March 22, 2017
by E. Edward Farnsworth, Jr.
Samuel I. White, P.C. - USFN Member (Virginia)
Clarification of the Rights of Foreclosed Tenants
In the 2017 regular legislative session, the Virginia General Assembly passed several bills addressing the rights of foreclosed tenants. After the expiration of the federal Protecting Tenants at Foreclosure Act (PTFA) on December 31, 2014, conventional thought was that treatment of foreclosed tenants had reverted to the Virginia common law. However, this was recently challenged by Wiendieck v. Wells Fargo Bank, N.A., WL 4444916 (2016). In Wiendieck, the U.S. District Court for the Western District of Virginia held that Virginia Code § 55-225.10(C)’s specific reference to Section 702 and the PTFA (without also referencing the sunset provision in Section 704) meant that the expired federal law still governed foreclosed tenants in Virginia. The new legislation, which becomes effective on July 1, 2017, settles this conflict and addresses several other issues stemming from pre-existing lease agreements. [The Wiendieck case was discussed in an earlier article published in the USFN e-Update (Jan. 2017 Ed.), which can be viewed here.]
House Bill 1623 and Senate Bill 991
These bills address the effect of foreclosure on existing lease agreements, rental responsibility, and termination of tenancy. It is uncertain whether Wiendieck influenced this legislative action, but reference to the PTFA has been eliminated completely from Virginia Code § 55-225.10(C). The amended version now adds “[i]f there is in effect at the date of the foreclosure sale a tenant in a residential dwelling unit foreclosed upon, the foreclosure shall act as a termination of the rental agreement by the owner.” The foreclosed tenant’s terminated lease is converted to a month-to-month tenancy and the other lease terms remain in effect until properly terminated via written notification. In Virginia, the termination of a month-to-month tenancy requires a 30-day written notice prior to the next due date, unless the lease requires additional notice.
Virginia Code § 55-225.10(D) has been added, outlining the tenant’s responsibility to pay rent post-foreclosure. Until the month-to-month lease has been terminated, the tenant is obligated to pay rent to the successor owner, to the owner or successor owner’s “managing agent,” or into escrow with the General District Court, which is not mandatory. The tenant is obligated to pay rent, whether or not a rental responsibility notice has been sent, but cannot be held in delinquent status or assessed late fees until the name, address, and telephone number of the party designated to collect rent has been provided in writing. Virginia Code § 55-225.10(E) has been created as well, acknowledging that the successor owner may enter into a new lease agreement with the foreclosed tenant and that will serve to terminate the existing month-to-month tenancy.
House Bill 2281 and Senate Bill 966
These bills deal with the effect of foreclosure on existing property management agreements, funds held in escrow, and the right of a foreclosed tenant to file a tenant assertion. In these identical bills, the legislature addressed the effect of foreclosure on a pre-existing property management agreement entered into by the foreclosed owner and a licensed real estate broker. Virginia Code § 54.1-2108.1(A)(4) has been added and indicates that if a property management agreement exists at the time of the foreclosure sale, rent may be collected by the real estate broker acting as a property manager and the sums shall be placed “into an escrow account by the end of the fifth business banking day following receipt.” Virginia Code § 54.1-2108.1(A)(5), another new provision, converts an existing property management agreement to a month-to-month agreement. The terms of the agreement between the real estate broker and prior landlord are effective against the new owner. Either party may terminate the agreement by providing a 30-day written termination notice. Funds held in escrow by the property manager must be disbursed under the terms of the agreement or applicable law. The property manager is prohibited from transferring funds to the foreclosed former owner/landlord by the newly created Virginia Code § 54.1-2108.1(B)(5). Virginia Code § 55-225.12(A) has been amended to allow a foreclosed tenant to file a “tenant assertion” in the General District Court, paying rent into escrow until an alleged non-compliance with the lease or law (constituting a fire hazard or serious threat to the life, health, or safety of the occupants) has been adjudicated.
Impact on the Virginia Eviction Process and Timelines
While the newly passed legislation may be more burdensome than the common law, it is much more favorable than the former PTFA. For example, the lease must exist prior to the foreclosure sale. This eliminates the issue of post-foreclosure lease agreements entered into by the foreclosed borrower and the need to litigate when “complete title to a property is transferred to a successor entity,” as was the case under the PTFA. The amended statutes also render irrelevant whether a tenant is “bona fide” and the resulting rights that were granted to such occupants. Accordingly, sending a 90-day notice to vacate (or an obligation to honor an even longer lease term) has been eliminated in favor of the ability to terminate the existing lease with a simple 30-day written notice, regardless of length. Moreover, there are no special protections for Section 8 tenants.
The new legislation will, however, require greater efforts to identify tenant occupants, obtain copies of lease agreements, and to identify the property manager, if applicable. Whereas common law rendered foreclosed tenants mere tenants-at-sufferance with no legal right to occupancy (like their foreclosed landlords), the new legislation now establishes an occupancy right in the way of a month-to-month tenancy. Without a proper termination notice, foreclosed tenants will have a bona fide defense to unlawful detainer actions. The legislation further makes clear that the foreclosure purchaser is bound to the terms of the lease, until terminated. This essentially renders a foreclosure purchaser a “landlord” from the outset. Likewise, the foreclosure purchaser may find themselves bound to a property management agreement with a real estate broker whom they have not selected, until the agreement is properly terminated. All of these issues will merit added consideration regarding post-foreclosure property preservation efforts and eviction procedures, as the legislation presumes knowledge of information that may exceed the level of detail currently sought.
Standard 5-day notices to vacate may need to include additional 30-day lease termination language, addressing “any occupants” who may be tenants. Such action could proactively and preemptively terminate existing lease agreements. If a tenant has been specifically identified as an occupant, a 30-day termination notice should be expressly addressed to that occupant and the unlawful detainer should not be filed until the notice period has expired. These termination notices should be sent by regular and certified mail to preserve a sufficient “proof of mailing” required by the Virginia landlord and tenant statutes. If the foreclosure purchaser wishes to collect rent under the new statute, an agent should gather the pertinent lease information to facilitate the appropriate notice of rental responsibility being mailed to the tenant. The information obtained should include identification of any property manager so that an existing agreement may be terminated, if desired, by sending proper notification. Such notice should also direct the existing property manager to turn over all rental sums held in escrow to the foreclosure purchaser’s rental agent.
The legislative changes discussed in this article (effective on July 1, 2017) will likely extend current Virginia eviction timelines where the property is occupied by a tenant. In addition, more tenants may appear at unlawful detainer hearings, both pro se and represented, asserting rights to occupy the property. Nevertheless, the Virginia unlawful detainer process still remains a relatively efficient one, so that these delays should not be substantial in contrast to jurisdictions like Maryland and the District of Columbia with more stringent foreclosure tenant laws. At the very least, the recent question presented by Wiendieck as to the PTFA’s viability in Virginia has been clarified; and the new legislation presents a framework for implementation of processes and procedures to address foreclosed tenants.
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