BILL ANALYSIS                                                                                                                                                                                                    






                             SENATE JUDICIARY COMMITTEE
                           Senator Ellen M. Corbett, Chair
                              2009-2010 Regular Session


          AB 331
          Assemblymember Hall
          As Amended May 19, 2009
          Hearing Date: July 1, 2009
          Civil Code
          BCP:jd
                    

                                        SUBJECT
                                           
                               Hiring of Real Property

                                      DESCRIPTION  

          This bill would require a landlord to disclose any of the  
          following circumstances to a prospective tenant before the  
          execution of a rental agreement:
           any outstanding notice of default, or notice of trustee's  
            sale;
           any pending suit to foreclose a mortgage, trust deed, or  
            vendor's lien under a contract of sale;
           any pending declaration of forfeiture or suit for specific  
            performance of a contract of sale; or
           any pending proceeding to foreclose a tax lien.

          This bill would exempt apartments from the above requirement by  
          limiting disclosure to a rental agreement for a single-family or  
          multifamily dwelling unit, not to exceed four units.

          This bill would allow a tenant to recover twice the actual  
          damages or twice the monthly rent, whichever is greater, and all  
          pre-paid rent, if their tenancy terminates as the result of a  
          circumstance that the landlord failed, but was required to  
          disclose.

                                      BACKGROUND  

          California, as well as the nation, is facing an unprecedented  
          threat to the economy and housing market due to increasing  
          numbers of foreclosures caused by mortgage payment defaults.   
          Often, tenants have become the innocent victims of the crisis; a  
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          November 2007 New York Times article noted:  "In the foreclosure  
          crisis of 2007, thousands of American families are losing their  
          homes without ever missing a payment." A recent study by the  
          National Low Income Housing Coalition found that more than 20%  
          of the properties facing foreclosure nationwide are rentals, and  
          "[b]ecause rental properties often are home to multiple  
          families, renters make up roughly 40% of the families facing  
          eviction."

          In response to those issues, the Legislature enacted SB 1137  
          (Perata, Corbett, Machado, Chapter 69, Statutes of 2008) which,  
          among other things, required tenants to be notified about the  
          pending sale of their rental home, and allowed them to stay in  
          that home for at least 60 days following a foreclosure sale.   
          Those tenant protections were recently increased when President  
          Obama signed the Protecting Tenants at Foreclosure Act of 2009  
          on May 20, 2009.  Regarding the signing of that Act, Tenants  
          Together, a nonprofit California renters rights organization  
          noted:

            A new law passed by Congress and signed ? by President Obama  
            provides protections for tenants whose landlords fall into  
            foreclosure.  Under the Helping Families Save Their Homes  
            Act, tenants have the right to stay in their homes after  
            foreclosure for 90 days or through the term of their lease.   
            The bill also provides similar protections to housing  
            voucher holders.  The protections go into effect immediately  
            and expire at the end of 2012.

            At least one third of the units going through foreclosure in  
            California are rentals. Under current law, most California  
            tenants are entitled to 60-days notice of eviction after  
            foreclosure.  The new federal law increases this to 90 days.

            In addition, California law provides that leases are  
            extinguished by foreclosure, with limited exceptions.  Many  
            tenants enter into one year leases, only to find a few weeks  
            or months later that the property is heading for foreclosure  
            and that their leases will be extinguished.  The new federal  
            law provides that the lease survives the foreclosure, except  
            that the lease can be prematurely terminated and the tenant  
            given 90-day notice where a purchaser seeks to occupy the  
            premises.

          Similar to the above measures, this bill would require a  
          landlord to disclose certain facts, including whether the  
                                                                      



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          property is in foreclosure, to prospective tenants before the  
          execution of a rental agreement.  This bill would limit its  
          provisions to single-family or multifamily dwelling units with  
          not more than four units (thus excluding most apartments).

