So, I hear you’re scooping up all the cheap residences around the Valley and planning to toss the tenants who look like “questionable” renters, based on the condition they’re keeping the property in, right? Oops. The Protecting Tenants at Foreclosure Act of 2009 (PTFA), part of the Helping Families Save Their Homes Act of 2009 (Pub. L. 111-22, approved May 20, 2009), requires that tenants residing in foreclosed residential properties be provided notice to vacate at least 90 days in advance of the date on which you want to have the tenants vacate your new property. Except where the purchaser will occupy the property as his/her/their primary residence, the term of any bona fide lease also remains in effect for the balance of the term. Oops, some more – but read on.

With the unprecedented number of foreclosures, tenants often were caught unaware that the residential property in which they reside was being foreclosed and were given little notice of the need to vacate the property. The objective of these new protections is to ensure that tenants receive appropriate notice of foreclosure and are not abruptly displaced.

Sections 702 and 703 define the scope of PFTA’s coverage over residential properties. The Section 702 requirements to provide tenants with at least 90 days’ advance notice to vacate and to preserve the term of any bona fide lease apply to foreclosures on all Federally related mortgage loans or on any dwelling or residential real property. Section 703 makes conforming changes consistent with the Section 702 requirements to the Section 8 rental voucher assistance provisions of the United States Housing Act of 1937 (1937 Act). (All these provisions “sunset” on December 31, 2012, by the way.)

The American Recovery and Reinvestment Act of 2009 (Pub. L. 111-5, approved February 17, 2009) (Recovery Act) contains similar protections under the heading “Community Development Fund” in Title XII of Division A, which applies to emergency assistance funding provided for the Neighborhood Stabilization Program, if you want to read more about that.
Let’s focus on the coverage of Section 702 in this post – that coverage is very broad. Section 702 applies, commencing after May 20, 2009, to “any foreclosure” on (1) a federally related mortgage loan, or (2) any dwelling or residential real property. Section 702 provides that “federally-related mortgage loan” has the same meaning as that provided in section 3 of the Real Estate Settlement Procedures Act (RESPA) (12 U.S.C. 2602).

The definition of federally-related mortgage loan is very broad in RESPA, but federally-related mortgage loans represent only part of Section 702’s coverage. Section 702 further covers “any dwelling or residential property,” and that extends the requirements to all residential property foreclosures, regardless of type or entity involved in the foreclosure, no matter whether the tenants receive any type of housing assistance.

The tenants to whom the notice must be provided must be bona-fide tenants, as this term is defined in Section 702(b). Section 702(b) defines “bona fide lease or tenancy,” and under this definition, bona fide tenants do not include the mortgagor or the child, spouse or parent of the mortgagor. (See 702(b)(1)) With respect to the lease, Section 702(b)(2) and (3) provide that a bona fide lease or tenancy must have been the result of an arms-length transaction, and the lease or tenancy requires the receipt of rent that is not “substantially less”(whatever that means these days) than fair market rent for the property or the unit’s rent is reduced or subsidized due to a federal, state, or local subsidy. Section 702(a)(2)(B) clarifies that the protections provided by this new law are minimum protections and do not supersede any greater protections (longer advance notice or additional protections) provided by state or local law. California’s got a law on the books already, I understand.
So, here’s when the requirement of Section 702 to provide at least 90 days notice to tenants applies:

(1) The advance notice applies to tenants in any foreclosed dwelling or residential real property, regardless of the type of loan or other security interest on the property.

(2) An advance notice of 90 days is the minimum period of notification. A longer period may be provided, for example, if greater protections are provided by state or local law.

(3) Responsibility for providing the advance notice to tenants falls on the immediate successor in interest of the property, which usually is the purchaser.

(4) The notice must be given to anyone whom, as of the date of the notice of foreclosure, is a bona fide tenant, whether or not there is a lease.

In addition, Section 702 provides that a tenant under any bona fide lease entered into before the notice of foreclosure has the right to occupy the premises until the end of the remaining term of the lease. The only exception to preserving the remaining term of the lease is for a purchaser who will occupy the unit as a primary residence. Even under this exception, however, the tenant must still be provided with the 90-day advance notice to vacate.

Once again, the lease or tenancy must meet the following requirements to be “bona fide” for purposes of Section 702 applying:

(1) The tenant cannot be the mortgagor or the child, spouse, or parent of the mortgagor,

(2) The lease or tenancy must be the result of an arms-length transaction, and

(3) The rent required under the lease cannot be substantially less than “fair market rent” for the property or the rent is subsidized by a federal, state or local subsidy.

So, cagey residential investor, scoop away, but don’t salivate over the forthcoming “rent bumps” until you check your compliance obligations under these federal statutes and any that Arizona may pass that are even more stringent.