclosure purchaser acquires title subject to the rights of any bona fide tenant under a lease. The court have not resolved whether this means only the habitability rights expressly stated in a lease apply or if it includes all tenant rights under the lease and ORLTA.

Additional complications arise between state law and the PTFA when the scope and applicability of ORLTA are considered. For example, in a non-judicial foreclosure proceeding, lenders can inadvertently become a landlord subject to ORLTA if they accept rent or enter into a rental agreement with a bona fide tenant. ORS 86.782(9)(A)-(B). In addition, and importantly, state law provides that a lender after foreclosure is subject, under certain circumstances, to ORLTA if it fails to terminate a tenancy within 30 days after the date of sale. ORS 86.782(9) ((a)(C). However, if the PTFA requires at least 90-days’ notice, then does the 30-day state law period mean ORTLA now applies? Presumably, Oregon courts will agree that the PTFA 90-day notice requirements override the state law provision because of the supremacy of federal law. However, there is no legal opinion resolving this issue.

With the renewal of the PTFA, a foreclosing lender should assess whether the PTFA applies. When it does apply, a prudent lender should work with its counsel to identify the existence and nature of any tenancies in the property prior to foreclosing if possible. Depending upon the facts involved, a lender may decide to foreclose judicially to avoid complications post foreclosure with tenants. Alternatively, a lender may decide to foreclose non-judicially but take steps ensuring appropriate notice is timely given and ORLTA is avoided. With the permanent renewal of the PTFA, lenders can no longer simply consider whether redemption rights and time frames influence a foreclosure election. In addition, the type of tenants, the time frames involved and the potential for becoming a landlord under ORLTA are factors to also discuss with counsel.

[1] Section 304 of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (Public Law 115-174) restored sections 701-703, and repealed section 704, of the Protecting Tenants at Foreclosure Act of 2009 (Title VII of the Helping Families Save Their Homes Act of 2009, Public Law 111-22), which expired on December 31, 2014. Section 704 contained the Protecting Tenants at Foreclosure Act of 2009’s sunset provisions; the restored act does not include an expiration date.

Erich Paetsch is a partner in the Litigation and Creditors’ Rights & Bankruptcy practice groups. The information in this article is not intended to provide legal advice. For a professional consultation, please contact Erich Paetsch at Saalfeld Griggs PC.  503.399.1070.  epaetsch@sglaw.com  © 2018 Saalfeld Griggs PC

Erich M. Paetsch