For institutional lenders, the filing of any foreclosure action requires careful navigation and compliance with various state and federal laws.  Notice to the mortgagor, for instance, is a prerequisite to any foreclosure; however, what if the property is subject to a residential lease? What obligation does a mortgagee then have to a third-party tenant?  For issues like these, states generally have their own specific tenant foreclosure notice requirements.  In many states, notice laws are drafted to mirror the federal provisions provided under the Protecting Tenants at Foreclosure Act (“PTFA”).

Introduced in 2009, the PTFA was originally enacted under Title VII of the Helping Families Save Their Homes Act.  The PTFA included a sunset clause, but on May 24 2018, the Trump Administration signed its permanent extension into law.  In addition to serving a notice on the mortgagor, the PTFA mandates that notices to foreclose must also be served on all tenants.  Generally, once the mortgagee issues a notice to foreclose, the PTFA permits tenants to stay in the foreclosed property for either: (1) 90-days from the date of the notice or (2) the remainder of their lease term, whichever is greater.  Significantly, however, the PTFA’s protections only apply to tenants with bona fide tenancies.

Under the PTFA, bona fide tenancies are those where: (1) the subject tenant is not the mortgagor or an immediate family member of the mortgagor; (2) the tenancy was created as the result of an arms-length transaction; and (3) the tenancy requires rent that is not substantially less than fair market value for the property.  Conversely, where the lease agreement does not constitute a bona fide tenancy or the tenancy was created after the notice of foreclosure was provided to the mortgagor, the PTFA’s protection will not apply.

The PTFA applies to all residential foreclosures but it will not preempt a state statute which provides greater protections to tenants.  Therefore, the PTFA should be not viewed in a vacuum, but in conjunction with state specific laws.  As such, it is important for mortgagees to carefully review and understand the individual state laws with regard to notices to tenants in foreclosure actions.