Featured Guest blogger at the National Law Review, W. Alexander Burnett of Williams Mullen provides great insight on the evolving role of certain lenders becoming landlords after foreclosures:  

 

Protecting Tenants at Foreclosure Act of 2009, Public Law 111-22

Introduction

On May 20, 2009, President Obama signed into law the Protecting Tenants at Foreclosure Act (the “PTFA” or the “Act”). The PTFA was part of the larger “Helping Families Save Their Homes Act of 2009.” The Act provides new protections to bona fide tenants in any federally-related mortgage loans or any residential real property. Before enactment of PTFA, a new owner of a foreclosed property could take immediate action to evict an existing tenant. The PTFA requires the foreclosing party to allow the tenant to remain in the premises through the end of the lease term, and it requires the foreclosing party to provide a bona fide tenant with at least 90 days notice to vacate. As a result, lenders and other parties who foreclose on residential rental property occupied by a tenant have no choice but to play the role of landlord until the expiration of the tenant’s lease. This article explains who is affected by the Act, the requirements under the Act, and the respective rights, remedies and obligations for both foreclosing parties and tenants who occupy the foreclosed properties.

The Basics

Who Is Affected by the PTFA?

The PTFA applies to any residential real property or any “federally-related mortgage loan” acquired through foreclosure. The only properties not covered by the Act are non-residential properties that were not foreclosed in connection with a federally-related mortgage loan. Note that one court in New York has held that the PTFA can only be enforced where “federally-related mortgage loans” are involved and that the enforcement of the PTFA in all residential loan situations “would extend federal control to arguably every area of human endeavor and vitiate the constitutional framers’ requirement that ‘federalism’ involves a limited universe of power and that the states retained all but expressly ceded powers.” Collado v. Boklari, 892 N.Y.S.2d 731 (N.Y. Dist. Ct. 2009). It is important to note, however, that this case has been distinguished by at least one other court, and that other courts have held that the PTFA applies in connection with non-federally-related mortgage loans.

The PTFA protects the rights of a “bona fide tenant,” which is defined by the Act as a person in possession of the property with or without a lease, provided that:

i. the tenant is not the mortgagor or the child, spouse, or parent of the mortgagor;

ii. the lease or tenancy was the result of an arms-length transaction; and

iii. the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property, or the rent is reduced or subsidized due to a federal, state, or local subsidy.

All three elements must be satisfied for a tenant to be a bona fide tenant.

The new restrictions in the PTFA are binding on any “immediate successor in interest” in the property. While the Act does not define “immediate successor in interest,” the term generally means the first party to take title to the property following the foreclosure. Note that the PTFA does not specifically address the situation involving a deed in lieu of foreclosure.

What Are the Effective Dates of the Act?

The PTFA became effective immediately upon enactment on May 20, 2009 and applies to all foreclosures that occur after enactment; pending foreclosures included. The provisions of the Act expire on December 31, 2012.

What Requirements Are Imposed on an Immediate Successor in Interest?

First, a successor must allow any existing tenants to remain in the premises until the end of the lease term. If, however, the property is sold to a purchaser who will occupy the property as a primary residence, then the new owner can give 90 days notice of the early termination of the lease. Second, if the lease has expired, is month-to-month or is terminable at will, the successor must give the tenant at least 90 days notice before requiring the tenant to vacate the property. The PTFA, therefore, places drastic new burdens on lenders and other foreclosing parties, especially when there is a significant amount of time remaining under a residential lease, because the lender must serve as a landlord throughout the duration of that lease.

The notice to vacate must be given to the tenant by the successor. Therefore, the successor can’t give notice prior to acquiring title to the property at the foreclosure sale. Accordingly, the notice of foreclosure sale cannot also serve as the 90-day notice to vacate. It is good practice to send the notice to vacate and any other notices to the tenant by Certified Mail, Return Receipt Requested, and to keep the receipts in case they are needed to prove to a court that proper notice was given.

