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Can A Foreclosure Buyer Raise A Tenant’s Rent?

Ginny…I owned a rental property that was fully occupied but still underwater by several hundred thousand dollars. I put it on the market as a short sale, and got several offers, including one from a buyer who ended up withdrawing her offer before I accepted any of them.  In the end, the bank did not respond to my short-sale application in time to stop the property from going to auction, and I lost it to foreclosure.

In the months between the time I listed the place as a short sale and the time I lost it, all the tenants’ leases came up and I signed them to new leases, with slightly lower rents based on the fact that I knew the short sale and foreclosure process was very disruptive to their lives, with all the showings and such.

The woman who had withdrawn her short-sale offer was the same one who ended up buying it from the bank at the auction. Now, she is upset and harassing me and the tenants because the lease terms changed between the time she saw the short-sale listing and the time she bought the place from the bank. She has also demanded that the tenants pay as much as 40 percent higher rent than they were paying before. What can we do?  Patrick C., Tempe, AZ

Patrick…I’ll bet you thought your problems with the property were over when the bank foreclosed it, right? Well, in truth, they really are.

The fact of the matter is that the new owner bought the place “as is” at the auction — from the bank, not from you. In truth, you don’t actually owe her anything or any information.

That said, I understand from portions of your letter that were edited for length that you have close relationships with the tenants and would like to make sure they are not taken advantage of. Here are my recommendations for how to wind down your involvement in this matter, without abandoning your tenants outright.

1. Stop communicating with the new owner. If I were you, I’d write her a letter, sending it to the address on record with the county recorder’s office. Tell her you have no contractual relationship or obligation to her, and that she should contact the actual seller (the bank) from whom she purchased the property if she has any further questions or concerns. Period.

If you want to err on the side of caution, you might even retain a local real estate attorney to consult with on the matter briefly, then to write the letter on your behalf.

2. Understand that the law is on your former tenants’ side. Under the federal Protecting Tenants at Foreclosure Act of 2009, your former tenants’ leases almost certainly survive the foreclosure — unless the new owner herself wants to move into the place, which it doesn’t sound like is the case. This law gives your former tenants the right to stay in the property until at least the end of the lease, on the terms set forth in their most recent leases.

Many larger cities have their own tenant protection provisions built into their municipal codes, which, in your city, actually go even further than the federal law in terms of controlling rent increases.

3. Refer the tenants to a legal aid provider. Rather than getting further embroiled in this dispute or smudging the boundaries of practicing law without a license, I’d suggest you refer the tenants to a legal aid society or other nonprofit, low- or no-cost provider of legal services to tenants. Almost every major city has one, and many actually have such organizations that are largely devoted to defending the rights of tenants vis-à-vis their landlords.

Your best bet is to simply advise the tenants that they have rights, and urge them to contact a legal services provider that will work with them for little or no expense to them.