Protecting
Tenants at Foreclosure Act – Poorly Worded Statue Offers
Opportunity For Credit Impaired Prospective Tenants to Lease Residential Properties
Los
Angeles Real Estate Specialist Suren Ambarchyan Outlines New
Foreclosure Defense Schemes
The U.S. Congress enacted Protecting Tenants at Foreclosure Act of 2009 (“PTFA”) to protect “bona fide” tenants from immediate eviction following a foreclosure sale. Los Angeles real estate specialist Suren Ambarchyan explained that “the statute generally provides that a purchaser at a foreclosure sale acquires title to the property subject to any bona fide lease entered into before the notice of foreclosure and the tenant under such a lease may continue to occupy the foreclosed property until the end of the remaining lease terms.” “The only exception is that a purchaser at a foreclosure sale acquiring the property as their primary residence has the right to terminate the lease prior to the expiration of the lease term by giving written notice to the tenant 90 days prior to the lease termination date,” noted Los Angeles real estate specialist Suren Ambarchyan.
Los Angeles real estate specialist Suren Ambarchyan doesn’t hesitate to share his views on the law. Suren Ambarchyan commented “The PTFA is not particularly well written or even thought out. It doesn’t seem that the ramifications of such a law were well considered prior to its adoption.” Suren Ambarchyan further explained that the law is “unusual and probably unconstitutional” because it “retroactively modifies the expectations of the lender when they made the loan – that is, the lender would be able to foreclose, secure possession of the property and then market and sell the loan to recover all or part of the balance due on the loan.”
The PTFA has certainly created uncertainty in the market and opportunities for abuse. There has developed a cottage industry of attorneys, real estate professionals and foreclosure specialist who seek to use the PTFA for purposes other than the protection of tenants. Suren Ambarchyan recently reviewed a website scheme promoting foreclosure relief. Here is how the scheme works:
Los Angeles real estate specialist Suren Ambarchyan cautioned that property owners considering such schemes should seek independent legal counsel to review the transactions. Suren Ambarchyan commented “legal review can be expensive, but it is certainly less costly than money wasted on fraudulent schemes that offer owners facing foreclosure little else – but false hope.” The law, although poorly written, does provide limited safeguards to lenders. Suren Ambarchyan explained that any leasing or exchange scheme must at a minimum meet the following requirements:
The U.S. Congress enacted Protecting Tenants at Foreclosure Act of 2009 (“PTFA”) to protect “bona fide” tenants from immediate eviction following a foreclosure sale. Los Angeles real estate specialist Suren Ambarchyan explained that “the statute generally provides that a purchaser at a foreclosure sale acquires title to the property subject to any bona fide lease entered into before the notice of foreclosure and the tenant under such a lease may continue to occupy the foreclosed property until the end of the remaining lease terms.” “The only exception is that a purchaser at a foreclosure sale acquiring the property as their primary residence has the right to terminate the lease prior to the expiration of the lease term by giving written notice to the tenant 90 days prior to the lease termination date,” noted Los Angeles real estate specialist Suren Ambarchyan.
Los Angeles real estate specialist Suren Ambarchyan doesn’t hesitate to share his views on the law. Suren Ambarchyan commented “The PTFA is not particularly well written or even thought out. It doesn’t seem that the ramifications of such a law were well considered prior to its adoption.” Suren Ambarchyan further explained that the law is “unusual and probably unconstitutional” because it “retroactively modifies the expectations of the lender when they made the loan – that is, the lender would be able to foreclose, secure possession of the property and then market and sell the loan to recover all or part of the balance due on the loan.”
The PTFA has certainly created uncertainty in the market and opportunities for abuse. There has developed a cottage industry of attorneys, real estate professionals and foreclosure specialist who seek to use the PTFA for purposes other than the protection of tenants. Suren Ambarchyan recently reviewed a website scheme promoting foreclosure relief. Here is how the scheme works:
- Owner
A and Owner B are both facing foreclosure.
- Owner
A agrees to lease its property at a below market rental rate to
Exchange; Owner B agrees to lease its property at a below market
rental rate to Exchange.
- Exchange,
without taking possession of either property, then leases Property A
to Owner B and Property B to Owner A at a market rental rate.
- Owner
A and Owner B secure long-term housing in desirable neighborhoods
without undergoing a credit or other background check. By entering
into the leases before foreclosure, Owner A and Owner B eliminate
the risk of non-approval based on credit or other conditions.
- Exchange
profits by charging an exchange fee, by collecting a non-refundable
lease deposit and by collecting and retaining the difference in rent
between what it collects on the subleases and what it pays out on
master lease.
- Owner
A offers to Tenant a long-term lease – 20 year lease. Owner A
enters into the transaction with the intention of rendering title to
the property unmarketable and to force the lender to agree to loan
modification.
- Foreclosure
specialist charges a $5,000 transaction fee to Owner A and Owner B,
who both have properties in foreclosure, for the exchange of their
properties. Foreclosure specialist sets the rental rate at 50%
below the owner’s current mortgage payments. Both lenders
foreclose, challenge the validity of the leases and win, and obtain
orders of possession. Owner A and/or Owner B, notwithstanding their
payment of a transaction fee and security deposit to the foreclosure
specialist, are evicted.
- Owner
A leases property to entity owned by family friend. Family friend
then rents to high-risk tenant at above-market rental rate.
Scenario is repeated with high-risk tenants ranging from recently
released prisoners to individuals running criminal enterprises from
the property.
Los Angeles real estate specialist Suren Ambarchyan cautioned that property owners considering such schemes should seek independent legal counsel to review the transactions. Suren Ambarchyan commented “legal review can be expensive, but it is certainly less costly than money wasted on fraudulent schemes that offer owners facing foreclosure little else – but false hope.” The law, although poorly written, does provide limited safeguards to lenders. Suren Ambarchyan explained that any leasing or exchange scheme must at a minimum meet the following requirements:
- The
lease transaction cannot be between the owner as the landlord and a
class of tenants including the owner, owner’s spouse, owner’s
parents or owner’s children.
- The
lease must be an “arms-length” transaction.
- The
rental rate for the lease must not be “substantially less” than
the fair market rent for the property.