Tenants and Property Foreclosure
A new California law will require landlords to provide disclosure to prospective tenants, prior to execution of a lease, if a notice of default (NOD) has been recorded against the property. This requirement will only apply to rentals of single-family homes and apartments in buildings of no more than four units.
The law is a result of Senate Bill 1191 (Simitian). It was approved by the Governor September 25, 2012 and will be enacted as Civil Code Section 2924.85. The law becomes effective January 1, 2013 and, unless extended, is automatically repealed January 1, 2018.
The required disclosure must be provided in writing. Its form is specified in the legislation as follows:
"The foreclosure process has begun on this property, and this property may be sold at foreclosure. If you rent this property, and a foreclosure sale occurs, the sale may affect your right to continue to live in this property in the future. Your tenancy may continue after the sale. The new owner must honor the lease unless the new owner will occupy the property as a primary residence, or in other limited circumstances. Also, in some cases and in some cities with a ‘just cause for eviction' law, you may not have to move at all. In order for the new owner to evict you, the new owner must provide you with at least 90 days' written eviction notice in most cases."
Supporter of the bill argued that there are several risks associated with leasing a property where the foreclosure process has begun: (1) Tenants often experience decreased services from landlords facing financial difficulties (e.g. non-payment of utilities and/or not making repairs). (2) If there is a foreclosure, tenants face a great amount of uncertainty, and they may be unaware of the protections guaranteed them under state and federal law. (3) Even with protections, the lease may be invalidated, for example, by the new owner wanting to move in. (4) It is in practice very difficult for a tenant to recover a security deposit after a foreclosure. (5) After a foreclosure tenants often may "face exposure to bad actors" and be subject to harassment and misinformation from individuals seeking to remove them from the property.
The Western Center on Law and Property argued that having an NOD filed is "a material fact that is critical for tenants to make an informed choice..."
Opponents of the bill argued that requiring such a disclosure could simply exacerbate the problems faced by the landlord. "By requiring the smallest and most vulnerable property owners (one to four units) to notify prospective tenants of Notice of Default - using prescriptive, alarming statutory language which translates into essentially a ‘don't rent here' sign - SB 1191 worsens the financial conditions of these owners and hastens foreclosure." [my emphasis]
Nonetheless, the bill passed with only minor amendments. According to the statute, a violation of the disclosure requirement "shall void the lease at the election of the tenant and shall entitle the tenant to recovery of one month's rent or twice the actual damages, whichever is greater, and all prepaid rent from the landlord..." If the tenant elects not to terminate the lease, and foreclosure has not yet occurred, "the tenant may elect to deduct a total amount equal to one month's rent from future rent obligations owed the landlord..."
Property managers shall not be liable for making the disclosure unless the landlord has notified them of the NOD and has directed them to make the written disclosure.
Members of the California Association of Realtors® (CAR) may access a new form (LID) that makes this disclosure in English and the other major languages proscribed by law.