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Usually, when a landlord enters into a rental agreement with a tenant while foreclosure is imminent, the tenant has no idea that the rental unit may soon be in foreclosure. Whether tenants have any recourse against their landlord in this situation depends on the type of rental agreement they signed and what the landlord knew at the time of the signing.
What Happens to Tenants When a Property is Foreclosed?
Tenants whose rented homes are the subject of a foreclosure almost always lose their leases. This is because in most states, a mortgage recorded before a lease was signed will wipe out that lease if it's foreclosed. There are a few exceptions to this rule. In
However, even if the lease or rental agreement is wiped out, the new owner of the property must still follow state eviction procedures in order to remove a tenant from the rental unit.
But what if the landlord had a pretty good inkling that her ability to pay the mortgage was in doubt at the time she negotiated and signed the lease? Or worse, what if a notice of default had already been filed against the property? Does the tenant have any recourse for the landlord's actions?
Legal Remedies for New Tenants When Foreclosure is Imminent
Whether a tenant has any legal remedy in this situation depends on whether the agreement with the landlord was a lease or a month-to-month tenancy.
Leases
Let's consider a landlord who signs a lease, knowing that the property may be foreclosed upon during the lease term. The more likely it is that foreclosure will happen (for example, when the landlord has already received notice of foreclosure), the more likely it is that this is a simple case of fraud, because the landlord is promising to do something (make the premises available for a year) that he reasonably knows he cannot do.
On the flip side, if the landlord is merely worrying about a remote possibility that he won't be able to meet his mortgage, the landlord's duty to disclose this worry (or his risk of a later charge of fraud if he doesn't disclose) decreases. We're dealing with a bit of a sliding scale here -- at the time the lease is signed, the more certain it is that the bank will foreclose, the higher the likelihood of fraud if the landlord doesn't disclose the possibility of foreclosure during the lease term.
Month-to-Month Rental Agreements
A tenant with a month-to-month rental agreement is less likely to be able to prove that the landlord defrauded her if the building goes into foreclosure. Monthly rental agreements can be terminated with proper notice -- 30 days in many states (however, rent control cities and New Jersey, New Hampshire, and Washington D.C. all require landlords to have a just cause, or good reason, to terminate a monthly agreement).
Damages for Fraud
Unfortunately, even if a tenant can prove that the landlord engaged in fraud by signing a lease while foreclosure was imminent, the tenant's remedy is limited to monetary damages. (To learn how to sue for damages in
Oregon's Approach: Landlords Must Disclose Defaults
At least one state has thought about this conundrum and has addressed it legislatively. Since 1997 in Oregon, landlords with properties of four or fewer units must disclose, before signing a lease, any outstanding notice of default, lawsuit to foreclose, declaration of forfeiture, or lawsuit to foreclose a tax lien. If the landlord fails to disclose and the tenant has to move as a result, the tenant can recover twice his actual damages and all prepaid rent (Or. Rev. Stat. §90.310).
Perhaps with the subprime meltdown, and the grief this has cost renters who happened to be living in these homes, more states will give some thought to protecting tenants caught in foreclosure.
For information about tenants' rights in other situations, as well as tips on all aspects of renting -- from inspecting a unit to getting along with roommates -- get Every Tenant's Legal Guide, by Janet Portman and Marcia Stewart (Nolo).
Copyright 2008 Nolo