Tuesday, February 2, 2010

Residential Tenants’ Rights and Responsibilities During Foreclosure

Article Abstract

An infrequently discussed issue is the plight tenants face when their landlords go into foreclosure.  This article highlights the impact of the foreclosure process on tenants, and discusses their rights and responsibilities as well as the preventative measures that can be taken to protect their interests.


            The last quarter of 2008 showed national record highs in mortgages that were 30 days past due and those that were in foreclosure.[1] Due to the foreclosure crisis facing this country (less so in this state[2]), tenants are facing eviction due to their landlords’ lenders foreclosing on their mortgages.  This article will discuss the rights and responsibilities of New York residential tenants during the entire foreclosure process and what preventative measures can be taken to protect the tenants’ interests.

Tenant’s Rights and Responsibilities Prior to the Judgment of Foreclosure
            A typical foreclosure starts when the landlord (mortgagor) defaults on his loan payments followed by the lender’s acceleration of the entire outstanding balance of the loan. If the lender decides to do a judicial foreclosure, the next step is to file a summons, complaint and lis pendens against the property owner. The Home Equity Theft Prevention Act, which became effective in February 2007, created RPAPL § 1303, which requires that a particular notice be delivered with the summons and complaint if the action involves residential real property consisting of owner-occupied one-to-four family dwellings.[3] This required notice lets the homeowner know, among other things, that he is in danger of losing his home and that he should contact an attorney to get advice on how to protect himself. Although the statute specifies that this notice must be sent to the mortgagor of an owner-occupied one-to-four family dwelling, it does not mention whether the tenants of the mortgagor get a similar notice. Likewise, newly enacted RPAPL § 1304 only requires that a lender or loan servicer give a similar notice to the borrower of a subprime home loan or a non-traditional home loan at least ninety days before the lender commences legal action against the borrower; it again does not refer to any tenants that the borrower may have on that property.[4] In the case of a foreclosure of a residential property containing not more than three units, RPAPL § 1320 demands that another notice be inserted into the summons[5], which again is only addressed to the property owner and not to the other unit occupants, if any.
           Even though New York law does not require that these special notices go out to the mortgagor’s tenants, a lender, who wishes to foreclose on the property free of any occupants, will have its process server deliver a summons and complaint to each tenant at the premises.[6]  The lender will likely list all known tenants of the premises in the caption of the action as well as the unknown occupants by inserting fictitious defendants’ names (such as ''John Does”).[7] On the other hand, if the lender believes that having the tenant(s) will add value to the property (more likely in the commercial context), then it may choose to omit the tenant(s) from the foreclosure action.
RPAPL § 1311(1), which defines who the “necessary” parties to a foreclosure proceeding are, requires, inter alia, that a tenant whose interest is subordinate to the plaintiff’s lien shall be named as a defendant[8] and would thus require the lender to deliver a summons and complaint to the defendant-tenant.  However, month-to-month tenants have been held to not be necessary parties.[9] Similarly, a tenant who has a superior interest in the property, because the lease was made prior to the mortgage or because the mortgagee and the tenant entered into a subordination or non-disturbance agreement, is not a necessary party.[10]

Even though tenants are necessary parties to a foreclosure, they are not indispensible parties. Thus, where tenants moved to dismiss a foreclosure complaint for failure to join them as parties, the court denied the relief, ruling that tenants are not such indispensible parties that their absence would mandate a dismissal of the action. Similarly, that a tenant may not have been named as a party defendant does not render a judgment of foreclosure and sale defective, nor would such a declination to name a tenant impede the granting of summary judgment. (Citations omitted.) [11]

One important exception to the rule that a tenant is a necessary party to the foreclosure action applies to rent controlled and rent stabilized tenants, whose rights are not affected by such a proceeding.[12]
            With the enactment of CPLR § 6501, “it is now necessary to file a lis pendens in the action to bind parties subsequently acquiring an interest in property.”[13] A tenant whose lease was recorded prior to the filing of a lis pendens is not bound by a subsequent foreclosure and even where there is an unrecorded lease (with a junior interest to the lender), possession of the premises by the tenant can constitute actual notice to the plaintiff thereby rendering the lis pendens ineffective against the tenant in possession. In order to extinguish this type of tenant’s rights, the lender would have to name and serve the tenant in the foreclosure action.[14]
           Once the lender decides to foreclose on the landlord’s property, it will likely enforce its assignment of rent provision in the mortgage. This provision, which is found in most mortgage agreements, assigns the rents from the borrower (landlord) to the lender in case the borrower defaults on the mortgage. If the lender decides to exercise this option, it should send a letter not only to the defaulting landlord, but to the tenants as well, letting them know to send their rent to the lender.[15] In some situations, tenants may not wish to oblige by the lender’s request for rent payments and this can result in a difficult situation for the lender.

