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It's The Law: Mortgage Foreclosure Can Evict Tenant

Q: I rent a home from my landlord. I was served with a summons and complaint in a mortgage foreclosure case in which I was named as "unknown tenant." Can I be evicted by the foreclosing mortgage holder?

A: A tenant is often a victim in a mortgage foreclosure. The tenant pays the landlord, but the landlord does not pay the mortgage holder. The mortgage holder forecloses and in most cases seeks to get rid of the tenant as well as the property owner.

Property ownership is often referred to as bundle of sticks. A tenant buys some of those sticks from the owner and has right of occupancy and use, as defined in his or her lease.

A tenant's rights and opportunities in a mortgage foreclosure are based in large part on the terms and date of the lease. Florida's Residential Landlord Tenant Act provides tenant protection in areas like maintenance, notice landlord eviction proceedings. The Act does not provide any protection from mortgage foreclosure.

Because the tenant holds some of the ownership "sticks," a foreclosing mortgage holder generally sues the tenant as well as the owner so that the foreclosure includes all of the ownership interest. That usually means the tenant will lose all his ownership rights under the lease if the foreclosure is completed. However, completion of foreclosure can take months.

In a mortgage foreclosure, the mortgage holder first must get a judgment confirming that the property owner is in default and the amount then due under the mortgage. The foreclosure judgment determines the total amount due to the mortgage holder and includes a provision that if the amount is not paid the property will be sold by the Clerk of Courts to the highest bidder. Sale date is no less than 21 and no more than 35 days after judgment date, to allow for publication of sale notice in the newspaper.

The foreclosure judgment and sale ends all ownership interests that are inferior to the mortgage being foreclosed and that have been joined in the lawsuit. The tenant's interest is inferior to the mortgage if the lease was entered after the owner entered the mortgage. If the lease predates the mortgage, the tenant has an interest superior to that of the mortgage holder. For that reason, most commercial lenders require that tenants in apartment buildings, shopping centers and the like sign subordination agreements making their lease hold interest inferior to that of the mortgage. Almost all leases in commercial properties have clauses making the lease hold interest subordinate to any mortgage placed on the property.

Perhaps the biggest foreclosure negative from the tenant's perspective is that tenant's security deposit is held by the property owner and obtaining a refund of the deposit may be difficult. If the tenant's interest is foreclosed, the new owner will not be obligated to abide by terms of the lease or deposit. A purchaser outside of foreclosure would be obligated by the lease and deposit requirements, since the purchaser would take subject to the ownership sticks held by the tenant. A foreclosing mortgage holder does not take subject to those sticks.

Another negative is that you may have to move out of the property prior to natural termination of your lease, if the lender so requires. If that is not an attractive option, you might want to contact the lender and negotiate lease terms for occupancy after the foreclosure sale. Some lenders are happy to have a tenant taking care of the property and paying rent. Most lenders will not sign long term leases, since they plan on selling the property as quickly as possible.

One possible positive is that many landlords in foreclosure will not pursue a tenant who does not pay rent. Hence, you may be able to get your security deposit back by stopping rent payments. There is no guarantee in this regard, as the landlord can still evict you for failure to pay rent as long as the landlord is the property.

Another risk you need to be careful about is the foreclosing mortgage holder may ask you to pay rent to the mortgage holder. Your lease is with the owner, not the lender. If you pay the mortgage holder, the property owner might evict you for failure to pay rent to the proper party. Paying rent to the wrong party is not generally a good defense to eviction.

Suing the landlord for damages is another option, although landlords in foreclosure may not be a ready source of money if you win your lawsuit. The facts and circumstances of each case will affect the outcome.

A tenant in a mortgage foreclosure is caught between the proverbial rock and hard place. Good legal advice can minimize your damages and might even help turn your problem into an opportunity. I suggest you meet with an experienced attorney as soon as possible for advice concerning your case.

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