Written By: Kayo Manson-Tompkins Published in USFN Report Spring Issue 2014
For some time now, California law has provided special protection to tenants in post-foreclosure evictions. Initially, this protection resulted in tenants receiving a 30-day post-foreclosure notice to quit instead of the otherwise standard three-day notice to quit given to the prior owners and other non-tenant occupants (California Code of Civil Procedure § 1161a(b)(3)). In 2008,California tenant protection was expanded by legislation, providing the post-foreclosure tenant a 60-day notice to quit if the tenant had a month-to-month lease or periodic tenancy. This was followed by the 2012 Amendment, providing the tenant with a 90-day notice to quit if the tenant were a bona fide tenant (§ 1161b).
Although these changes significantly increased the time period for post-foreclosure tenant evictions, evictions were made even more difficult by Assembly Bill 2610 (effective January 1, 2013). This bill amended California Civil Code § 2924.8 and California Code of Civil Procedure (CCP) §§ 415.46 and 1161b, providing even greater tenant protections (discussed below) and has basically resulted in a far greater percentage of eviction defendants claiming to be tenants and, of those purported tenants, a large percentage falsely claiming to have unexpired leases.
Special Notice to Tenants in the Notice of Trustee’s Sale — Civil Code § 2924.8 sets the stage for a difficult or elongated eviction. In addition to posting and mailing the notice of trustee sale, a foreclosure trustee must also now concurrently post and mail a separate notice in English, Spanish, Chinese, Tagalog, Vietnamese and Korean to all “Residents of property subject to foreclosure sale.” The notice advises “residents” that the foreclosure may affect their right to continue to live in the property. It notifies them that the property may be sold at foreclosure and the new owner may offer a new lease or rental agreement or give them a 90-day notice to quit. It then states that they may be able to stay longer than 90 days if they have a fixed term lease, or if they are in a “Just Cause Eviction” city, in which case they may not have to move at all. Having this language mailed and posted with the notice of trustee’s sale invites abuse. Although the legislature intended to protect tenants who were victims of borrowers collecting rents knowing that a foreclosure sale was imminent, the new requirements open the door to the creation of a lease for the specific purpose of delaying the eviction.
90-Day Notice to Quit — From 2008, as referenced above, California CCP § 1161b required tenants with a lease to be given a 60-day notice. Due to an amendment to CCP 1161b, which became effective January 1, 2013, the purchaser at a foreclosure sale was required to give a 90-day notice. The purchaser bore the burden to prove that a tenant was not entitled to protection. Furthermore, if a fixed term lease was entered into prior to the foreclosure sale, the tenant had a right to stay in possession until the end of the lease term, unless the purchaser was able to prove that the lease was not bona fide, in which case a 90-day notice applied. It has become standard practice that judges would demand that any tenant coming forward be given a 90-day notice if the tenant presented a lease or rental agreement, regardless of arguments that they were not a bona fide tenant. In addition, California CCP § 1161c required a special notice to be attached to a post-foreclosure notice to quit, informing tenants of their rights and providing websites about where to go for help. This notice, as with the special tenant notice attached to the notice of trustee’s sale, opens the door for occupants to claim and/or create a tenancy status, which causes delays in the eviction proceedings.
Interpretation of Federal PTFA — Prior to the amendment of CCP 1161b, on May 20, 2009, Congress enacted under Title VII, Protecting Tenants at Foreclosure Act of 2009 (PTFA) to provide bona fide tenants with a 90-day notice to quit. Although the PTFA was originally set to expire at the end of 2012, operation of the PTFA extends through the end of 2014 following passage of the Dodd-Frank financial reform bill of 2010. The amendment also clarified that notice of foreclosure shall be deemed to be the date title is transferred. Therefore, as long as a tenant’s lease is dated any time prior to the foreclosure sale itself, the tenant was protected. (Note that S. 1761 is currently pending, which would make PTFA permanent.)
