May 19, 2009
Recent reports suggest at least one-third of California’s 267,000 foreclosure sales in 2008 were foreclosures of rental units. Generally a mortgage lien which is first in time takes priority over the encumbrance of a lease which was entered into after the mortgage lien was created. As a result, the purchaser of a foreclosed property may generally terminate the subordinate leases on the property and evict its tenants. In California, however, the rules are changing and eviction of tenants in foreclosed property is becoming more complicated, and depending on the locality, may require showing just cause and paying significant relocation costs. As foreclosures of rental property continue through 2009, lenders and new owners should be aware of the various state and local tenant protections with which they must comply.
Limits on Evictions and Payment of Relocation Assistance in Los Angeles
The City of Los Angeles recently adopted an ordinance that prohibits the eviction of tenants when a building has been obtained through foreclosure unless the new owner can demonstrate one of the authorized grounds for eviction (e.g., failure to pay rent, illegal activity, violation of lease terms, owner occupancy, demolition, condo conversion, etc.), which is sometimes also referred to as a "just cause" eviction. Contrary to the general legal proposition that a mortgage lien which is first in time takes priority over the encumbrance of a later entered lease, the foreclosure is not an authorized ground for an eviction. Furthermore, when a tenant occupied building is obtained through foreclosure and tenants are evicted for certain specified reasons (i.e., a subset of the authorized grounds of eviction including owner occupancy, demolition, condominium conversion, or pursuant to a governmental order) the tenant must be paid a relocation fee of up to $17,600 per unit (with fees increasing in July 2009). This new ordinance applies to properties regardless of whether they are covered by the City’s Rent Control Ordinance.
Special Requirements for Cities Requiring "Just Cause" for Eviction
While the City of Los Angeles’ relocation benefits are currently the most stringent protections for tenants of foreclosed rental units, numerous cities in California impose various "just cause" requirements on eviction of tenants. "Just cause" provisions generally limit the circumstances under which a landlord can evict renters. Where foreclosure is not listed as a cause for eviction, it is generally not a valid basis for terminating a lease.
Tenants in buildings subject to the San Francisco Rent Control ordinance (a building built prior to June 13, 1979) have a right to stay in their units on the same terms and conditions of their rental agreements as existed before the foreclosure. Eviction from these units is subject to the City of San Francisco’s "just cause" limitations such as failure to pay rent, damaging the property, building demolition, etc. Like the ordinance in Los Angeles, an ordinance under consideration by the San Francisco Board of Supervisors would extend just cause eviction requirements and protections to tenants in units that are not presently subject to eviction controls (i.e., most residential rental units with a certificate of occupancy issued after June 13, 1979).
Enforcing its own "just cause" eviction ordinance, the City of Oakland recently filed lawsuits against numerous lenders who failed to initiate eviction proceedings of tenants on foreclosed properties in compliance with the ordinance.
In addition to the cities of Los Angeles, San Francisco, and Oakland, the cities of Berkeley, Beverly Hills, East Palo Alto, Glendale, Hayward, Palm Springs, San Diego, Santa Monica, Thousand Oaks, and West Hollywood each have their own "just cause" eviction ordinances with various unique requirements.
For these reasons, State statutes and local ordinances should be reviewed prior to acquisition of rental properties in foreclosure or commencement of tenant evictions.
Gibson, Dunn & Crutcher’s Real Estate Practice Group is available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or any of the following lawyers in the firm’s Los Angeles offices:
Dennis B. Arnold (213-229-7864, firstname.lastname@example.org)
Amy R. Forbes (213-229-7151, email@example.com)
Jesse Sharf (310-552-8512, firstname.lastname@example.org)
Shireen B. Rahnema (213-229-7096, email@example.com)
Mary Beth Maloney (213-229-7167, firstname.lastname@example.org)
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