Because the lender does not become the landlord (which is probably to the lender's overall benefit), no landlord-tenant relationship exists. Consequently, no summary proceeding to obtain possession can be brought; only an action for a money judgment for rent is available. As an agent, but not a landlord, the assignee of rents does not have physical possession of the property. This remains so even if the assignment of rents clause also contains an assignment of lease aspect. (Citations omitted).[16]

While the lender may wish to collect the tenants’ rents when the landlord defaults, it may not necessarily want to maintain the subject premises. In Department of Housing Preservation and Development vs. Greenpoint Savings Bank, the City of New York had a rare victory against such a foreclosing lender.[17] The Queens County Civil Court found that the lender should be fined for failing to provide heat and hot water and failing to file Multiple Dwelling Registration Certificate due to the fact that after the lender received judgment of foreclosure and sale, it waited 29 months to hold sale all the while failing to inspect premises, advise tenants, file the Certificate, or communicate with utility providers.  The more typical scenario, however, is illustrated in Greenpoint Bank v. John, which involved a motion brought by tenants for a determination that mortgagee was owner of property under Multiple Dwelling Law, and to compel it to make repairs.[18] There, the Second Department affirmed the Kings County Court finding that the mortgagee was not in direct or indirect control of property so as to trigger an obligation to make repairs.[19]
            One way that the lender can avoid these types of situations is to have the court appoint a receiver, an officer of the court. A receiver stands in the shoes of the landlord (borrower) to collect the rents and maintain the property.[20] “Unless the mortgage is missing a very standard clause (and it would be unlikely) a receivership is obtained by court order applied for without notice to anyone.”[21] This type of order can sometimes take several weeks to get signed, unless of course there is an emergency situation at the premises (burst pipes or some imminent danger to the health, safety and welfare of the tenants).[22] Although a receiver is required to take care of the subject premises, there have been cases where the property is not looked after at all.[23]  When a receiver neglects to maintain the foreclosed property, the receiver cannot be held personally liable, but his commissions (the typical way a receiver gets paid) could be denied[24] and the tenants can raise the warranty of habitability against the misbehaving receiver.[25]  It should also be noted that once a receiver has been appointed, a tenants’ motion for the appointment of an administrator (pursuant to RPAPL Article 7-A) will not be granted since its functions would usually be those of a receiver.[26]
            Before a receiver’s appointment is finalized, if there is a receiver at all, circumstances can arise wherein occupants in possession cause damage to the premises. A remedy for this situation is found in RPAPL § 211, which states that if a party commits waste upon or does other damage to property during the pendency of an action to recover a judgment affecting the title to such property, an order without notice or security may be granted restraining the party from committing further waste or damage to the property. Contempt is available as a remedy for disobedience of this order.[27] Bringing (or threatening) criminal sanctions against the mortgagor or against other parties (like tenants) is another way to prevent the property from falling into disrepair.[28] A New York City tenant can also review his landlord’s mortgage[29] for a standard provision that empowers the lender to enter the premises to protect it from waste or damage.[30]
            In cases where there is a receiver and there are tenant security deposits being held by the landlord, both the order of appointment and GOL § 7-105(1) mandate that the deposits be turned over to the receiver, pursuant to the statute, within five days of the receiver’s qualification.[31] GOL §7-105(3) states that failure to comply is a misdemeanor. Also, where there is an assignment of rent in the mortgage and a receiver has been appointed, the right of the receiver to collect the rents is given preference over the assignment[32] resulting in the tenants’ having to then pay their rent to the receiver instead.

Tenants Rights and Responsibilities After Foreclosure

            At the foreclosure sale (which can be several months after the judgment of foreclosure and sale is entered) a bidder makes an offer to the court for the property, which the court can accept or reject. After the sale (and after the deed is delivered), the purchaser takes the property and if it is still subject to a leasehold, he acquires the previous landlord’s rights under the lease. The tenants become liable to the purchaser, who can then maintain an action for the rent due under the lease.[33] In case there are tenants (or even the previous landlord) who refuse to leave the premises, the new owner can either try to evict the occupants through a writ of assistance[34] or a special proceeding pursuant to RPAPL § 713.[35]  A tenant should keep in mind however, that if he was in possession (with or without a lease) prior to the landlord’s mortgage and the tenant was not been named in the foreclosure action, “or a tenant who was junior to the mortgage being foreclosed but who nevertheless was not made a party, [he] cannot be dispossessed by the purchaser at the foreclosure sale.”[36]
           As previously mentioned, rent-regulated tenants get special protection in the case of a foreclosure. The purchaser of a foreclosed property with rent-regulated tenants, takes the premises subject to those tenancies and can only evict them pursuant to the applicable statute or guidelines.[37] In New Jersey, all types of tenants get this type of protection under the Ant-Eviction Act, except if they are a tenant of an owner-occupied home with no more than two units, or a unit set aside for developmentally disabled members of the owners’ immediate family, or a hotel, motel, or guest house.[38] Fannie Mae has recently implemented a new form of tenant protection as well – the National Real Estate Owned (REO) Rental Policy.

