Foreclosure and Tenants

A tenant living in a residence that is being foreclosed upon must still pay the rent until the house is actually sold at which time the landlord is no longer the owner of the residence. If the tenant fails to pay the rent he or she could be evicted.   Obviously if the written lease is expired or the tenant has an oral lease, the tenant can give proper notice to terminate the lease.

There is also an argument that the tenant can stop paying rent to the landlord once a final judgment of foreclosure has been entered against the landlord.

The tenant naturally does not want to pay and fears not having the security deposit returned.

There is a school of thought that the foreclosure is a breach of the covenant of quiet enjoyment and unless the landlord stops the foreclosure the tenant can get out of the lease.

However, the safest bet is for the tenant to pay the rent until the house is actually sold.  In the event of a sale of the house there is a new federal statute that protects the tenant and allows the tenant to finish out the lease if there is one and if there is not one to get at least ninety days notice before the tenant has to vacate.

Foreclosure sale of leased premises does not constitute breach of landlord’s covenant for quiet enjoyment, since such covenant, express or implied, goes only to possession, not of title, and change of title to leased premises is of itself not inconsistent with lessee’s peaceable possession. Hyde v. Brandler, 118 A.2d 398 (Mun. Ct. App. D.C. 1955).

Thus, declaring that there could be no breach of the covenant for quiet enjoyment unless there was an eviction, actual or constructive, the court in Capone v. Hinck (1937) 163 Misc 47, 296 NYS 346, held that a tenant could not recover damages for breach of such covenant because of the institution of an action against him and his lessor to foreclose a mortgage on the leased premises, where it was not shown that there was an actual sale of the premises and a delivery of the referee’s deed to the purchaser. To the contention that the lessee had requested the lessor to defend the action to foreclose the mortgage and that the lessor had refused to do so, and that this constituted sufficient grounds for damages for breach of the covenant of quiet enjoyment, the court pointed out that the foreclosure action never reached a final stage of actual sale of the premises and delivery of the referee’s deed, but was settled by the lessor’s payment of a consideration to the lessee, who then surrendered the lease.

Lessors did not breach covenant of quiet enjoyment, despite lessors’ failure to pay their taxes, where lessees were not evicted, either actually or constructively, but continued to occupy premises through foreclosure sale and beyond. U.S. v. G & T Enterprises, L.C., 978 F. Supp. 1232, 80 A.F.T.R.2d 97-7908 (N.D. Iowa 1997), judgment aff’d, 149 F.3d 1188, 81 A.F.T.R.2d 98-2202 (8th Cir. 1998).

Although an action to foreclose a mortgage resulted in a decree of foreclosure, the court in John R. Thompson Co. v. Northwestern Mut. L. Ins. Co. (1937, DC Ohio) 31 F Supp 399, pointing out that it did not appear that there was a sale under the decree, but, on the contrary, that the mortgage was satisfied and discharged within the period given in the decree, held that the express covenant of quiet enjoyment in the lease was not breached by such proceedings, even if the covenant could be breached by loss of title by the lessor, it being apparent that no title was lost by the lessor under such proceedings.