Due to the volatility of the economy and housing market at times, anything can happen. If you are a landlord or lessee you may wonder, does foreclosure affect a lease? A lot of the answers to this question depend both on the type of lease and your locality. Below you will find helpful information on how to navigate a lease on a property that has been foreclosed on.
The Basics of Foreclosure
Foreclosure occurs when a lender takes ownership of a mortgaged property due to a borrower defaulting on their own. If the borrower cannot pay their mortgage, the lender takes ownership of the property and then sells it to recover the amount owed. A borrower can default by not paying the mortgage for a specified number of monthly payments, or by failing to meet the terms of the mortgage in some other way. The foreclosure process varies by state, but often begins with the first missed payment.
After a borrower fails to make their monthly payment, the lender sends a notice about the missed payment. When a borrower misses two or more payments, the lender sends a demand letter. If the 90-day mark passes without any response from the borrower, the lender then sends a notice of default. This is a crucial step in the process as the borrower has very limited time to correct the issue.
Usually the borrower has 30 days once the notice of default is sent to settle the missed payments and reinstate the loan. At the end of the 30-day reinstatement period the lender begins foreclosure proceedings. This foreclosure process differs depending on the state so it’s important to understand your localities laws that govern the foreclosure process.
Does Foreclosure Affect a Lease?
A foreclosure can have an impact on a lease. It is important to note that there are both residential and commercial leases. Both have their respective differences and the impact of foreclosure can be different depending on the type of lease. The general rule is that a foreclosure terminates all subordinate leases on a property. A subordinate lease proves determined by the timing of the:
- Mortgage document
- Lease agreement
- And any other agreements attached to the property
A lease agreement signed after the mortgage we consider junior. However, if a lease was agreed upon and entered into before the mortgage, the lease will stay in effect. Because the rights of a tenant in this scenario stay considered senior as compared to the mortgage.
Residental vs Commercial
One of the notable differences between residential and commercial leases is that commercial leases generally have a clause outlining this scenario. In general, a retail or commercial lease will include a clause that specifically states that the lease is subordinate to all mortgages (often referred to as a “subordination clause”). This can also include mortgages entered into after the lease. These would typically would remain junior to the lease (because they were entered into after the lease). Still, they can legally be contracted away.
In exchange, the lender may agree to leave the lease as is in the event of foreclosure. We often refer to this as a “non-disturbance clause.” If a tenant agrees to the subordination clause, it proves crucial to also protect themselves. Also, to ensure a non-disturbance clause remains included to protect their rights and interests. In a case like this, the tenant will need to treat the new landlord as they would the prior one. This includes paying rent and complying with the lease agreement.
Professional Foreclosure Prevention Services
If you are involved in a residential or commercial lease and are concerned about the mortgage, professional foreclosure prevention services are necessary. Apex Resolution foreclosure prevention can help you maintain your mortgage without issue. There are a variety of foreclosure options for homeowners and it is important to have an industry professional on your side. Contact Apex Resolution for help today!