Creditors Rights

From Commercial Lender to Residential Landlord: The Protecting Tenants at Foreclosure Act

On May 20, 2009, the United States Congress enacted the Protecting Tenants at Foreclosure Act (APTA@) which grants specific rights to residential tenants affected by foreclosure.  The PTA is federal law that acts as a minimum requirement for foreclosing lenders with any additional state requirements left unaffected.  Congress, in the midst of the recent Aforeclosure crisis,@enacted the PTA to protect unsuspecting/innocent tenants by imposing restrictions on a foreclosing lender=s ability to evict a holdover tenant upon foreclosure.  As noble a cause as it may have been, the PTA has resulted in significant post-foreclosure obstacles to lenders. 

Requirements under PTA

Prior to the enactment of PTA, a residential tenant occupying a foreclosed property could be required to vacate the property on 30 days notice, under Texas law.   If the tenant failed to vacate upon the expiration of 30 days, the foreclosing lender could then proceed with an eviction action.  Under the PTA, a foreclosing lender is now required to provide a residential tenant remaining in the foreclosed property a minimum of 90 days to vacate.  The PTA further mandates that a foreclosing lender takes title to a foreclosed property subject to an existing lease.  In short, a foreclosing lender Asteps into the shoes@of the prior landlord/borrower and assumes all of the rights, duties, and obligations under the existing lease.  Therefore, if a foreclosed property is occupied by a residential tenant who is under a lease that is protected by the PTA, the lender must honor that lease for its term.  Although the tenant under the existing lease must continue to make monthly rental payments, this results in a clear obstacle to the foreclosing lender=s ability to market and sell the property.  The PTA allows such a property to be sold to an Ainvestor@who agrees to honor the existing lease or to an Aend user@(owner-occupant).  A sale to an Ainvestor@or Aend user,@however, does not relieve the foreclosing lender of the duty to give the tenant 90 days notice to vacate. 

Not all residential tenants or leases are protected under the PTA.  There are situations in which the occupant of a foreclosed property does not rise to the level of a Atenant@under the PTA and, therefore, is not entitled to its protections.  These occupants include, but may not be limited to, the child, spouse, or parent of the defaulting borrower.  Moreover, not all leases will actually qualify as a Alease@protected under the PTA if: (1) the lease was not negotiated at arms-length; (2) the lease is not for fair-market rent; or (3) the lease was not entered into prior to foreclosure.  These situations, however, are highly fact intensive and need to be addressed on a case by case basis to ensure that the foreclosing lender is not only protecting its rights against opportunistic Atenants,@but also complying with the PTA as to not violate the rights of protected tenants under legitimate leases.  Although it may be eloquently asserted at times, it is important to note that the PTA does not provide protections to the owner/borrower on which the lender has foreclosed.    

Real Effects of PTA on Foreclosing Lenders


One of the most significant effects of the PTA is that a foreclosing lender is now forced into the residential landlord business with all its attendant obligations and responsibilities.  These obligations include, but are not limited to, yard/building maintenance, repairs, payment of water utilities, and safety requirements such as installation and maintenance of smoke detectors.  In addition, foreclosing lenders need a strong and experienced local agent to collect rental payments and manage the property.  Tenants may require a 24 hour local contact for emergency matters, and the local agent needs to be able to make decisions (such as hiring a plumber or electrician) on nights and weekends without waiting for the lender=s office to open the next business day.  Foreclosing lenders must also be mindful of the physical condition of the property, including the installation and maintenance of any security devices required by Texas law.  These obligations alone are enough to cause concern, but what happens when these obligations remain without the reciprocal obligation of the tenant to actually pay rent to the foreclosing lender? 

 In the higher-end Aspec@house market, it is not uncommon for the tenant to pre-pay lease payments for up to a year.  This in turn causes substantial economic issues for a foreclosing lender.  For example, a lender forecloses on a property in June 2011 that is under a written lease term from January 2011 through December 2011, and the tenant has already pre-paid rent for one year to the defaulting borrower/landlord per the terms of the lease.  As a result, the lender is forced to allow the tenant (assuming the tenant is not otherwise in default under the lease) to remain in the property Arent free@for six months.  To add insult to injury, the lease terms may require that the landlord is responsible for yard maintenance and water.  Now, a commercial lender has essentially been transformed into a residential landlord with no rent stream and yet saddled with maintenance expenses and obligations. 

Minimizing the Impact of PTA

Many foreclosing lenders have discovered that Acash for keys@provides a clean, cost-effective means of obtaining a vacant property in order to prepare and market the property for sale prior to the expiration of 90 days.  Although the pre-paid tenant in the above example is not likely to accept a Acash for keys@deal, many tenants under a month-to month lease or an expired lease are all too happy to hand over the keys for a reasonable sum.  This sum should be determined by the foreclosing lender via a cost/benefit analysis based on factors unique to the specific case.  To a foreclosing lender, the idea of passing out money to an occupant of property already owned by the lender may be of little attraction, but given the requirements under the PTA and the possibility of a quick sale to a third-party, Acash for keys@can provide a sensible solution to the post-foreclosure problems created by the statute.  

