Monday, April 28, 2014

FYI: Cal App Ct Holds PFTA Causes Bona Fide Lease to Survive Foreclosure to End of Lease Term

Saturday, February 22, 2014

The California Court of Appeal, Sixth District, recently held that the Protecting Tenants at Foreclosure Act (“PFTA”) causes a bona fide lease to survive foreclosure through the end of the lease term, overriding state laws that provide less protection but expressly allowing states to retain the authority to enact greater protections, and that such continued PFTA tenancies remain protected by California law.

A copy of the opinion is available at

A bank foreclosed on a residential property, and purchased same at a nonjudicial foreclosure sale.  It hired a real estate company and a servicer to act on its behalf in connection with the property.  At the time of the foreclosure sale, appellant-occupants ("occupants") were parties to an ongoing lease to rent a portion of the subject property. 

The occupants were allegedly displaced from the rental unit, and their belongings were allegedly placed in the backyard, although the bank contended that neither it nor anyone acting at the bank's behest was responsible for same.

The occupants argued that they informed the bank of the fact that they had a valid lease, and that they were wrongfully evicted from the property, but the bank indicated that the occupants would have to seek redress from the parties responsible, as it was not involved. The occupants further argued that the bank had failed to determine whether they might have a bona fide lease.

The occupants sued the bank and related parties, alleging wrongful eviction, breach of the covenant of quiet enjoyment, and a violation of the federal Protecting Tenants at Foreclosure Act ("PTFA"), among other causes of action. 

The bank moved for summary judgment.  The trial court granted the bank's motion, finding that the foreclosure sale extinguished the lease under California law.  Accordingly, the trial court determined that the bank did not step into the shoes of the landlord, and was not responsible for the alleged wrongful eviction and related allegations, in the absence of any evidence that agents of the bank carried out the wrongful conduct. 

The occupants appealed, arguing that the federal Protecting Tenants at Foreclosure Act (“PFTA”) created a landlord-tenant relationship between the bank and the occupants for the duration of their lease. 

As you may recall, the PTFA provides among other things that bona fide tenants of foreclosed residential properties must be given a notice to vacate at least 90 days before the effective date of such notice, and further provides that bona fide leases entered into "before the notice of foreclosure" will generally survive the foreclosure. 

The occupants argued that the PTFA created a landlord-tenant relationship between the occupants and the bank, such that the bank owed them the same duties as any landlord would owe to any tenant under California law.  The bank argued that the PTFA only provides a defense to eviction proceedings, and did not make it a landlord nor impose any duties on it, apart from those specifically enumerated therein. 

The Court began its analysis by scrutinizing the legislative history related to the PTFA, concluding that same "strengthens the case" that the PTFA was intended to cause bona fide leases for a term to survive foreclosure.  It further noted that "Congress clearly intended [the PTFA] to put a stop to self-help measures like blocking bona fide tenants' access, turning off their utilities, or removing the tenants' possessions." 

Therefore, the Court determined that were it to accept that "the PFTA could only be invoked defensively in court, bona fide tenancies for a term...would be largely unprotected and immediate successors in interest could interfere with tenants' possessory rights with impunity..."  The Court termed this result "completely at odds with the aim of [the PTFA]." 

Instead, the Court opined that interpreting the PTFA to provide that "bona fide tenants under [bona fide leases] and the immediate successor in interest in the foreclosed property have a landlord-tenant relationship..." 

The Court next turned its attention to the occupants' various state law claims, reasoning that the bank had not "identified any legal bar precluding a bona fide tenant...from seeking state law remedies for violations of tenant's rights against an immediate successor in interest in a foreclosed property."  For that reason, the Court concluded that the lower court erred in granting summary judgment in favor of the bank as to the occupants' various claims under state law. 

The Court determined that the occupants failed to produce sufficient evidence to support several of their claims, noting that there was no evidence presented to suggest that the bank had directly "interfered with appellants' possession or quiet enjoyment." 

However, the Court stated that it found the bank's agent's alleged failure to determine whether the occupants were bona fide tenants "troubling," and further opined that "the PTFA's protection of bona fide tenancies...would be empty if it did not impose a legal identify all bona fide tenants and determine whether they are entitled to continue as tenants..." 

The Court indicated that where a successor in interest to a foreclosed property "unreasonably fails to inform or misinforms a third-party as to a bona fide tenant's right to occupy leased premises," such omission could constitute an interference with the tenant's "possession and quiet enjoyment and render that interference attributable to the successor in interest." 

Accordingly, the Court held that the occupants raised "triable issues of material fact" as to whether the bank's employees caused the "third parties' substantial interference with appellants' possession" of the subject property and therefore violated California law. 

Specifically, the Court indicated that one of the bank's alleged agents who was responsible for advising the occupants of the property of the foreclosure, and facilitating relocation if possible, did not take "steps to determine whether [occupants] had the right to remain as tenants..." 

Because it determined that triable issues of material fact existed as to the bank's alleged conduct, the Court reversed the lower court's judgment.    

Eric Tsai
McGinnis Wutscher Beiramee LLP
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