Mr-Landlord | Real State rentals.

It's estimated that as many as 40% of the foreclosed homes around the country are actually homes with a rental agreement signed, and occupied by tenants. In many (if not most) of these cases, the landlord's desperation and embarrassment lead to many landlords not telling their tenants that the rental unit is going to foreclosure until the last minute, leaving tenants with little time to find a new residence. To prevent these last-minute relocations and evictions, the Obama Administration enacted a law earlier this year called the Protecting Tenants from Foreclosure Act, which outlines new restrictions on foreclosure eviction notice.

To understand the new law, it's helpful to review the old system first. Traditionally, rental agreement contracts remain in place when a property sells, and the new buyer is beholden to the rental agreement. Foreclosure cases were an exception to this rule: when a rental property sold at foreclosure, the new buyer could sever the rental agreement and serve an eviction notice if necessary to remove a tenant.

According to the new law, rental agreement contracts survive foreclosure sales (if the property is purchased by an investor, instead of a home buyer), with some exceptions. If purchased by a home buyer looking to occupy the property, the buyer may serve the tenant with an eviction notice, but only after providing them with 90 days notice.

Existing rental agreement contracts also survive the foreclosure sale if the rental agreement was signed before the foreclosing loan was originated, e.g. if the lease agreement was signed five years earlier, and the loan was originated only three years earlier.

There are exceptions to the 90 day eviction rule as well, allowing certain scenarios in which the new homeowner who bought at auction do NOT have to give the tenants 90 days notice. To qualify for the 90 day eviction notice, the tenants must meet three criteria:

1.The tenant must not have owned the property at some time, or be a spouse, child, or parent of the former owner.

2.The rental agreement must an arms-length transaction.

3.The amount of rent specified by the rental agreement must be fair market rent, unless it's government-subsidized.
These exceptions were put into place to avoid "sweetheart deals," in which cozy landlords and tenants try to cheat the system and gain an extra few months of eviction-free living.

The new law leaves open the possibility of a wave of landlord lawsuits, where tenants looking to make a quick dollar sue their landlords for "breach of contract." Landlords should be aware of the exposure and risk of frivolous lawsuits, and do what they can to defend against tenants looking to take advantage of the landlord's financial hardship.

All landlords and tenants should be educated on the bill's provisions, so they can prepare accordingly in the event of a foreclosure. It's unclear whether the new law will decrease foreclosure prices even further, as buyers shy away from having to potentially carry newly bought properties for several months with the lengthier eviction notice requirements, but the bill is scheduled to expire on December 31, 2012 regardless, when the tide of foreclosures has hopefully receded.