Purchasing a Virginia Residential Rental Property at Foreclosure? You Need to Understand the Tenant’s Rights.
If you purchase a Virginia residential rental property at foreclosure, you need to understand the rights of the tenants occupying the property. In the wake of the 2009 foreclosure crisis, Congress enacted the Federal Protecting Tenants at Foreclosure Act (“PTFA”), which expired in 2014 but was permanently extended on May 24, 2018. The purpose of the PTFA is to protect tenants from immediate eviction after the homeowner defaults on the mortgage and the lender forecloses on the property. Virginia Code § 55-225.10, which went into effect on July 1, 2017 before the extension of the PTFA, also protects tenants from immediate eviction after foreclosure, but is less favorable to tenants than the PTFA. Since the PTFA is federal and it explicitly provides that states can only enact more protective state laws, it will presumably control over Virginia Code § 55-225.10 to the extent the two laws are inconsistent.
The key provisions of the PTFA are as follows:
1. “Bona Fide” tenants can remain in the property for at least 90 days after notice to vacate, or through the full term of a lease, whichever is longer. However, if the purchaser will occupy the property as a primary residence, the 90-day notice period will be effective even if there is a lease with a longer term. The only exception is for Federal- or State-subsidized tenancies, which afford tenants with longer time periods and additional protections provided by the terms of the subsidized housing program.
2. A “Bona Fide” tenant, as defined by the PTFA, excludes the “mortgagor or the child, spouse, or parent of the mortgagor”. The lease must be an “arms-length transaction” for “not substantially less than fair market rent”.
The PTFA and Virginia Code § 55-225.10 do not relieve the tenant of the obligation to pay rent to the new property owner, and do not preclude an eviction action for non-payment before the 90-day period expires. The PTFA does not clarify the extent to which the lease is terminated by the foreclosure. Under Virginia Code § 55-225.10, the lease terminates at the time of the foreclosure; however, that if the tenant elects to remain in the property, the terms of the lease will continue to control until such time as the new owner terminates the post-foreclosure tenancy. Presumably, this includes both the monetary and non-monetary terms of the lease. The tenant’s security deposit, however, remains the obligation of the original owner, and is typically lost in the foreclosure.