Foreclosure and that new lease: How long is your arm?

Many tenants with landlords in foreclosure mistakenly believe that they can manipulate the law to stay as long as they want. Those tenants may find themselves on the wrong end of an eviction action.

Under section 1161b of the California Code of Civil Procedure, also known as AB 2610,  tenants who have a fixed-term lease may stay after foreclosure until the lease is up. They may sign this lease, for one year, two years, or even longer, at any time before the foreclosure sale. If they don’t have such a lease, the bank or whoever buys the property can evict them on 90 days notice.

Many tenants have signed new leases, for five years or longer, right before their houses go on the auction block. It’s no skin off the landlords’ back—they’re about to lose the place, anyway. The tenants then wave their new lease at the bank and say that they can stay for, really, as long as they want.

Not so fast. The law has two big hurdles for tenants with their new leases. First, the rent must be close to market value unless the tenant is on Section 8 or gets some other subsidy. Tenants paying half the rent that the place is worth should look at packing up in 90 days, despite that lease.

Second, the lease must be a result of an “arms’ length transaction.” That’s lawyers’ jargon for a contract between people with roughly equal bargaining power acting in their own interest. In other words, an arms’ length lease is one to which two strangers, both trying to get the best deal they could, would reasonably agree. A lease the landlord gives just to thwart the bank is not arms’ length.

A lease will hold off an eviction after foreclosure only if it looks like a real lease. Few residential leases last longer than one year, two years tops. A longer one is not at arms’ length. If the landlord and tenant had been happy with a month-to-month rental, suddenly deciding on a long lease just before the bank takes over looks very shaky. A tenant who wants to stay until the end of a long lease may even have to show that the landlord had some hope of avoiding foreclosure.

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