How Does Foreclosure Affect Tenancy?

QUESTION:   I am a property manager. A tenant in a property I manage recently received a formal notice of a foreclosure sale. The tenant called me and said he is not going to pay next month’s rent. He also claims that because of the foreclosure, he is entitled to a refund of his entire security deposit. What should I do?

ANSWER:  Tenants in properties that are involved in foreclosure proceedings have certain legal protections under both state and federal laws that entitle them to either stay or leave, in certain circumstances.

Under North Carolina law, a tenant who resides in residential property having 15 dwelling units or less may terminate his or her lease after receiving what is known as a “notice of sale” issued by the foreclosing lender. To properly terminate the lease, the tenant must give written notice to the landlord (or the landlord’s agent) and the effective date of the termination may be no sooner than 10 days after the date of the notice of sale. Upon termination of a rental agreement in this manner, the tenant is liable for the rent due pursuant to the rental agreement, prorated to the effective date of the termination, payable at the time that would have been required by the terms of the rental agreement.  The security deposit would be handled in the same way you would handle any other security deposit as of the termination of the tenancy.

Unlike the North Carolina statute, which authorizes tenants to terminate a lease, a federal statute known as the “Protecting Tenants at Foreclosure Act” protects tenants who wish to stay in the leased premises. The statute forces the purchaser at a foreclosure sale to recognize an existing lease, as long as that lease is with a “bona fide tenant”. A tenant will be considered bona fide if he or she is not the owner of the premises (or a close family member), if the lease was the result of an arms-length transaction, and if the rent specified in the lease is not “substantially” less than fair market rent. There is an exception for a purchaser who buys a foreclosed property and will occupy the premises as a primary residence. That type of purchaser is permitted to terminate an existing lease but must provide the tenant with a 90-day notice to vacate.

The bottom line for your situation: the fact that a property is “in foreclosure” does not relieve the tenant from the obligation to pay rent as required by the lease, at least until that lease is properly terminated. You should provide the tenant with a copy of the statute (NCGS 42-45.2) and then wait to see if he provides written notice of termination.