The new policy applies to renters occupying foreclosed properties at the time Fannie Mae acquires the property. Renters occupying any type of single-family property will be eligible including residents of two- to four-unit properties, condos, co-ops, single-family detached homes and manufactured housing. Eligible renters will be offered a new month-to-month lease with Fannie Mae or financial assistance for their transition to new housing should they choose to vacate the property. The properties must meet state laws and local code requirements for a rental property.[39]

            If a tenant is forced to leave his premises, he may be entitled to sue his previous landlord for damages (including the costs associated with getting a new lease, moving expenses and the increase in his rent) under the breach of covenant of quiet enjoyment.[40] (Whether the landlord is able to actually pay for such damages is another issue however.) The covenant of quiet enjoyment is implied in all leases. However, if the tenant’s lease with the prior landlord contains a mortgage subordination clause, which will subordinate the lease to any future mortgage, the covenant of quiet enjoyment cannot be breached by a mortgage foreclosure.[41]
The Proactive Tenant

Before a landlord defaults on his mortgage, there are some ways that a tenant can protect himself from facing an eviction from the bank or the new owner.  In the case of a tenant who had a lease prior to the landlord getting his mortgage, getting a non-disturbance agreement with the lender would allow for the lease to stay in force so long as the tenant is not in default. Many leases do not contain a non-disturbance provision, so it would have to be negotiated between the parties as part of the lease agreement. 
If a tenant is unable to obtain a non-disturbance agreement, it should at least request a representation from its landlord that it has not received a notice of default from its mortgagee or superior lessor; although this will not protect a tenant from a future such default, at least the tenant will know that it is not signing a lease with a landlord who may already be having problems with its lender or lessor.[42]
             California tenants are able to request a copy of the notice of default before such notice recorded against the property but after the landlord’s mortgage (or deed of trust) is recorded.[43] This can give the tenant more time to find a suitable replacement unit and lessen his risk of surprise that a foreclosure proceeding has been initiated against his landlord. Unfortunately, no such right exists for tenants in New York, making it all the more difficult for those tenants facing an eviction after foreclosure.[44]


            For many residential tenants in New York, the balance of bargaining power is always in favor of the landlord. This results in less preferable provisions in their lease agreements which can have detrimental effects on the tenant’s rights when his landlord defaults on the property’s mortgage. That is why it is so important for tenants to understand their rights and responsibilities when their landlord is facing foreclosure; it could mean the difference between losing their home abruptly and without much notice or in a more hospitable manner that suits their needs and concerns.

Author's Bio

Anna Sklyarsky, Esq. earned her J.D. from New York Law School in 2009 and graduated cum laude from Baruch College's School of Public Affairs where she received a B.S. in Real Estate & Metropolitan Development.  Ms. Sklyarsky has actively been involved in the real estate field since college, where she was secretary of the Real Estate Club.  While attending NYLS, Ms. Sklyarsky was President of the Real Estate Law Students Association and an Honorary Student Co-Chair of the New York County Lawyers Association - Real Property Section, of which she is now the Vice Chair.  

