There has been much publicity, on the national level, of changes to the Dodd-Frank Act.  A small part of the amendment that is not getting much publicity, is the fact that the changes made in May 2018 resurrected the Protecting Tenants At Foreclosure Act (“PTFA”).  This renewed law will significantly impact those persons buying occupied properties at a trustee’s sale.  The PTFA will once again become law on June 23, 2018.

As a result of the recession and the unprecedented amount of foreclosures and trustee’s sales, on May 20, 2009, the PTFA was enacted as law.  It expired in 2014, but unfortunately, is now back.  The law provided that in the event of a foreclosure, the subsequent owner takes title subject to the rights of any tenant with a bona fide lease.  A bona fide lease had to be for fair-market value and an arms-length transaction.  If a tenant had a bona fide lease, the new owner had to honor the lease through its expiration unless the new owner was moving into the property, and then only a 90-day notice was required for the tenant to vacate.  Alternatively, if the lease was month-to-month, a 90-day notice was still required.

This law is significant because of its legal and practical implications.  First, as a legal matter, since it is a federal law it controls the rights of investors and banks in every state, regardless of what the local law says.  Therefore, in Arizona, which has very investor-friendly laws, the PTFA gives tenants many more rights than they would otherwise have.  Second, as a practical matter, the PTFA has a huge impact on investors because it limits a buyer’s ability to fix and flip a home and it punishes investors that bought the property using hard money.  It is possible that the rent being paid on the property is significantly less than the hard money costs associated with ownership.  Such circumstances will lead investors to stay away from occupied homes or Cash for Keys agreements.

We expect to see more bad-faith games as we did the first time the law was enacted.  We saw a lot of unscrupulous people move into homes that were foreclosing, sign fraudulent leases in an attempt to either get a cash for keys deal or live in a property at below market rent.  I did numerous trials where the new owner questioned the validity of a lease because they thought it was fraudulent.  We even had numerous cases where the real estate agent who was trying to sell the home ended up moving in and claiming to be a tenant.  While we were generally successful for our clients, those were contentious cases.

As we always advise, bid carefully.

 

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