Prior to foreclosure, lenders should be aware of the status of the property and whether it is occupied by a residential tenant who will be protected under the PTA.  Often, commercial builders will lease properties that they are unable to sell without notifying the lender.  Many times copies of any leases can be obtained by request to the borrower or borrower=s counsel.  Knowing the terms of a lease in connection with a property prior to foreclosure can provide invaluable information to a foreclosing lender and may even affect the liquidation strategy depending on the terms and whether rent has been pre-paid as in the above example.       

There are numerous nuances to the PTA and an infinite number of directions a case can take upon foreclosure of a property that involves a residential tenant.  This article is intended merely to provide a general overview of the statute=s requirements and a sample of its effects.  As with all situations involving a relatively untested area of law, there are many legal issues that may arise at different stages of the foreclosure process involving property with residential tenants, and each and every issue requires examination and analysis to ensure that the foreclosing lender=s rights are maintained and the tenant=s rights are protected within the confines of the law.

By: Michael P. Menton.

Creditors Rights

Another Arrow in Your Quiver: Considering the Benefits of Receivership for Secured Lenders

When secured lenders intend to foreclose on collateral securing a defaulted loan, they are sometimes faced with the prospect of having to manage or maintain an ongoing business operation on the foreclosed premises.  Suppose that the collateral is a multi-unit apartment structure with multiple tenants, and the secured lender wishes to maintain tenant occupancy to preserve the value of the business upon foreclosure.  How might the lender most easily gain access to the rent roll, leases, security deposits, access keys, and other information necessary to maintain operations?  Or suppose that a lender seeks to collect on a borrower’s accounts receivable, but the borrower is uncooperative and the accounts are worthless without the borrower’s records.  What is the best course of action for the lender when the value of such accounts may be tied up in information (such as contact information and historical invoices) that is under the exclusive control of the borrower?  What are the lender’s options?           

Perhaps in a more favorable economic environment, lenders could pursue foreclosure, collection on accounts receivable, or similar remedies with less worry over such complexities.  However, given the current financial climate, lenders must consider the potential drawbacks of taking title to distressed real estate or otherwise assuming control of collateral, regardless of whether an ongoing business is involved.  Such drawbacks and obstacles can include, but are not limited to, the following: 

Managing business affairs; obtaining important documents and elusive information; lender liability; assuming control over properties with multiple code violations; assuming control over properties with incomplete construction; and environmental concerns. 

Receivership as a Possible Solution

In today’s uncertain lending environment, a court-supervised receiver can offer a useful and cost-effective solution, avoiding some or all of the obstacles listed above.  A receiver is an officer appointed by the court (upon motion by a lender) that can hold possession of the property, manage the property, and preserve it on behalf of the creditor.  Moreover, a receiver can be appointed pre-foreclosure, while generally enjoying judicial immunity.  The primary legal authority establishing the receivership remedy is set forth in the Texas Civil Practice and Remedies Code § 64.001, et seq.  In short, the statute allows a lender to communicate directly with the receiver and monitor its collateral while remaining insulated from the various vexations that can arise.    

In the case of our multi-unit apartment structure above, upon court appointment before foreclosure, a receiver can assume control of the apartments, receive rents, make disbursements (such as salaries, utilities, maintenance, and insurance), reconcile bookkeeping, and generally perform any other acts authorized by the court.  In this way, the lender is able to protect its collateral while the receiver, under court guidance, navigates pitfalls and facilitates a smoother transition in ownership. 

A great advantage of employing a receiver is that the receiver’s powers and duties are limited only by the necessities of the situation at hand and the auspices of the court.  Thus, a prudent secured lender can have a receivership specifically tailored to whatever situation (or court proceeding) it may be involved in.  In addition to the powers described above, a partial listing of a receiver’s potential powers includes the following:

             1)  Gaining access to and control of collateral (real and personal property);

            2)  Collecting and compromising accounts;

            3)  Listing any and all collateral for sale or auction and making transfers;

            4)  Borrowing and investing funds held as receiver;

            5)  Retaining support professionals (such as appraisers, surveyors, and property managers); and

            6)  Closing and opening borrower bank accounts.

It is also worth mentioning that a secured lender can use a receivership to gain leverage or secure performance under a forbearance agreement should the lender wish to delay foreclosure for any reason.  Lenders should also be aware that their loan documents may provide for the appointment of a receiver upon default, and this can factor into a court’s decision as to whether a receivership is appropriate, and if so, under what terms and conditions the receiver should operate. 

This article is intended only as a general overview of the scenarios under which a receivership may benefit a secured lender and the powers a court may grant a receiver.  Multiple legal issues are implicated in petitioning a court for a receivership, including applicable statutory and common law requirements.  Each issue must be evaluated and analyzed on a case-by-case basis.   Depending on the lender’s goals and the nature of the collateral, a receivership may provide an invaluable tool to maximize the value of a lender’s collateral while reducing the risks associated with lender liability.

By: Cliff A. Wade and Will G. Bassham.