Paying rent when property in Foreclosure

If you are a tenant and you have received a notice that your landlord has not been paying the mortgage and the property is in the process of foreclosure, do not stop paying rent and do not immediately move out!

The foreclosure process may have begun but that does not terminate your lease. You are still responsible for honoring the terms of your lease and paying rent. If you do not pay rent then the landlord has the right to file a lawsuit for eviction. If you try to break your lease (without working out an agreement with the landlord) then the landlord has the right to sue you for rent until the property is re-rented or until the end of the lease term.

If the landlord is unable to stop the foreclosure then your situation may change.

If the property is part of a multi-unit building, like an apartment building or multi-family house, then it is very likely that the new owner has to honor your lease and cannot evict you. It depends on the type of mortgage documents that the landlord signed. You will be notified by the new owner of where to send your rent.

If the property is a single-family home then, in most states, the lease will be automatically terminated by the foreclosure. At that point the new owner must give you at least 15-30 days written notice that your tenancy is terminated and you must move. If you don't move within that time period then the new owner has to file a lawsuit for eviction. They are not allowed to change the locks or turn off the utilities. If you are unable to find a new place before the court date then make sure you appear in court. You can ask the judge to postpone the eviction to give you more time to find a new place. Many judges will give you another 30 or 60 days.

Some states do not follow these rules. We know for sure that in NJ a foreclosure does not terminate the lease. The new owner has to honor the terms of the lease and they must offer you a renewal of the lease unless the situation meets one of 16 specific requirements, the most common being that the new owner wants to live in the property. So if you are in NJ and your landlord goes through a foreclosure then you can be sure that you can stay there at least until the end of your lease.

California has a law about rent skimming. You can read it at TITLE 6. RENT SKIMMING - Sections 890-894 - California Civil Code - California Code :: Justia That law basically says that if a landlord, during his first year of ownership of the property, accepts rent from a tenant but does not pay the mortgage, then the tenant can sue the landlord for their damages, including the security deposit and moving expenses. There has been some talk that the tenant may also stop paying rent or pay it into an escrow account but we have not been able to verify that yet and we do not suggest that you stop paying rent.

If you are a tenant and you are notified that your landlord is in default or that the foreclosure process has begun, one of the best things that you can do is to try and work out an agreement with either the landlord or the lender to purchase the property. You may be able to get it through a short sale for just the value of the current mortgage. So if you receive a notice, speak to your landlord.

Note from Scottgem. A US federal law was passed and went into effect in May that requires tenants be given a 90 day notice to vacate once a foreclosure is finalized.