12/01/2016 by John R. Lockard
Often when residential properties undergo foreclosure, they have tenants residing in them. In those circumstances, the Code of Virginia requires the landlord to provide notice to the tenant that foreclosure is pending. The Code of Virginia also allows a tenant to remain in the property after foreclosure, subject to the requirements of the federal Protecting Tenants at Foreclosure Act (PTFA) and provided that the tenant complies with the lease, including by continuing to pay rent. If these requirements are met, the tenant can remain in the property until the lease expires.
The PTFA also includes provisions that benefit lenders after foreclosure. Most importantly, a tenant can remain in possession of the property under the PTFA only pursuant to a “bona fide” lease. For a lease to be considered “bona fide,” it must require the tenant to pay fair market rent and the tenant cannot be the child, spouse or parent of the foreclosed owner of the property. This prevents a relative of the original owner from trying to remain in the foreclosed property pursuant to a lifetime, rent-free lease, which – believe it or not – has happened.
PTFA also included a “sunset” provision that repealed the statute as of December 31, 2012, which created uncertainty as to whether the PTFA still applied to foreclosures in Virginia. A recent federal court decision, however, found that the terms of the federal statute still apply in Virginia, because Virginia’s statute incorporating the PTFA only incorporated the substantive sections of the federal act and not the “sunset” provision. This is good news for banks and lending institutions who do business in Virginia, because they can continue to sell properties after foreclosure subject to the remaining term of any “bona fide” lease. They also can collect fair market rent for the property and evict tenants who fail to pay rent.