A Quick Glance at the Protecting Tenants at Foreclosure Act

leaseTrue or false? The Protecting Tenants at Foreclosure Act (“PTFA”) allows a person who rents a residence that is foreclosed to live rent free in that home. False. The PTFA requires a foreclosing party to honor a sham lease. False. The PTFA doesn’t apply to military service members. False. It has been about five years since the PTFA was enacted and much confusion about the law still abounds.

  • What is the Protecting Tenants at Foreclosure Act?

The PTFA (Pub. L. No. 111–22, §§ 701, 702, 123 Stat. 1632, 1660–61 (2009); 12 U.S.C. § 5220 note) is a federal law that applies in all 50 states and the District of Columbia. Its stated purpose is to protect tenants from eviction because of foreclosure on the properties they occupy.

  • What does the PTFA generally require?

The PTFA basically requires two things. First, it requires an immediate successor in interest to foreclosed, residential property (referred to here as the “foreclosing party” for simplicity) to give a person who is leasing that property at least 90 days’ notice to vacate the premises. Second, it generally requires a foreclosing party to honor a good faith lease that was in effect on the date of the notice of foreclosure.

There are two exceptions to the general rule that a foreclosing party must honor a good faith lease that was in effect on the date of the notice of foreclosure. A foreclosing party may terminate the lease, after giving the 90-day notice, on the date of the sale of the property (1) to a purchaser who will occupy it as a primary residence; or (2) when the lease is terminable at will under state law.

Moreover, even if a foreclosing party must honor the lease after foreclosure, should the tenant default in his or her obligations under the lease after the foreclosure (like not paying rent), the foreclosing party may initiate eviction proceedings after giving proper notice.

If the PTFA doesn’t apply then a foreclosing party must still comply with state law regarding eviction notices and procedures. Furthermore, regardless of whether the PTFA applies, a foreclosing party must still comply with all other laws regarding foreclosures and evictions.

  • When does the PTFA apply?

The PTFA only applies to a foreclosure on a “federally related mortgage loan” or on any dwelling or residential real property. Further, it only applies to leases and tenancies made in good faith. A good faith lease is statutorily defined as one: (1) in which the debtor on a mortgage (the “mortgagor”) or the child, spouse, or parent of the mortgagor under the contract is not the tenant; (2) that was the result of an arms-length transaction; and (3) that 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.

In other words, the PTFA does not apply if (1) the foreclosure involves non-dwelling, non-residential property that is not the subject of a federally related mortgage; (2) the mortgagor or his/her child, spouse, or parent is the tenant; (3) the lease isn’t the result of an objectively independent, legitimate transaction; (4) the lease requires rent that is substantially less than fair market value; or (5) the unit’s rent is reduced or subsidized by the government. In addition, the PTFA will not apply if the lease wasn’t in effect at the time of the notice of foreclosure.

  • Are there other notable items?

The PTFA also provides additional protections to tenants in residential housing who receive rental voucher assistance under Section 8 of the United States Housing Act of 1937 that aren’t discussed here. Those provisions should be consulted in situations involving foreclosures of these properties.

  • What does the future hold?

The PTFA is set to expire in December 2014. Will it? Or will Congress extend it again such that it assumes a more familiar, quotidian role in future residential foreclosure/lease situations? Time will tell.

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