Unfortunately, the PTFA does not give any details or set forth the rights or remedies of the successor during the time that the tenant is allowed to remain in the property. The Act merely states that successor assumes an interest in the property “subject to the rights of any bona fide tenant.” That likely means that the successor steps into the shoes of the former landlord and assumes both the rights and responsibilities of the landlord under the lease. This, of course, raises many questions which the Act does not answer.

Reading Between the Lines: The Details Behind the PTFA

What Responsibilities Do Tenants Owe to their New Landlords?

Presumably, a tenant must abide by all of the provisions in the lease. If the tenant defaults under the lease, the Act does not preempt a landlord from evicting the tenant without giving the 90 day notice under the Act. If a tenant has stopped paying rent, for example, the new landlord should follow applicable provisions under the lease and in the Landlord Tenant Act (Va. Code § 55-217, et seq.) or the Virginia Residential Landlord Tenant Act (Va. Code § 55-248.2, et seq.) to give proper notice of the default to the tenant and then to file an Unlawful Detainer suit to evict the tenant.

The Successor Has the Burden of Proving that an Occupant Is Not a Bona Fide Tenant.

In Bank of America v. Owens, the successor issued a 90 day notice to vacate immediately after foreclosure. 2010 NY Slip Op 20164, 2010 N.Y. Misc. LEXIS 954 (N.Y. City Ct. May 5, 2010). Along with the notice to vacate, the successor also issued a questionnaire to determine if the occupant was a bona fide tenant. The questionnaire stated that, if it was not returned to the successor within five days, the successor would commence eviction proceedings. When the questionnaire was not returned, the successor filed an eviction suit immediately and well before the expiration of the 90 day period. The court held that the new burden imposed by the questionnaire was impermissible and was not authorized by the PTFA. The court also held that the burden is on the successor to show that an occupant is not a bona fide tenant.

Can Tenants File Suit Against Successors For Violating the PTFA?

No. The PTFA does not create a private right of action. In Nativi v. Deutsche Bank National Trust Co., the Bank foreclosed on property and evicted the tenants one month later without giving 90 days notice. 2010 U.S. Dist. LEXIS 51697 (N.D. Cal. May 26, 2010). The tenants’ personal property was placed on the street where it was damaged or stolen. The tenants filed suit against the Bank seeking money damages for, among other causes of action, violations of the PTFA. The court held that the PTFA does not create a private cause of action and dismissed the PTFA count. See also, Fannie Mae v. Lemere, 2010 U.S. Dist. LEXIS 67005 (E.D. Cal. July 6, 2010) (“[F]ederal courts have held that the [PTFA] does not create a federal private right of action, but indeed provides directives to state courts.”) It is important to note, however, that these tenants may have had other valid causes of action against the bank, such as conversion or unlawful ouster. In addition, it is clear from the Bank of America v. Owens case that a tenant may use a violation of the PTFA as a defense in an eviction proceeding, even though it cannot be used as the basis for an affirmative claim for damages against a successor.

Is the New Landlord Responsible for the old Security Deposit?

This question is simply not answered by the Act, and there are no cases from the Virginia state or federal courts that interpret the Act. Generally speaking, however, under Virginia law a foreclosure wipes out the lease, which suggests that the new landlord is not responsible for the security deposit. In addition, the old landlord holds the security deposit in trust for the tenant. If the old landlord fails to transfer the security deposit to the new landlord, pursuant to Va. Code § 55-507, then the tenant would have a direct claim against the old landlord. The new landlord may not have any recourse against the old landlord. Furthermore, under the PTFA the new landlord steps into the shoes of the old landlord only with respect to the real property itself and not with respect to incidentals such as the security deposit. Nevertheless, it is possible that a court making a generous interpretation of the PTFA could find that the new landlord stepped into the same shoes of the old landlord and, therefore, is responsible for the old security deposit.

Can a Successor Terminate a Lease Early Using “Cash for Keys”?

