Lawsuits by Foreclosed-upon Tenants

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The mortgage crisis that began in 2006 has resulted in the foreclosure of many tenant-occupied homes. Most leases used to be wiped out after foreclosure–the rule was that only leases that predated the mortgage (were signed before the mortgage was recorded in the county Recorder's Office) survived the foreclosure sale. Now, even leases signed after the mortgage was recorded (the overwhelming number of leases) will survive the sale, if the bank itself buys the property. But if an individual buys and intends to live there, the tenant at least gets the benefit of 90 days' notice before having to move out. In both situations, the tenant must be "bona fide." This means the tenant must not be the spouse, parent, or child of the former owner/landlord; the lease transaction must have been conducted "at arms' length," and the rent must not be substantially below fair market value.

Within this set of legal rules, there will be tenants who lose their leases–either because the buyer of the foreclosed property intends to occupy it, or because the tenants don't meet the "bona fide" tenant criteria. But these tenants have done nothing wrong. Do they have any recourse against the former, defaulting owner, who broke the lease by letting the property fall into foreclosure? Technically, yes. Here's why: After signing a lease, the landlord is legally bound to deliver the rental for the entire lease term. In legalese, this duty is known as the "covenant of quiet enjoyment." A landlord who defaults on a mortgage, which sets in motion the loss of the lease, violates this covenant, and the tenant can sue for the damages it causes. Small claims court is a perfect place to bring such a lawsuit. The tenant can sue for moving and apartment-searching costs, application fees, and the difference, if any, between the new rent for a comparable rental and the rent under the old lease. Though the former owner is probably not flush with money, these cases won't demand very much, and the judgment and award will stay on the books for many years. A persistent tenant can probably collect what's owed, eventually.

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