In our prior blog we discussed the Protecting Tenants at Foreclosure Act (“Act”), which protected renters of foreclosed properties from immediate eviction. Although the original Act was terminated on December 31, 2014, it was resurrected earlier this year under a larger deregulation bill, and ultimately signed into law by President Trump on May 24, 2018, permanently extending the Act effective June 23, 2018.
The purpose of the Act is to protect tenants from immediate eviction in the event of foreclosure and sale of real property being leased from the owner. Once a foreclosure is complete and title transfers to a new owner, if there is a “bona fide” tenant in place as of the date of the foreclosure notice, the tenant’s lease is not automatically terminated. The foreclosing party takes the property subject to the rights of the tenants with a lease. A lease or tenancy is considered “bona fide” only if:

1. The tenant is NOT the mortgagor (i.e., the prior owner) or the mortgagor’s child, spouse, or parent;
2. The lease was the result of an arms-length transaction; and
3. The rent is NOT substantially less than fair market rent, unless the reduction is due to a federal, state, or local subsidy.

Tenants with bona fide leases may occupy the premises through the remainder of the lease term unless: (i) the property is being sold to a purchaser that will occupy the unit as a primary residence, or (ii) there is no lease or the lease is terminable at will. However, even under these exceptions the tenant must still receive at least 90 days’ notice before the lease can be terminated.

What does this mean for associations? Boards should know that the Act may not be applicable to actions initiated by associations to foreclose on assessment liens. The language of the Act is unambiguous when dealing with foreclosure of a federally related mortgage loans, but less clear where it concerns foreclosure for other reasons.

A literal reading of the Act, i.e., its “plain meaning,” leads one to conclude that Congress intended the Act to apply to tenants upon foreclosure of federally-related mortgage loans, as well as any foreclosure on any dwelling or residential real property. The legislative history of the Act provides little guidance as to Congress’ intent. However, this issue was addressed by the District Court of Suffolk County in New York in 2009. The Court determined that the Act only applied to tenants if a federally related mortgage loan had been foreclosed. The court reasoned that to hold otherwise would render the Act unconstitutional for attempted preemption of state landlord-tenant laws. Colorado courts have yet to litigate this specific issue.

If you would like more information on the Act or to discuss how it may impact the Board’s decision to foreclose on tenant-occupied property, please contact our Foreclosure Group attorney, Kate M. Leason at [email protected].

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