The author may be reached at this email address:   annas227@gmail.com

[1] See Amy Hoak, Delinquent Mortgages Hit Record Level, Wall St. J (Mar. 5, 2009) at http://online.wsj.com/article/SB123626569437640523.html
“A record 5.4 million U.S. homeowners with a mortgage, or nearly 12%, were either behind on payments or in foreclosure at the end of last year… The percentage of loans at least 30 days past due rose to a record 7.88%, up from 6.99% in the third quarter and 5.82% a year earlier -- the biggest quarterly jump for delinquencies since the survey began in 1972.”
But also see Catherine Rampell, Foreclosure Rates Aren’t Really That High, New York Times (Mar. 2, 2009) at http://economix.blogs.nytimes.com/2009/03/02/foreclosure-rates-arent-really-that-high/
A new study by University of Virginia’s William Lucy and Jeff Herlitz found that 62% of the nation’s foreclosures in 2008 occurred in just Arizona, California, Florida and Nevada.
[2] See Press Release, State of New York Banking Department, New York Foreclosure Filings Down in Fourth Quarter 2008, Reflecting Impact of State Legislation and Initiatives (Jan. 23, 2009) at http://www.banking.state.ny.us/pr090123.htm
“In the fourth quarter of 2008 New York State foreclosure filings decreased 42 percent compared to the third quarter of 2008 and decreased 33 percent compared to the fourth quarter of 2007.  For the full year 2008, foreclosure filings increased 29 percent compared to an increase of 81 percent for the United States. In 2008, New York State ranked 35th among all states in total foreclosure filings, which is an improvement from 2007 when New York ranked 27th in total filings.” (Emphasis added.)
[3] N.Y. Real Property Law § 265-a (McKinney’s 2008); N.Y. Real Property Actions and Proceedings Law § 1303 (McKinney’s 2008).
[4] N.Y. RPAPL § 1304 (McKinney’s 2008).
[5] N.Y. RPAPL § 1320 (McKinney’s 2008).
[6] See J. Bruce Bergman, Bergman on New York Mortgage Foreclosures, § 2.11 (rev. 2008).
[7] Id.
[8] N.Y. RPAPL § 1311 (McKinney’s 2008).
[9] Bergman, § 12.03.
[10] Id.
[11] Id.
[12] Id.
[13] Id at § 15.02.
[14] Id.
[15] Id at § 2.17.
[16] Id.
[17] 169 Misc.2d 61, 646 N.Y.S.2d 601 (1995), discussed in Bergman at § 2.20.
[18] 256 A.D.2d 548, 682 N.Y.S.2d 438 (1998), discussed in Bergman at § 2.20.
[19] Id, 682 N.Y.S.2d 439.
[20] Bergman at § 2.26.
[21] Id.
[22] Id.
[23] See Anthony Ramirez, Tenant Says Receivership Has Been All Downhill for Co-op, New York Times (Mar. 30, 1997) at http://query.nytimes.com/gst/fullpage.html?res=9E05E5D6153AF933A05750C0A961958260.
[24] Bergman at § 10.21.
[25] Id at § 10.15.
[26] Bergman at § 10.04.
[27] Id at § 9.02.
[28] Id. at § 9.04 –
“For the instance of damage done by persons other than the mortgagor, the category of offense is criminal mischief and Penal Law sections 145.00, 145.05, 145.10 and 145.12 should be consulted.”
See Footnote 1:   Penal Law § 185.10: A person is guilty of fraudulent disposition of mortgaged property when, having theretofore executed a mortgage of real or personal property or any instrument intended to operate as such, he sells, assigns, exchanges, secretes, injures, destroys or otherwise disposes of any party of the property, upon which the mortgage or other instrument is at the time a lien, with intent thereby to defraud the mortgagee or a purchaser thereof. Fraudulent disposition of mortgaged property is a class A misdemeanor.
[29] This can be done by visiting the City’s Department of Finance website and using ACRIS (Automated City Register Information System) to find the latest mortgage (and other documents) recorded against their property.
[30] Bergman at § 9.05.
[31] N.Y. General Obligations Law § 7-105(1) (McKinney’s 2008).
[32] Bergman at § 10.15.
[33] Id. at § 30.05.
[34] RPAPL § 221 gives a party that is entitled to possession, the right to get a court order enforcing such right and, if necessary, having a sheriff “put that [party] into possession.”
[35] RPAPL § 713 was designed for situations where there is no landlord-tenant relationship, such as in the case of a purchaser of a foreclosed property and the occupants of that property.
[36] Bergman at § 33.04.
[37] Id.
[38] N.J. Stat. Ann. § 2A:18-61.1 (West 2000). A tenant may be evicted for only “good cause” such as failure to pay rent.
[39] Press Release, Fannie Mae, Fannie Mae Announces National REO Rental Policy, (Jan. 13, 2009) at http://www.fanniemae.com/newsreleases/2009/4581.jhtml
[40] Bergman at § 35.03 citing Mack v. Patchin, 42 N.Y. 167, 42 N.Y. (N.Y.S.) 167, 42 N.Y. 167, 1 Am. Rep. 506 (1870); Title Guarantee & Trust Co. v. Twenty-First St. & Fifth Ave. Corp., 110 Misc. 126, 180 N.Y.S. 358 (1920).
[41] Id.
[42] Robert C. Epstein, Protecting Tenants in a Soft Market (Nov. 28, 2008) available at http://www.nyrealestatelawblog.com/alterations_generally/index.html
[43] Cal. Civ. Code § 2924b (West 2009)
[44] The Associated Press, States act for renters caught in foreclosure trap; New laws require mortgage holders to give sufficient notice to tenants (Oct. 16, 2008) at http://www.msnbc.msn.com/id/27226273/
A few states recently passed or proposed laws to protect renters by requiring mortgage holders to provide sufficient notice for tenants living in foreclosed properties.”

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