Yes. “Cash for keys” is a program offered by many mortgage lenders where the tenant agrees to turn over the property in good condition and/or before the expiration of the tenant’s lease in exchange for a cash payment from the lender. It is no different than an agreement between a landlord and tenant to modify or terminate a lease early. There is no magic to it, and there is nothing in the PTFA that prevents a successor and a tenant from reaching such an agreement. It is important, however, to ensure that the transaction is arms-length, that it is agreed to voluntarily by both the successor and the tenant, and that the parties put the agreement in writing and sign it.

© 2011 WILLIAMS MULLEN ALL RIGHTS RESERVED

 

This week’s featured bloggers at the National Law Review are from Williams Mullen.  Jamie Watkins Bruno details two options available in Virgina for defaulted loans secured by deeds:  

In Virginia, a lender holding a defaulted loan secured by a deed of trust has two primary means to enforce its remedies under that deed of trust: foreclosure by a trustee’s sale and conveyance by a deed in lieu of foreclosure. We’ve put together a brief primer summarizing the key strengths, weaknesses and procedural guidelines for each alternative to help you determine which option works best for your needs, timeline and budgetary constraints.

I. Trustee’s Sale.

The most common procedure for foreclosure is the sale of the property by a trustee, a non-judicial action. A trustee can act only in a manner authorized by the express or implied terms of the trust instrument or as authorized by statute. If the deed of trust does not provide otherwise, the provisions of the Virginia Code control as to the authority of the trustee. Foreclosure by a trustee’s sale can usually be completed within thirty (30) to forty-five (45) days after the expiration of any cure period provided by the loan documents for the default giving rise to the foreclosure, if the lender acts promptly.

A. The Trustee.

1. Duties and Obligations. A trustee is a fiduciary for both the debtor and the creditor. The trustee must not place himself in a position where the trustee’s personal interests conflict with the interests of the parties to whom he owes a fiduciary duty. A trustee who is counsel to or an employee of the noteholder must be sensitive to the obligation to discharge his fiduciary duties in an impartial manner. The mere fact that a trustee in a deed of trust securing a debt due to a corporation is a stockholder, member, employee, officer or director of, or counsel to, the corporation, however, does not disqualify him from exercising the powers conferred by the trust instrument. Trustees cannot act as purchasers, directly or indirectly, at their own sales; when a trustee buys directly or indirectly at his own sale, that constitutes constructive fraud, and the transaction is voidable. This rule also applies to a trustee who is named in a deed of trust but does not act.

2. Substitution of Trustee. If the person who is to conduct the foreclosure is not named in the deed of trust as trustee, a substitution of trustee is needed. When an instrument appointing a substitute trustee has been executed by the holders of more than fifty percent (50%) of the secured obligations, the substitute trustee can immediately execute all powers granted to the prior trustee.

B. Initial Procedures.

1. Documentation. A trustee should secure the proper documentation from the noteholder, which includes the deed of trust, the original note, title evidence (including title policies and surveys), copies of any correspondence between the noteholder and the debtor, copies of mortgage insurance or guaranty agreements, appraisal, written direction to proceed with the foreclosure and engagement letter. The trustee should verify that the noteholder has complied with all notice requirements set forth in the deed of trust.

2. Diligence. A trustee should contact the local commissioner of accounts regarding fees charged for approving and examining accounts as well as any local requirements, including proper advertisement procedures. Though the trustee is only charged with selling the property encumbered by the deed of trust, the noteholder should consider any relevant diligence issues affecting the property prior to initiating foreclosure proceedings, including environmental matters, permits, insurance, utilities, leases, appraisal, physical condition and rights in fixtures. In addition, though there is no statutory right of redemption in Virginia, the debtor does have the right to pay off the secured indebtedness before the sale; some deeds of trust provide for reinstatement of the debt if the debtor cures all defaults and pays all expenses in the manner and time provided in such deeds of trust.

