What Happens if My Apartment Building Is Foreclosed On? Your Rights as a Renter

If a rental property owner defaults on their loan, the bank could foreclose on the rental unit. By taking title to the home, the bank can recoup past-due loan payments. That means the bank becomes the new landlord.

But banks aren’t in the rental business. They will typically move to sell the foreclosed property as soon as possible. This often means quickly evicting anyone living on the property—usually with little warning. This article explains what typically happens when a rental building is foreclosed on and what renters in foreclosure can do about it.

If Your Landlord Is in Mortgage Default

Sometimes, landlords can’t cover the mortgage payments on the property they rent out to tenants. This can happen for many reasons, such as:

• The landlord may be insolvent or unable to balance the property’s expenses.
• The landlord took out too large a loan.
• There is a second or even third mortgage on the property the landlord is behind in paying.

Whatever the cause, if the bank begins foreclosure proceedings on the property, it will likely attempt to evict any tenant renting there.

Meet Your New Landlord: The Bank

Most banks and lenders are not in the business of renting to consumers. This often becomes apparent when they become your new landlord. The bank has two potential decisions it can make:

• Hire a managing company to run the property, maintain the building, and collect each month’s rent.
• Sell the property.

When a Bank Hires a Property Management Company

This may be a smarter long-term decision for banks. A bank could manage the property until better times. Then, it could recover any potential losses if the property’s value drops below the amount the bank initially loaned for its purchase. Holding onto the property also prevents further rental-property deterioration by keeping hard-hit areas from becoming ghost towns because of foreclosures.

If a bank chooses this option, it will hire a property management company to run the day-to-day operations, like facilitating repairs, addressing tenant concerns, and collecting rent.

As smart as it may be in the long run, however, this is unlikely. Especially during a crisis, banks want certainty and cash in hand. If the landlord can’t cover costs through rent, the bank probably considers itself even less likely to have that ability.

If this happens, expect poor service. The bank cares more about money than happy tenants.

When a Bank Sells the Rental Property

Often, a tenant will not know that the property has been taken to a foreclosure sale. This means that overnight, you’ll get a notice of a new owner and potentially an eviction notice.

If you refuse to leave after the notice period expires and face eviction proceedings, you’re in trouble. Without a valid defense, expect a lawsuit that you likely can’t win and isn’t worth the risk. Having an eviction on your record can seriously harm your ability to find future housing, regardless of whose fault the situation was.

Some banks may offer “cash for keys” programs designed to get you out of the property as quickly as possible. This may not be a good decision to accept if you’re a protected tenant, such as a:

• Section 8 tenant
• Elderly, disabled, or active military duty tenant
• Rent-controlled tenant

In these situations, an eviction case may be stayed (delayed) due to an undue hardship recognized by local ordinances (like housing codes) or a court. While a landlord can certainly evict you for good cause, such as nonpayment of rent, it’s harder for them to force you to vacate when you’re not at fault. Protected tenants often cannot be evicted by the new owners unless they:

• Fail to pay the amount of rent due
• Violate a material term of their lease

While the specifics vary by state and even city, eviction is a legal process that requires several steps. If you are facing an eviction, a landlord-tenant attorney can review your situation, explain your options, and pursue defenses that may allow you to stay in your home. Find local legal help.

Losing Your Lease Upon Foreclosure

When a property is foreclosed, it usually ends your lease term. If the mortgage was signed before your lease, the foreclosure usually wipes out your lease. Sadly, it doesn’t matter if you still have 10 months left on your written lease agreement.

A lease is usually subordinate to a mortgage that predates it. This means the mortgage takes priority and the bank’s rights come before the tenant’s rights. The lease is secondary and can be canceled if the mortgage holder takes over.

But under some state laws, the foreclosing bank may have to delay the eviction process for a set amount of time.

Fortunately, that doesn’t necessarily mean you have to leave immediately. The new owner must still give you proper written notice of the lease termination. But your occupancy doesn’t necessarily end even if you get a notice to quit by certified mail. The bank may also need to initiate unlawful detainer proceedings, which allows you to voice your undue hardships at a court hearing.

Mortgage Reform and Anti-Predatory Lending Act

In 2009, Congress passed the Mortgage Reform and Anti-Predatory Lending Act after the subprime mortgage crisis. Federal law now typically requires a 90-day notice to tenants.

Before, tenants had at most 30 days’ notice, and some received far less. State-level landlord-tenant laws may provide greater protection.

For example, consider an eviction lawsuit in which the bank engages in illegal activities. They may have failed to give proper notice under state law. At your eviction hearing, you can avoid a default judgment by appearing personally to voice your grievance with the bank.

The Protecting Tenants at Foreclosure Act

The Protecting Tenants at Foreclosure Act (PTFA) was signed in 2009 and revived on June 23, 2018. It may also protect your lease, but state laws always take precedence. The Act requires:

• 90-day notice before an eviction
• Honoring bona fide leases or tenancy on the property

You can learn more about the PTFA in the Comptroller’s Handbook.

What Are Your Rights if Your Building Goes Into Foreclosure?

You generally can’t prevent the foreclosure process from wiping out your rental agreement. The bank may get a writ of possession from a court, allowing them to force you out. However, that lease was a contract, so the landlord who signed it is still bound by its terms. If you sue the former owner, they may be held accountable for taking away your home.

Almost all leases contain a “covenant of quiet enjoyment,” which is a material term of the contract. A landlord who evicts a tenant by defaulting on their mortgage may violate the tenant’s rights.

Small claims court is the best place to get a court order, and you can try to recoup economic losses such as:

• Moving expenses
• Apartment searching costs
• The difference between your new and old rent
• Application fees
• Other reasonable costs associated with relocating

Be aware that your landlord is unlikely to have much available cash. A judgment against your landlord lasts a long time, and if you pursue it diligently, you may eventually recover your costs. Depending on your state, you may need to renew a judgment at regular intervals.

Tenant Eviction in Foreclosure? Get Legal Advice

Learning that your rental home is in foreclosure is unsettling and frustrating. But you still have rights. A local attorney can help you navigate the unknown and guide your next steps.