A recent appellate court decision further clarifies the tenant’s rights [Nativi v. Deutsche Bank National Trust Company, 2014 S.O.S. H037715 (Cal.Ct. App. Jan. 23, 2014)]. The appellate court took great lengths to review interpretations of PTFA by Senators Kerry and Dodd, legislative history, HUD, FDIC, and OCC. All entities were in agreement that no tenant may be evicted prior to receiving a 90-day notice. Moreover, if a tenant has an unexpired lease, a landlord/tenant relationship exists until the lease expires and, thus, no notice to quit can be sent until after expiration of the lease, or if the property is subject to a rent or eviction control ordinance, or is part of a Section 8 contract, until the protections under those programs end. Of course, if the tenant fails to pay the rent or is otherwise in breach of the existing lease, the successful purchaser has the right to pursue eviction under standard landlord/tenant grounds.
In Nativi, the respondent made the argument that PTFA did not apply because the tenants occupied an illegal garage unit and thus were not bona fide tenants. However, the appellate court held that they saw no language or legislative history exempting illegal rental units from PTFA protection. The court reasoned that if they accepted the bank’s position, it would circumvent the PTFA and frustrate its fundamental public policy purpose. The appellate court further stated that rather than exercising supremacy or preemption, Congress intended to supplant less protective state law but not any state law that provided longer periods or additional protections to the tenants. The purchaser at the foreclosure sale takes subject to a bona fide tenancy for a term, but it retains the power to terminate the lease upon a breach of the lease. In addition, for those that file or remove a case to federal court for a determination, the appellate court held that PTFA did not create a private cause of action under federal law. Instead, the court found that Congress intended tenant rights established by PTFA to be enforceable under state law. (Here, too, it should be noted that S. 1761 is currently pending, which proposes to make PTFA permanent as well as grant tenants an explicit right to sue.)
Reviving the Old Claim of Right to Possession — California CCP § 415.46 was amended to “revive” the old claim of right to possession post-judgment. Initially, a typical challenge arose through an individual coming forward at the time of lockout and claiming a right to possession under CCP § 1174.3. This challenge required an additional hearing to determine whether the plaintiff had a right to possession against the claimant and, as a consequence, court dockets became crowded with these types of hearings. In an attempt to remedy this situation, California enacted CCP § 415.46 (effective January 1, 1991), which provided that if the unknown occupants were served with a Prejudgment Claim of Right to Possession (PJC) together with the complaint and did not come forward to be added as a defendant, any judgment obtained would be effective as to all unknown occupants. However, effective January 1, 2013, an exception was created for post-foreclosure rental housing units such that tenants may file a claim of right to possession under CCP § 1174.25 at any time before a judgment is entered; or under CCP § 1174.3 to object to the enforcement of judgment, whether or not a PJC was served. For post-foreclosure evictions, this amendment has rendered serving a PJC ineffective.
Purpose of Amendments vs. Abuse by Tenants — The California legislators enacted these amendments in order to protect tenants who had fallen victims to borrowers collecting rents, knowing that their homes were being foreclosed upon. The PTFA was enacted to promote public policy and for the purpose of protecting tenants from being displaced and suddenly made homeless due to a foreclosure. However, as with many public policies and laws, there are going to be those who will try to abuse the system. Many former owners will create lease agreements prior to the foreclosure sale in order to collect rents with no intention of curing their mortgage loan delinquency, or without any intent to protect the rights of the tenants to whom they rent their homes. Then, there are former owners who continue to reside in the property and rent rooms out to tenants. Nevertheless, as was evident in Nativi v. Deutsche Bank National Trust Company, the purchaser at a foreclosure sale needs to make sure that it exercises due diligence in determining who is occupying the property, as well as obtaining a copy of the tenant’s lease. If the lease has not expired, then it must be honored. If the lease has expired, or if the tenant merely has a month-to-month tenancy, then the tenant is entitled to a 90-day notice, unless the property is subject to a rent control or eviction control ordinance, or there is a Section 8 contract in effect, in which case the tenant could possibly stay longer.
Asset Managers’ Role in Light of the Amendments — Asset managers need to be aware of the California statutory changes that have created the additional tenant rights described in this article. Additionally, they must make certain that all efforts are made to investigate who is occupying the property. This investigation should include all of the following: (1) obtaining a copy of the lease, (2) obtaining proof of payment of rent, and (3) obtaining proof that utilities are in the tenant’s name. Furthermore, they need to know what jurisdictions have eviction or rent controls. As was evident with the appellate court’s position in Nativi v. Deutsche Bank, “due diligence” means more than just “driving by” the property. It is imperative to make contact with the occupants and know what obstacles are present that will impact the eviction.