3. Title. While the doctrine of caveat emptor applies in a foreclosure sale, a trustee must be aware of all liens and encumbrances affecting the property. A trustee cannot sell a greater interest in the property than the deed of trust gives him authority to sell, and any sale by the trustee will be subject to encumbrances having precedence over the deed of trust. A trustee must be aware of all encumbrances on the property, including federal tax liens, in order to properly notify all interested parties, to exercise proper discretion as to whether a fair sale can be had, and to make a lawful distribution of the proceeds of the sale. A trustee should order a title rundown of the property from the date of the original title policy, which can be obtained for approximately $100-$250.

C. Notice.

The trustee has no authority to exercise the power of sale or to obtain possession of the property until such time as the debtor defaults under the terms of the note and the trust instrument. The trustee must satisfy himself that the note and the deed of trust are actually in default before initiating foreclosure proceedings, including providing any pre-acceleration notice required by either document.

1. Requirements; Timing. The present owner of the property must be given written notice of sale at his last known address as such address and owner’s name appear in the records of the secured party, which must be personally delivered or sent by registered or certified mail at least fourteen (14) days before the date of the foreclosure sale. It is a good idea to send a separate notice to each owner by regular mail. Each such must provide the date, time, and place of sale and is sufficient if it contains the same information set forth in the public advertisement of the sale. ‘Inadvertent’ failure to give notice imposes no liability on either the trustee or the secured party, and failure to comply with the notice requirements will not affect the validity of the sale. A purchaser for value will have no duty to ascertain whether proper notice was given. Actual receipt by the owner of the foreclosure notice is not required, and a defective statutory notice does not affect the validity of a foreclosure sale.

2. Other Parties. Notice should also be given to any guarantors of the indebtedness, subordinate lienholders, private mortgage insurers, the United States (if a federal tax lien affects the property) and any government agencies that are involved with the secured loan. If a federal tax lien affects the property and has been filed for at least thirty (30) days before the date of the proposed sale, notice should be given to the United States at least twenty-five (25) days prior to such sale.

D. Advertisement.

A trustee must conform the advertising to the terms of the deed of trust, and any material departure will invalidate the sale. Substantial compliance, however, is sufficient as long as the rights of the parties are not materially affected. Section 55-62 of the Virginia Code provides a permissible form of notice that must include the time, place, and terms of sale, including the amount of any deposit required. The advertising provisions are mandatory and override the discretion of the trustee, regardless of the contractual agreement of the parties.

1. Requirements; Timing. The advertisement must briefly describe the property to be sold by street address, if any, and, if there is no street address, the general location of the property with reference to routes, streets, and known landmarks. The tax map identification number of the property may be used but is not required. The advertisement must also include the name, address, and telephone number of the trustee and the secured party, or the secured party’s agent or attorney, to respond to inquiries from the public about the sale. Advertisement of the foreclosure must be made in a newspaper having a general circulation in the city or county where the property being sold or any portion thereof lies. The sale can be held no earlier than eight (8) days after the first advertisement and no later than thirty (30) days after the last advertisement.

2. Number of Publications. If the deed of trust provides for the number of publications by using language such as “advertisement required,” then the direction of the deed of trust must be followed. In any event, if the newspaper advertisement is published on a weekly basis, it must be published not less than once a week for two weeks before the sale; and if published on a daily basis, it must be published not less than once a day for three days, which may be consecutive days. If the deed of trust does not provide for the number of publications, the Virginia Code requires that “the trustee shall advertise once a week for four successive weeks; provided, however, that if the property or some portion thereof is located in a city or in a county immediately contiguous to a city, publication of the advertisement five different days, which may be consecutive days, shall be deemed adequate.”

