I’ve Foreclosed on a Property, Some Tenants Live There Already, But I Think I Can Do Better…

Let’s say you’ve purchased a Maryland residential property (defined as having four or fewer dwelling units) at foreclosure, and you want to either move in or rent it as investment property. However, tenants living in it at the time of foreclosure still reside there, under a lease having an unexpired term at what you consider a below-market rent. What, if anything, can you do?

Recent legislation in Maryland, passed in response to the turmoil of the real estate economy, has given tenants living in residential property that has been foreclosed upon enhanced protections. This legislation limits opportunities to terminate existing leases.

Assuming the property you purchased is residential and you intend to lease it, you will take title subject to the rights of existing tenants – which means that they have the right to continue renting the property until the end of the lease term. However, this right applies only to tenants that are “bona fide,” meaning that they are not the mortgagors who have defaulted (or the child, spouse, or parent of the mortgagors), the lease was the result of an arms-length transaction, and the rent is not substantially less than fair market value. (The measure of fair market value, while objectively quantifiable through, for example, an MAI appraisal may be costly, if the tenants dispute your valuation.)

Different rules are applicable if the lease is an “at will” lease (meaning that either side can terminate at any time) or is for a month-to-month tenancy. In those instances, you must give 90 days notice before terminating the tenancy.

Similarly, if you purchased the property with the intent of occupying it yourself as your residence, then, no matter how much time remains on a lease term, you can terminate it, provided the 90 day notice is given.

A word to the wise, however; Maryland’s notice requirements are specific, and must be strictly followed. More information about the notice requirements and the foreclosure process can be found at here.