In addition to the lender and the defaulting owner, another party that
stands to suffer greatly from the foreclosure of a residential property
is the innocent tenant.
The suffering typically begins early, long before the foreclosure sale.
Notices of Sale, appraisers and potential buyers begin appearing at the
property much to the confusion of the tenant. Despite learning that a
foreclosure may be imminent and a new owner may soon be in place, the
tenant is bound by the terms of his rental agreement until such a transfer
actually takes place. This places the tenant between a rock and a hard
place: Should he abide by the terms of the lease agreement and risk being
forced to leave on short notice by the new owner? Or should he break the
lease agreement now and risk liability to the owner if the property is
not ultimately foreclosed upon?
Once the property is sold at auction (or the property reverts back to the
lender if no sale occurs), the new owner is entitled to possession and
the tenant becomes a "hold-over" tenant. The sale terminates
the existing tenancy and there is no landlord-tenant relationship between
the new owner and the existing tenant. (There is a minor exception where
the tenancy begins prior to the loan that is foreclosed upon and notice
of the tenancy has been given to the lender, but that situation is rare).
In terms of money, rent owing before the foreclosure sale is payable to
the new owner and although technically the new owner cannot demand that
the tenant pay rent after the sale, the new owner can seek the "fair
rental value" of the property in a subsequent eviction action.
The new owner can decide to continue the tenancy, but that is unusual,
especially if the new owner is the lender bank. However, if the new owner
does accept rent, the relationship between the two becomes a consensual
month-to-month tenancy and the new owner becomes a landlord with all the
duties and obligations of such. Because of this, many lenders are simply
allowing hold-over tenants to live rent-free until the lender can get
around to filing an eviction, which is sometimes several months.