Tenancy After Foreclosure: Obama “Tenant Protection Law” Obscures Previously Clear California State Law And Gives Rise To Tenant Scams

Aaah, the good ‘ol days, back when in 2008.  Life was so much simpler then.  When an investor purchased real estate after foreclosure in California, the trustee conveyed clear title to the new owner.  All junior liens, including junior leases, were wiped out.  If the property had a tenant, no worries, the new owner need only give a 3-day notice if the tenant was the prior owner; a 30-day notice if the tenant was a third party. 

     Planning was easy; so was turning around a dead property and putting it back on-the-market, ready for a new family, occupied, useful and socially beneficial again, typically at a windfall savings to the new homeowner.   In July 2008, the California legislature, with our Governator’s consent, increased the 30-day tenant notice period to 60 days, not a great piece of news for the much-needed California real estate investor but at least the new law was clear and the investor could still plan. 

     And then came Barack.

     In a major federal intrusion into long-settled, clear, and fair California state law, Obama and the democratically-controlled Congress passed the beneficently-titled “Protecting Tenants At Foreclosure Act” signed into law by President Obama on May 20, 2009.  As with many of the grandiosely named federal laws, this one too has a truth in labeling problem. 

     The Act doesn’t “protect” tenants in California so much as it delays the rehabilitation of foreclosed properties and the offer of those properties to new families at discounted prices, increases the cost and uncertainty of real estate investment in tenant-occupied properties in California, and increases the amount of  deficiencies to be born by the lender in foreclosure since new investors price into their bids the inevitable delay and uncertainty that Obama’s law creates.  More troubling, the Obama law has given rise to tenant scams wherein tenants seek to extort huge sums of money from the new investor in exchange for leaving.     

     How has the Obama law created such uncertainty and havoc? 

     It’s very simple.  Recall that under pre-Obama state law, the junior lease held by the tenant was extinguished by the foreclosure sale.  In nearly all foreclosure cases, the tenant’s lease was junior to the foreclosed deed of trust because it either came after that deed of trust or because the lease contained a subordination clause.  Thus, the new investor bidding at foreclosure could do so knowing that he would receive absolutely clear title to the property and that any tenant residing there could be evicted on either a 3-day or 30-day notice (later increased to 60 days), depending upon whether the tenant was the prior owner. 

     The critical change to California legal prerogatives that Mr. Obama’s federal law made is that now new investors purchase at foreclosure “subject to” any existing term lease.  In other words, the tenant’s leasehold is no longer wiped out at the foreclosure sale.  If the lease is month-to-month, the new owner must give the tenant a 90-day notice, a period thirty days greater than what California state law currently provides.  

     From a policy standpoint, this hastily prepared law makes little sense.  The real estate market won’t recover until it first hits bottom.  It is the real estate investor, the “flipper”, who will determine the bottom of the real estate market.  For the benefit of all homeowners, the law should be making the process easy for flippers to turn these foreclosed properties around.  Instead, the federal government has chosen to make the process for investors less certain, more costly, and more time consuming.  Additionally, the Obama law was an unnecessary incursion into state law since California’s 60-day notice statute already adequately protected the rights of tenants.

     As if waiting 90 days-an eternity in real estate time-to terminate a tenancy weren’t bad enough, the law gets worse.  The Obama law also permits term-lease tenants to stay for the duration of their term, even where the remaining term exceeds 90 days.  The upshot?  A real estate investor in a tenant-occupied property in California has no idea going in how long it will take to offer to the market a vacant property. 

     But don’t worry investors, our president had your concerns in mind when he signed the law.   In a gesture of presidential even-handedness, Mr. Obama limited the scope of the law to only “bona fide tenancies” and “bona fide leases”.  Under the law, a bona fide tenant is one who a)  is not the prior owner or the child, spouse, or parent of the prior owner,  b) the lease was the result of an arms length transaction, and  c) the lease requires rent “not substantially less than fair market rent”.  The law fails to define “not substantially less than fair market rent.”      

     For the tenant to stay the duration of his term lease, the lease must also have been signed “before the notice of foreclosure”.  The Obama law does not define what is meant by “before the notice of foreclosure.”  Does that term mean before the tenant’s or the owner’s actual notice of . . .  what?  Default?  Notice of Sale?  What about the cases where the foreclosure sale was postponed?  Is the time of “notice” the date of the original sale or the postponed date?  Is the prior owner’s power to lease tied to his right of redemption?  Since the law doesn’t specify, it is virtually impossible for the new owner to know whether the tenant signed his term lease “before notice of the foreclosure” or afterwards. 