E. The Sale.

There are virtually no rules regarding bidding at a foreclosure sale, other than that the purchase price of the property must not be so low as to ‘shock the conscience’. The sale may take place “at the premises or at such other place in the city or county in which the property or the greater portion thereof lies, or in the corporate limits of any city surrounded by or contiguous to such county.” Most sales take place on the front steps of the city or county circuit court building. In the absence of specific direction in the trust instrument, the trustee is authorized to sell “upon such terms and conditions as the trustee may deem best.” This language has been interpreted to include the power to sell either for cash or on credit. The trustee must be present and either conduct or supervise the sale. In the absence of specific authority in the deed of trust, a trustee cannot, even with the consent of the lender, delegate the power to sell and be absent from the sale; the trustee may employ an auctioneer to cry out the sale. Prior to bidding, the trustee should announce the terms of sale and answer any general questions from the public. The trustee should disclose fully any known liens or encumbrances. A contract of sale between a trustee and a purchaser is complete when the trustee knocks down the property to the highest bidder and makes and signs a memorandum of the sale and its terms. The trustee may require a deposit, and a closing will be scheduled for approximately ten (10) to thirty (30) days after the sale, all as set forth in the advertisement. In the event that there was a federal tax lien on the property, the government has a right of redemption for a period of one hundred twenty (120) days, meaning that the government may take the property and reimburse the purchaser for the amount paid within this time frame. The trustee may request the waiver of such right upon the delivery of the notice of sale.

F. Settlement and Accounting.

A purchaser can only require a deed with special warranty of title from the trustee. The trustee is not responsible for conveying good title, because a trustee can sell only the interest conveyed to him under the deed of trust. Recordation tax to be paid upon recordation of the deed is the greater of the amount bid at the sale or the assessed value of the property. The trustee must receipt for the proceeds. Any proceeds from the sale must be applied in the following order: to discharge the expenses of executing the trust, including the trustee’s commission; to discharge all taxes, levies, and assessments, with costs and interest, including the due pro rata thereof for the current year; and to discharge in the order of their priority, if any, the remaining debts and obligations secured by the trust instrument, and any liens of record inferior to the trust instrument under which sale is made, with lawful interest. Any residual proceeds shall be paid to the debtor or his assigns. Within six months of the sale, the trustee must file an accounting of sale, including the original note, and all vouchers for his expenses with the local commissioner of accounts. The secured party may sue the debtor or any guarantor for any deficiency between the amount of the proceeds of the sale applied to the note and the amount of indebtedness outstanding thereunder.

G. Advantages and Disadvantages.

In Virginia, a trustee’s sale is a relatively quick and efficient means of foreclosing on real property. Once the sale has been completed, the purchaser will own the property free and clear of other junior encumbrances (provided that the junior lienholders were properly notified). However, the lender must be cognizant of the procedural and timing requirements in order to properly coordinate the trustee’s sale, and the foreclosure process can be more expensive than acquir4ing the property by a deed in lieu.

II. Deed in Lieu of Foreclosure.

With a deed in lieu of foreclosure, the grantor transfers the fee simple title to the property encumbered by the deed of trust to the lender under the deed of trust. The lender contemporaneously releases the lien of the deed of trust and forgives or stipulates the liability of the obligors under the obligations secured by the deed of trust.

A. Advantages. Acquisition by a deed in lieu can be advantageous to a debtor, as the process minimizes damage to the debtor’s reputation and credit rating by avoiding a formal foreclosure and creates substantial savings in costs, expenses, attorneys’ fees and trustee’s fees. The lender may find significant benefits as well, such as efficiency and the ability to obtain quick control of the property to effect its completion, rental or sale to a third party.

B. Disadvantages. A lender should be aware of the potential disadvantages to obtaining property by a deed in lieu of foreclosure. The lender will own the property subject to junior encumbrances (which are normally extinguished by a foreclosure sale) and all obligations of the former owner (including building code violations and environmental responsibilities). The debtor’s creditors may attack the sale as a fraudulent or voluntary conveyance if the value of the property greatly exceeds the value of the loan forgiven; and any guarantor that did not consent to the transaction may assert that the guarantors and debtor are released from any deficiency claim.

© 2011 WILLIAMS MULLEN ALL RIGHTS RESERVED