Protecting Tenants at Foreclosure Act: California Court of Appeal

Real Estate Litigation Attorney
by Nicholas Kanter
818-907-3289

Five years after the Protecting Tenants at Foreclosure Act was passed, the California Court of Appeal recently published its first opinion interpreting the Act in depth.

The PTFA, a federal statute, was passed in 2009 as an effort to protect tenants from being quickly displaced from a rental property following a foreclosure sale. Prior to the PTFA, a foreclosure sale would generally eliminate a lease that was junior to the deed of trust for the subject property.

As a result, the purchaser at a foreclosure sale was able to file an unlawful detainer lawsuit against tenants in a foreclosed property following the expiration of a Three Day Notice to Quit. The PTFA changed this.

Under the PTFA, a purchaser at a foreclosure sale takes title to the property subject to the rights of a bona fide tenant residing in the property under a bona fide lease, with certain exceptions.

For example, where the lease is terminable at will, or the purchaser intends to occupy the property as his/her primary residence, the tenancy can be terminated upon 90 days written notice to the tenant. However, if these exceptions do not apply, a foreclosure purchaser must generally honor the bona fide tenancy through the end of the lease.

In Nativi v. Deutsche Bank Nat’l Trust Co., (Cal. Ct. App. Jan. 23, 2014), Deutsche Bank purchased a residential property at a foreclosure sale in August 2009. At the time of the sale, Rosario Nativi was renting a converted garage unit on the property pursuant to a lease that did not terminate until June 1, 2010. Following the sale, Nativi was displaced from the property and sued Deutsche Bank for a number of landlord-tenant causes of action, including wrongful eviction, breach of the covenant of quiet enjoyment, illegal entry of landlord and illegal lockout.

Ultimately, the trial court granted a motion for summary judgment filed by Deutsche Bank finding the foreclosure sale extinguished the lease under California law, and therefore Deutsche Bank, as the immediate successor in interest in the property, did not step into the shoes of the landlord.

The Court of Appeals reversed the trial court finding that under the PTFA,

…a subordinate bona fide lease survives foreclosure for the remainder of the term by operation of the Act regardless of the state law to the contrary and, consequently, the bona fide tenants under that lease and the immediate successor in interest in the foreclosed property have a landlord-tenant relationship, although the lease may be terminated as provided in the Act.

While the Court’s holding is not surprising in light of the PTFA’s language, it reinforces the importance of the foreclosure purchaser to take steps to determine if the purchased property is tenant occupied, and if so, the terms of the tenancy. Moreover, if a bona fide tenancy exists, based on the Court’s ruling, the purchaser becomes the tenant’s landlord and should act accordingly or risk claims by the tenant.

Although the Nativi ruling focuses on the rights of bona fide tenants under the PTFA, it also touches an important but overlooked aspect of the Act.

In particular, the PTFA does not explicitly address whether a bona fide tenant is required to pay rent to the new owner of the property, and if so, whether the new owner can terminate the tenancy for failure to pay rent without waiting 90 days. Nativi appears to answer this question in the affirmative.

As quoted above, the Court held that “bona fide tenants…and the immediate successor in interest…have a landlord-tenant relationship…” In a landlord-tenant relationship, the tenant pays rent to the landlord.  Furthermore, the Court relied on administrative construction of the PTFA to support its ultimate findings.  One of the administrative guidelines relied upon was a release by the FDIC which stated: “For tenants under a lease who are current on their rental obligations, PTFA prohibits eviction prior to the end of their lease terms…”  (Emphasis added).

This implies that tenants must be current on their lease to enjoy the protections of the PTFA.  A logical conclusion is thus, if a tenant is not current on his/her lease, the new owner may terminate the tenancy prior to 90 days for failure to pay rent.

The lesson learned here is this: anyone purchasing a residential property at a foreclosure sale should take steps to ascertain the status of the occupants in the property.

If tenants are occupying the property under a bona fide lease the purchaser should try to obtain a copy of the lease to determine the rights and obligations of both the tenant and the landlord (i.e., the purchaser) thereunder. Depending on the lease terms, the purchaser may be able to terminate the lease upon proper notice to the tenant, or may have to honor the lease until it expires.

Nicholas Kanter is a Real Estate Litigation Attorney at our firm. Contact him via email: nkanter@lewitthackman.com.

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