     In order for the new owner to learn whether the Obama law requires a 90-day notice or permits the tenant to stay for the balance of a term lease, the investor will have to sleuth out facts about the lease and tenancy, all of which will have to be voluntarily disclosed by the tenant.   For example, the new owner will have to learn who the tenant is and whether the tenant is related to the prior owner.  The new owner must obtain the tenant’s lease so that he can determine at what point during the foreclosure process the lease was entered into, whether the rent is “not substantially below fair market rent”, and, most importantly, what term remains on the lease.  The foregoing facts were irrelevant under state law but are now central issues due to the Obama federal law. 

     In practical terms, what is the problem?  Where President Obama and his fellow utopians saw an opportunity for reform, tenants saw an opportunity for profit.  Tenants and foreclosed property owners (particularly when the tenant and prior owner had a pre-existing personal relationship) have colluded to enter into long term leases near the time of foreclosure thus tying the property up for the new owner.  When the new owner comes on the scene, the tenant then demands an exorbitant amount of money in order to move. 

     The Obama law’s failure to define “before notice of the foreclosure” guarantees that the issue of whether the term lease is valid, i.e. whether it was entered into before or after “notice of the foreclosure”, will have to be litigated.  The Obama law makes this scam possible because it circumvents California state law that would have wiped out the junior lease at foreclosure.

     It didn’t take tenant lawyers long to get into the act.  Now, when a tenant-occupied property goes to foreclosure, the tenant is inundated with solicitations from lawyers promising the tenant months of free rent and financial windfall.  These solicitations advise the tenants not to cooperate with the new owner, not to identify themselves, not to give the new owner a copy of the lease, not to say how long they have lived there.  In short, the tenants are being told not to give any information to the new owner, regardless of the new owner’s legal right to the information.  The tenants are also advised against complying with the new owner’s statutory rights to enter the premises or cooperating in the new owner’s efforts to renovate and market the property.

     What are the solutions to the problems created by the Obama law?  First, try to work with the tenant.  Speak to the tenant and try to learn his name and the names of all people living at the property.  Try to obtain a copy of the lease.  Attempt to work out a cash-for-keys deal or, if your business model calls for the tenant to stay, try to close a new lease.  This process may take a lot of telephone calls and trips to the property. Second, make clear to the tenant that, if you have to hire a lawyer, all deals are off and the lawyer will do all that he must to safeguard the new owner’s rights.  Third, if you have a steadfastly uncooperative tenant, your only option is to obtain legal help. 

     I have a system in place to deal with uncooperative tenants that begins with telephone calls and correspondence and continues all the way through multiple lawsuits designed to give the tenant incentive to cooperate and to move-out, nearly always before the 90-day Obama period and commonly in as little as 30 days. 

     The costs and attorney’s fees associated with this system are often less than what you would pay the tenant to move, less than the monthly carrying charges on many properties, and a fraction of the discount that you factored into your bid to acquire the property because it was tenant-occupied.  If you would like to learn more, please contact me so that we can explore your options.  Please remember:  You do not have to tolerate an uncooperative or scamming tenant.

San Diego Landlords: Beware Of Eviction Control When Trying To End A Month-To-Month Tenancy

Mercifully, San Diego does not have rent control.  Unfortunately, San Diego does have its close relative-the unwelcome mother-in-law of rent control-better known as eviction control or “for cause” eviction.  

San Diego’s eviction control ordinance substantially impacts a landlord’s right to end a month-to-month tenancy.  Moreover, the ordinance can be a trap for the unwary landlord unfamiliar with its mandatory notice provisions.  A notice terminating a month-to-month tenancy that does not comply with the eviction control ordinance could cause the inexperienced landlord to lose his eviction case at trial and have to start the eviction process all over again. 

What is San Diego’s eviction control ordinance? The ordinance applies to every tenancy of two years or greater duration.  When a tenant has lived in your rental property for two years or more, you may only terminate his month-to-month tenancy, or refuse to renew his lease, for certain specified reasons.  On the face of it, the authorized reasons in the ordinance don’t seem unreasonable.  As examples, a landlord may only terminate the tenancy for things such as nonpayment of rent, breach of lease, tenant use of the property for an illegal purpose, or landlord withdrawal of the premises from the rental market just to name a few.  

The ordinance’s restrictions wouldn’t appear too onerous to most landlords since a landlord’s typical reasons for terminating a tenancy match those permitted by the eviction control ordinance.  However, the ordinance’s mandates do not end there.   The ordinance further requires that the landlord serve on the tenant a notice setting out the reason or reasons for terminating the tenancy at the same time that the landlord serves the 30-day notice, 60-day notice, or 3-day notice, whichever the case requires.  

