PROTECTING TENANTS AT FORECLOSURE ACT – POORLY WORDED STATUTEOFFERS

OPPORTUNITY FOR CREDIT IMPAIRED PROSPECTIVE TENANTS TOLEASE RESIDENTIAL

PROPERTIESLos Angeles Real Estate Specialist law Offices of ALG & Associates
Outlines NewForeclosure Defense Schemes

The U.S. Congress enacted Protecting Tenants at Foreclosure Act of 2009 (“PTFA”)
toprotect “bona fide” tenants from immediate eviction following a foreclosure
sale.Los Angeles real estate specialist explained that “the statutegenerally provides
that a purchaser at a foreclosure sale acquires title to theproperty 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 propertyuntil the end of the
remaining lease terms.” “The only exception is that a purchaserat a foreclosure
sale acquiring the property as their primary residence has the rightto terminate the
lease prior to the expiration of the lease term by giving writtennotice to the tenant
90 days prior to the lease termination date,” noted Los Angelesreal estate specialist
Law Offices of ALG & Associates.Los Angeles real estate specialist doesn’t hesitate
to share his views on the law. They commented “The PTFA is not particularly
wellwritten or even thought out. It doesn’t seem that the ramifications of such a
lawwere well considered prior to its adoption.” They further explained that the law
is “unusual and probably unconstitutional” because it “retroactivelymodifies the
expectations of the lender when they made the loan – that is, thelender would be
able to foreclose, secure possession of the property and thenmarket and sell the
loan to recover all or part of the balance due on the loan.”The PTFA has certainly
created uncertainty in the market and opportunities forabuse. There has
developed a cottage industry of attorneys, real estateprofessionals and
foreclosure specialist who seek to use the PTFA for purposes otherthan the
protection of tenants. They recently reviewed a websitescheme 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 toExchange;
Owner B agrees to lease its property at a below market rental rateto Exchange.

•Exchange, without taking possession of either property, then leases PropertyA 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 neighborhoodswithout

undergoing a credit or other background check. By entering into theleases 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-refundablelease
deposit and by collecting and retaining the difference in rent betweenwhat it
collects on the subleases and what it pays out on master lease.

While Los Angeles law offices of alg & associates declined to comment on the
legality or ethicalimplications of such schemes, did indicated that it is “prettyeasy
to see how an unscrupulous company or individual might take advantage of this
law.” They offered a few examples of opportunistic behavior:

•Owner A offers to Tenant a long-term lease – 20 year lease. Owner A entersinto

the transaction with the intention of rendering title to the propertyunmarketable
and to force the lender to agree to loan modification.

• Foreclosure specialist charges a $5,000 transaction fee to Owner A andOwner B,

who both have properties in foreclosure, for the exchange of their properties.
Foreclosure specialist sets the rental rate at 50% below theowner’s current
mortgage payments. Both lenders foreclose, challenge thevalidity of the leases
and win, and obtain orders of possession. Owner Aand/or Owner B, notwithstanding
their payment of a transaction fee andsecurity deposit to the foreclosure specialist,
are evicted.

Owner A leases property to entity owned by family friend. Family friend thenrents
to high-risk tenant at above-market rental rate. Scenario is repeatedwith high-risk
tenants ranging from recently released prisoners to individualsrunning criminal
enterprises from the property.Los Angeles real estate specialist further explained
that underPTFA “the lender is faced with an unappealing choice - The lender can
foreclose.”However, if the lender does foreclose and there is a lease in place, the
lender mustwait until the end of the lease term before it can terminate the lease,
takepossession and sell the property. Lenders are ill-equipped to be long-term
propertyowners. Their business is lending, not managing rentals. They commented
“While it is hard to feel sorry for lenders who to a large extent createdthe housing
mess with their easy credit… low underwriting standards, the PTFA hasgreatly
changed the rule of the game and legal landscape for lenders.” They pointed out
that the biggest threat to lenders as well as to localcommunity is that the “lender
becomes the landlord and is then responsible formaintenance, repairs, insurance,
taxes and even possibly pre-paid rent and securitydeposits.”Los Angeles real estate
specialist cautioned that propertyowners considering such schemes should seek
independent legal counsel to reviewthe transactions. They commented “legal
review can be expensive,but it is certainly less costly than money wasted on
fraudulent schemes that offerowners facing foreclosure little else – but false hope.”
The law, although poorlywritten, does provide limited safeguards to lenders. They
explained that any leasing or exchange scheme must at a minimum meet the
followingrequirements:]

•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 fairmarket
rent for the property.If you are an owner facing foreclosure and considering the
leasing or exchange of your property, contact Los Angeles real estate specialist to
assess the legality and likelihood of success of any proposed transaction.