PROTECTING TENANTS AT FORECLOSURE ACT – POORLY WORDED STATUTE OFFERS OPPORTUNITY FOR CREDIT IMPAIRED PROSPECTIVE TENANTS TO LEASE RESIDENTIAL PROPERTIESLos Angeles Real Estate Specialist Suren Ambarchyan Outlines New Foreclosure Defense SchemesThe U.S. Congress enacted Protecting Tenants at Foreclosure Act of 2009 (“PTFA”) to protect “bona fide”tenants from immediate eviction following a foreclosure sale. Los Angeles real estate specialist SurenAmbarchyan explained that “the statute generally provides that a purchaser at a foreclosure saleacquires title to the property subject to any bona fide lease entered into before the notice of foreclosureand the tenant under such a lease may continue to occupy the foreclosed property until the end of theremaining lease terms.” “The only exception is that a purchaser at a foreclosure sale acquiring theproperty as their primary residence has the right to terminate the lease prior to the expiration of thelease term by giving written notice to the tenant 90 days prior to the lease termination date,” noted LosAngeles real estate specialist Suren Ambarchyan.Los Angeles real estate specialist Suren Ambarchyan doesn’t hesitate to share his views on the law.Suren Ambarchyan commented “The PTFA is not particularly well written or even thought out. It doesn’tseem that the ramifications of such a law were well considered prior to its adoption.” SurenAmbarchyan further explained that the law is “unusual and probably unconstitutional” because it“retroactively modifies the expectations of the lender when they made the loan – that is, the lenderwould be able to foreclose, secure possession of the property and then market and sell the loan torecover all or part of the balance due on the loan.”The PTFA has certainly created uncertainty in the market and opportunities for abuse. There hasdeveloped a cottage industry of attorneys, real estate professionals and foreclosure specialist who seekto use the PTFA for purposes other than the protection of tenants. Suren Ambarchyan recently revieweda website scheme promoting foreclosure relief. Here is how the scheme works: • Owner A and Owner B are both facing foreclosure. • Owner A agrees to lease its property at a below market rental rate to Exchange; Owner B agrees to lease its property at a below market rental rate to Exchange. • Exchange, without taking possession of either property, then leases Property A to Owner B and Property B to Owner A at a market rental rate. • Owner A and Owner B secure long-term housing in desirable neighborhoods without undergoing a credit or other background check. By entering into the leases before foreclosure, Owner A and Owner B eliminate the risk of non-approval based on credit or other conditions. • Exchange profits by charging an exchange fee, by collecting a non-refundable lease deposit and by collecting and retaining the difference in rent between what it collects on the subleases and what it pays out on master lease.While Los Angeles Suren Ambarchyan declined to comment on the legality or ethical implications of suchschemes, Suren Ambarchyan did indicated that it is “pretty easy to see how an unscrupulous company orindividual might take advantage of this law.” Suren Ambarchyan offered a few examples of opportunisticbehavior:
• Owner A offers to Tenant a long-term lease – 20 year lease. Owner A enters into the transaction with the intention of rendering title to the property unmarketable and to force the lender to agree to loan modification. • - • Foreclosure specialist charges a $5,000 transaction fee to Owner A and Owner B, who both have properties in foreclosure, for the exchange of their properties. Foreclosure specialist sets the rental rate at 50% below the owner’s current mortgage payments. Both lenders foreclose, challenge the validity of the leases and win, and obtain orders of possession. Owner A and/or Owner B, notwithstanding their payment of a transaction fee and security deposit to the foreclosure specialist, are evicted. • Owner A leases property to entity owned by family friend. Family friend then rents to high-risk tenant at above-market rental rate. Scenario is repeated with high-risk tenants ranging from recently released prisoners to individuals running criminal enterprises from the property.Los Angeles real estate specialist Suren Ambarchyan further explained that under PTFA “the lender isfaced with an unappealing choice - The lender can foreclose.” However, if the lender does foreclose andthere is a lease in place, the lender must wait until the end of the lease term before it can terminate thelease, take possession and sell the property. Lenders are ill-equipped to be long-term property owners.Their business is lending, not managing rentals. Suren Ambarchyan commented “While it is hard to feelsorry for lenders who to a large extent created the housing mess with their easy credit… lowunderwriting standards, the PTFA has greatly changed the rule of the game and legal landscape forlenders.” Suren Ambarchyan pointed out that the biggest threat to lenders as well as to local communityis that the “lender becomes the landlord and is then responsible for maintenance, repairs, insurance,taxes and even possibly pre-paid rent and security deposits.”Los Angeles real estate specialist Suren Ambarchyan cautioned that property owners considering suchschemes should seek independent legal counsel to review the transactions. Suren Ambarchyancommented “legal review can be expensive, but it is certainly less costly than money wasted onfraudulent schemes that offer owners facing foreclosure little else – but false hope.” The law, althoughpoorly written, does provide limited safeguards to lenders. Suren Ambarchyan explained that anyleasing or exchange scheme must at a minimum meet the following requirements:] • The lease transaction cannot be between the owner as the landlord and a class of tenants including the owner, owner’s spouse, owner’s parents or owner’s children. • The lease must be an “arms-length” transaction. • The rental rate for the lease must not be “substantially less” than the fair market rent for the property.If you are an owner facing foreclosure and considering the leasing or exchange of your property, contactLos Angeles real estate specialist Suren Ambarchyan to assess the legality and likelihood of success ofany proposed transaction.