In other words, to comply with San Diego’s eviction control ordinance, you must first have a permitted basis for terminating the tenancy.  In addition, you must serve a separate notice on the tenant setting forth that permitted reason at the same time that you serve the notice terminating the tenancy.  Thus, a tenant who is protected by the eviction control law should get two notices, one terminating the tenancy (the 3-day, 30-day, or 60-day depending upon the case) plus another notice setting forth the reason authorized by the eviction control ordinance.  

Additionally, to be valid, both notices must be served according to law, i.e. they must be personally served on the tenant or served through a valid substitute service or post and mail service.  I can’t tell you how many landlords I have seen in my practice make the mistake of not complying with the eviction control ordinance.  In fact, nearly every client I see who has tried to terminate a month-to-month tenancy with a 30-day or 60-day notice either didn’t comply with the ordinance or didn’t serve it right.  

The consequences for the landlord to not terminating the tenancy right can be dire.  At a minimum, the landlord will suffer the lost time and inconvenience of having to serve a new notice.  If the landlord has sued on a bad notice, the consequences can be worse.  The tenant will win the eviction case and the landlord will have to start the entire process over again, thus losing more time, rent, plus costs and attorney’s fees.  If you want to end a month-to-month tenancy, or not renew a tenancy, on some ground other than non-payment of rent, you should consult a lawyer to make sure that you comply with San Diego’s eviction control ordinance.

San Diego Landlords: Should You Do Your Own 3-Day Notice To Pay Rent or Quit?

To do or not to do; that is the question.   

My apologies for the slight revision of Hamlet but then again Shakespeare never had to deal with California eviction law.  California landlords, on the other hand, do.  And every landlord in California has had to confront the issue:  “Should I fill out the 3-Day Notice to Pay Rent or Quit and serve it myself or should I have a professional do it?”  

Considering the vital importance of the 3-day notice to the eviction case that follows, the answer is not as simple as it seems.  To California landlords out there struggling with this question, this article is written for you.  I hope to provide you with the information that you need to decide whether to handle the 3-day notice yourself or have your lawyer and his process server take care of it.  

First, a brief explanation of what a 3-Day Notice to Pay Rent or Quit is.  The 3-day notice is the first step in the eviction process based upon the tenant’s failure to pay rent.  The notice is served on the tenant.  The tenant then has three days to pay the rent in full.  If the tenant pays the rent within the three days, the landlord must accept it, the default is cured, and the tenancy goes on.  If the tenant fails to pay the rent within the three days, the tenant is in default and the landlord may file an eviction lawsuit (called an unlawful detainer in California) on day four.  

After the three-day notice period runs, the tenant is no longer permitted to pay the rent and the landlord need not accept it.  The landlord may accept rent if he wants to keep the tenant but he does not have to.  If the landlord accepts rent after the three day period expires, however, the landlord waives his right to declare a default and cannot evict the tenant until a future non-payment of rent occurs.    

In other words, if a problem tenant fails to pay rent and you want to get rid of him, don’t accept any rent after expiration of the three-day notice.  If you do accept the rent, you’ll waive the default and won’t be able to evict until the tenant fails to pay rent again, at which time you’ll have to serve a new 3-day notice.  

When deciding whether to do the 3-day notice yourself, remember the 4 “C’s”:  Content, Communicate, Consequences, and Cost.  Regarding Content, the law mandates that certain information be included in the 3-day notice.  Many landlords rely upon pre-printed form 3-day notices.  The landlord then hand writes in the information particular to that tenant and gives the notice to the tenant.  These forms are usually legally sufficient.  Form 3-day notices sold by a company called nolo or forms available through the San Diego Apartment Owners’ Association are kept up to date and comply with all of California’s legal requirements.  Most experienced landlords use the forms without a problem.  

Even with pre-printed forms, however, I have seen landlords make two types of mistakes.  First, I have seen landlords use out-of-date forms.  If you use a form that does not reflect current legal requirements, you could lose at trial and suffer the Consequences described below.  Thus, make sure that the form you use is the most current version.  Second, I have seen landlords fill out the form incorrectly or incompletely.  If you use a form, make sure that you’ve filled in all of it.  If you’re not sure about a part of the form, don’t guess.  Hire a professional to take care of it and teach you how to complete the form for future use.  Don’t get caught with an incorrectly filled out notice or it could result in you losing your eviction case at trial.    

