Tip of the Month October 2009

Tenant Rights When a Landlord Loses the Building to Foreclosure

Submitted by Maisa Jean Frank, J.D. Candidate, 2010,

University of Minnesota Law School

When a landlord faces losing rental property to foreclosure, it is often a confusing process for tenants.  In Minnesota, most residential property is foreclosed non-judicially, through a foreclosure by advertisement.  When the foreclosure process begins, dates will be set for a sheriff’s foreclosure sale and a redemption period.  The tenant must be given notice of the sale pursuant to Minn. Stat. § 580.042.  The dates of the sheriff’s foreclosure sale and the redemption period in Hennepin County can be found on the Sheriff’s Department website: http://www4.co.hennepin.mn.us/webforeclosure. 

Sheriff’s sale.  The sheriff will hold a public auction for the property.  Often the bank that holds the mortgage bids at the sheriff’s sale.

Redemption period.  After the sheriff’s sale, the owner (landlord) generally has six months[1] to sell the property or pay the balance to the lender and redeem the property. 

Postponement by Landlord.This year, the Minnesota legislature enacted a new law (Minn. Stat. § 580.07, subd. 2) that allows owners of one to four unit properties classified as homestead to unilaterally postpone the sheriff’s sale for five months.  If the landlord exercises this option, the redemption period will be reduced to five weeks.  If your client lives in a duplex, for example, be sure to check when the redemption period ends.

DURING THE REDEMPTION PERIOD

During this period, the rights and responsibilities of the landlord and the tenant remain unchanged.  This means the tenant must continue to follow the terms of the lease, including making timely rent payments and giving proper notice to vacate; the landlord must continue to properly maintain and manage the property.

Paying Rent.  The tenant should continue to pay rent to the landlord, unless the tenant has received notice from the landlord’s lender that the tenant should pay the rent to a “receiver” that the lender has appointed to collect rent during the redemption period.  Minn. Stat. § 504B.178, subd. 8 allows a tenant to withhold the amount of the security deposit from rent for the last month of the foreclosure redemption period on the grounds that the security deposit should serve as all or part of the last month’s rent.

New Leases.  The landlord must give prospective tenants written notice that the property is in foreclosure, and can only legally enter into periodic lease agreements with a term of two months or less, or a fixed term not extending beyond the redemption period.  (Minn. Stat. § 504B.151)  If a purchaser at the sheriff’s sale (usually the landlord’s lender) agrees in writing with the landlord that the purchaser will continue to honor the lease, these requirements do not apply.

Saleof Building During the Redemption Period.  If the landlord sells the building during the redemption period, the new owner takes over the lease obligations of the previous owner.  The existing leases continue to govern the relationship.

“Cash for Keys.”  Sometimes when lenders buy foreclosed buildings, they offer renters cashsettlements in exchange for voluntarily moving out of the property at a specified time.  Lenders are not obligated to offer any cash.  Tenants often use a cash for keyssettlement to help with moving expenses.

AFTER THE REDEMPTION PERIOD ENDS

The new building owner must give the tenant proper notice before requiring the tenant to move.  In May 2009, a law was enacted (P.L. 111-22) that requires all new owners of foreclosed property to give all tenants, including those who do not have written leases, at least ninety days’ notice of termination of their lease, or fulfillment of the lease, whichever is greater. Tenant advocates will argue that a lender or other purchaser is not an owner until the redemption period ends, and therefore cannot give the ninety-day notice until the redemption period ends.  Note that some lenders may try to argue that the ninety-day notice period begins before the end of the redemption period.

Term Leases.  Leases for a fixed period of time that began before the landlord received notice of foreclosure continue with the new owner until the end of the lease.  An exception applies to new owners who intend to reside in the property or who sell to someone who intends to reside in the property; they may terminate a lease before the end of the term, but must still provide ninety days’ notice.

Month-to-Month Leases.  The new owner must give month-to-month tenants at least ninety days’ notice of termination.  A month-to-month tenant has the right to end the tenancy by giving the new owner proper written notice of at least a full rental period (typically one month).

Paying Rent.  After the redemption period ends, if the new owner asks the tenant to continue paying rent and tells the tenant to whom payments should be sent, the tenant should do so in order to remain in the property.  If the new owner does not ask the tenant to pay rent, then the tenant does not have to pay rent. 

Section 8 Vouchers.  Tenants with Section 8 vouchers have similar rights as tenants with term leases when the property goes into foreclosure, with the additional protection that only new owners who themselves intend to reside in the property may terminate the lease early.  Upon receiving notice of foreclosure, Section 8 tenants should contact their Section 8 office to ask about program-specific policies.  In particular, moving out before the end of a lease may cause a Section 8 tenant to lose his or her status.

Security Deposits.  When the landlord’s interest in the premises ends, the original landlord has sixty days to either transfer the deposit to its successor in interest and inform the tenant of the amount transferred, or return the deposit to the tenant, with interest.  If a tenant fears she will not receive her deposit back, she can withhold the amount of the deposit from her last month’s rent as discussed above.

RESOURCES

HOME Line: www.homelinemn.org; 612.728.5767 (phone advice and information for tenants)

LawHelpMN.org: www.lawhelpmn.org (fact sheets on various housing topics)

National Housing Law Project: www.nhlp.org (resources for tenants and their advocates)

National Low Income Housing Coalition: www.nlihc.org (“Renters in Foreclosure Toolkit” is particularly helpful.  www.nlihc.org/template/page.cfm?id=227)