What Happens If Your Landlord Defaults on the Mortgage?

What Happens If Your Landlord Defaults on the Mortgage?

What happens if your landlord ends up in foreclosure after defaulting on the mortgage? In most U.S. jurisdictions a tenant cannot be immediately evicted or forced to leave a unit when a landlord is in foreclosure. And no matter how dire his financial straits may be, landlords are not permitted to turn off utilities, change the locks, or board up a building. And if any of these things have happened to you – call M&A Law Firm today.

Laws Provide Protections for Tenants

Laws were established to protect tenants due the increase in the number of foreclosures across the United States in because of the financial crisis complicating lending, causing falling home prices, and leading to high unemployment. Generally, foreclosures occur when a lender takes back a building from an owner who did not make the mortgage payments. A lender files a complaint and summons to the court and serves it on the borrower who failed to make timely payments to the lender.

tenants’ rights and duties, per the lease agreement, do not change when a landlord is in foreclosure; rent must be paid and the landowner, or an appointed Receiver, must continue to manage and maintain the property. A Receiver is a court-appointed individual who is instructed to temporarily manage the property and collect rent when the original landlord is unable to perform those duties. A Receiver has the responsibility to give notice of their management, find out the names and addresses of all the tenants, give written notice of the foreclosure and its case number, and provide tenants with the Receivers’ contact information.

Federal Laws Protecting Tenants

Federal law protects tenants after a foreclosure. In 2009, President Obama signed into law the Protecting Tenants at Foreclosure Act (PTFA), which permits tenants to stay on the property until the end of their lease. Tenants without a lease (or a lease terminable at will) are entitled to the 90 days’ notice before having to vacate a property. Importantly, the law does allow a foreclosure buyer who intends to personally occupy the property to terminate a lease with a 90 days’ notice.

The Illinois Mortgage Foreclosure Law (IMFL) provides for foreclosing on mortgages in Illinois and includes protections for renters. In August 2013, Illinois adopted parts of the federal PTFA into Senate Bill 56 signed by Illinois’ Governor Pat Quinn. The law protects Illinois renters occupying foreclosed properties by requiring new owners of a residential property to honor the existing rental leases of current tenants, or to provide sufficient notice to renters so they have adequate time to relocate.


Foreclosure Protection in Illinois

Foreclosures in Illinois are judicial, meaning that a foreclosure procedure takes place in the state court system. The Illinois law applies to bona fide tenants who have bona fide leases. Most tenants are bona fide tenants. A bona fide tenant is defined by law as someone who:

  • does not own the building,
  • is not a child, spouse or parent of the owner of the building,
  • has a lease which was agreed to in a fair way,
  • pays rent not below the rent charged for other like-units in the building, and
  • was occupying the residence before a judge confirmed the judicial sale of the property.

An exception is if a tenant is named in the foreclosure lawsuit from the beginning and is without a bona fide lease, they may not be entitled to a 90 days’ notice for eviction.

Under most circumstances, once a property has changed ownership, the original landlord-tenant lease is no longer valid. New owners cannot begin to collect rent until they give notice to current tenants in writing within 21 days of taking ownership. If they do not give notice, an eviction can be thrown out of court. The new owner of an occupied rental property may terminate a bona fide lease only at the end of the term of the bona fide lease agreement, by no less than 90 days’ written notice.

Special Protections Afforded to Tenants by the City of Chicago

The City of Chicago provides additional protections during foreclosure through the 1986 Residential Landlord and Tenant Ordinance (RLTO), better known as Keep Chicago Renting Ordinance (KCRO). This law was a response to the effect that mortgage foreclosures were having on renters and tenants.  Under the KCRO, the new owner of a property is required to pay a one-time relocation assistance fee of $10,600, offer an option to renew, extend the tenant’s current rental agreement with a capped annual rental rate, or provide a replacement unit if the unit, upon transfer of ownership, is in a state of an unlawfully hazardous condition. The relocation assistance is in addition to any deposits, refunds, or other money that a renter would normally get back after a lease term is over. If the owner does not pay the relocation assistance, a renter has the right to sue for two times the relocation assistance, or $21,200, and if an attorney is hired, the new owner must pay for the attorney fees.

Federal and state laws work to protect tenants from being evicted immediately upon foreclosure. Knowing the law can be beneficial for tenants and hiring a lawyer can help navigate the legal process and protect tenant rights. M&A Law Firm has the best real estate attorneys in the Chicago area, and if you’re facing potential eviction from a landlord in default contact us today.