The next “C” is Communicate.  Specifically, the law requires that the notice be given to the tenant in a certain manner.  If you don’t serve the notice correctly, you could lose at trial later.  The first method of serving the notice that the law permits is personal service.  By personal service, I mean that the landlord simply hands a copy of the notice to the tenant.  If you personally serve the tenant, make a note of the date and time so that your lawyer can prepare the Proof of Service later.  

The second method for serving a 3-day notice is called “substitute service”.  Substitute service means that the landlord gives the notice to someone at the premises who is over the age of 18 and then mails a copy to the tenant at the property address.  Substituted service becomes necessary when you go to your rental property to serve the notice and the tenant isn’t there but another adult is, such as an adult child, spouse, friend, or parent.  When that occurs, the law allows the landlord to give the notice to the other adult and then mail a copy to the tenant.  

In such a case, be sure that you mail.  I’ve seen landlords make the mistake of giving a proper notice to an adult at the premises but the service is nonetheless defective because the landlord forgot to mail a copy to the tenant.  Also, make a note of when (date and time) that you substitute served the tenant, the name of the person who you gave the notice to, and the date that you mailed the notice.  

The third legally authorized method of service is called “nail and mail” or “post and mail.”  Suppose you go to the property and nobody is there?  How do you serve the notice then?  Easy.  Post a copy of the notice in a conspicuous place on the property (usually on the door) and mail a copy to the tenant.  Make a note of when you posted and mailed and you’re set.  

Remember one extremely important fact:  You must serve a notice on each tenant and every known occupant.  This is also a common mistake that I’ve seen in my practice.  A landlord will give one notice to the tenant who answers the door but doesn’t serve the two roommates. In such a case, you could lose later at trial against the two roommates since they were not served with notice.  

The third “C” is Consequences.  By that I mean, what are the consequences to the landlord of serving a 3-day notice that is defective in content or incorrectly served.  The answer is that you are in trouble if the tenant contests the case and shows up at trial.  If the tenant doesn’t contest the case or doesn’t show up at trial, i.e. you win by default judgment, then you got away with your mistake and you’ll win anyway. 

But that is the risk that you take if your notice is bad, either in content or manner of service.  You’ll be down to banking on the tenant not answering your lawsuit or not showing up to trial.  If the tenant contests the case and shows up ready for trial, either himself or through a lawyer, you’re sunk.  

So let’s assume for a moment the worse case scenario:  Your notice is no good.  You’re in the courtroom waiting for trial and nearby is Mr. Tenant with his lawyer ready to slice your case to ribbons.  How bad will the damage be?  Pretty bad.  When the defect in the notice (or how it was served) is pointed out to the court, the court will dismiss your case and tell you to start over. You read that right.  You will have to start the entire process over, beginning with serving a new (and correct) notice and then a new lawsuit.  All of the time that you wasted going to trial in the first case (in San Diego that would be about five weeks) will amount to rent-free living for your tenant.  

It gets worse.  Since the court dismissed your case, the tenant, under California law, would be the prevailing party.  Therefore, you will have to pay the tenant’s costs and his attorney’s fees if your written lease has an attorney’s fees provision which it almost certainly does.  Thus, if you go to trial and lose, you will have to suffer the tenant living rent-free at your property for an additional five weeks or more and you will have to pay the tenant’s litigation costs and his attorney’s fees in addition to your own.  To put it more concisely, get the notice right.  

The final “C” is Cost.  What will it cost you to have a lawyer prepare, and a professional process server serve, the 3-day notice.  In San Diego, the attorney’s charge to prepare a 3-day notice usually runs between $70.00 and $90.00.  I charge $70.00.  The process server will typically charge anywhere from $35.00-$45.00 per tenant to serve the notice.  Thus, if two tenants reside at your property, you’re looking at a total charge of about $150.00.  

I always recommend to clients that they use a registered process server for two reasons.  First, sometimes the tenant will deny at trial that he received the notice.  In that case, I can call the process server to testify. Whenever I’ve had to call the process server at trial, my client has always won.  In my experience, the court gives the process server’s testimony considerable weight because the process server is viewed as a neutral, impartial, objective witness who is far more credible than the freeloading tenant.  The second reason that I recommend a process server is simple.  When a process server delivers the notice, I know that the service will be done right.  

I’ve provided the above article to help landlords in California decide whether they should do it themselves when it comes to the 3-Day Notice to Pay Rent or Quit or have a lawyer and process server do it.  I hope that the article was informative and helps California landlords make the decision that works out best for them.