                                CHANGES TO EXISTING LAW
           
           Existing law  regulates the non-judicial foreclosure of  
          properties pursuant to the power of sale contained within a  
          mortgage contract.  To commence the process, existing state law  
          requires the trustee, mortgagee, or beneficiary to record a  
          Notice of Default and allow three months to lapse before setting  
          a date for sale of the property. (Civ. Code Secs. 2924, 2924f.)   
          Existing law governs the issuance of the Notice of Sale, and  
          requires that notice to be recorded at least 14 days prior to  
          the date of sale. (Civ. Code Sec. 2924f.) 

           Existing law  requires a trustee or authorized agent, upon  
          posting a notice of sale, to also post, and mail, a statutory  
          notice informing tenants that they are the resident of a  
          property subject to a foreclosure sale.  (Civ. Code Sec.  
          2924.8.)  Existing law provides that a tenant or subtenant of a  
          rental housing unit at the time the property is sold in  
          foreclosure shall be given 60 days' written notice to quit  
          before the tenant or subtenant may be removed from the property.  
          (Code Civ. Proc. Sec. 1161b.)

           Existing law  generally regulates the judicial foreclosure  
          process, and states that a notice of sale may not be given for  
          at least 120 days after the notice of levy was served on the  
          judgment debtor.  (Code Civ. Proc Sec. 701.510 et seq.)  

           Existing law  contains various provisions regulating the hiring  
          of real property, as specified.  (Civ. Code Sec. 1940 et seq.)

           This bill  would require a landlord, before the execution of the  
          rental agreement, to disclose the following circumstances to the  
          prospective tenant in writing:
           any outstanding notice of default, or notice of trustee's  
            sale;
           any pending suit to foreclose a mortgage, trust deed, or  
            vendor's lien under a contract of sale;
           any pending declaration of forfeiture or suit for specific  
            performance of a contract of sale; or
           any pending proceeding to foreclose a tax lien.

                                                                      



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           This bill  would limit the above disclosure to rental agreements  
          for a single-family or multifamily dwelling unit, not to exceed  
          four units.  

           This bill  would provide that if the tenancy terminates as a  
          result of a circumstance that the landlord failed to disclose as  
          required, the tenant may recover from the landlord twice the  
          actual damages or twice the monthly rent, whichever is greater,  
          and all pre-paid rent, in addition to any other remedy at law.

                                        COMMENT
           
          1.    Stated need for the bill  

          The sponsor, California Apartment Association (CAA), states:

            Unfortunately, as a result of California's foreclosure crises,  
            some tenants have entered into a new rental agreement for a  
            single family home only to discover shortly thereafter that  
            the house may soon be foreclosed upon.  The owners of these  
            properties provided no warning about the pending foreclosure.

            The mortgage crisis is predominantly about single family  
            homes.  Unlike apartments or multi-family housing, when a  
            single family home goes into foreclosure, the  
            successor-in-interest often terminates any existing tenancies  
            so they themselves may live at the property.  Moreover, single  
            family home values are not measured by the amount of rent  
            collected, as opposed to apartments which are valuable because  
            of rent. 

          2.   Impact of Protecting Tenants at Foreclosure Act of 2009

           On May 20, 2009, President Obama signed S. 896, P.L. 111-22,  
          which included the Protecting Tenants at Foreclosure Act of 2009  
          (Act).  That Act generally requires the purchaser of a home at a  
          foreclosure sale to honor the tenant's lease unless the  
          purchaser intends to occupy the home as their primary residence.  
           If there is no lease, the lease is terminable at will (a  
          month-to-month tenancy), or if the purchaser will occupy the  
          home as their primary residence, the tenant must be provided  
          with a 90-day notice to vacate (unless a longer period is  
          required by state or local law.)  The White House's press  
          release noted:

            One of the often overlooked problems in the foreclosure  
                                                                      



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            crisis has been the eviction of renters in good standing,  
            through no fault of their own, from properties in  
            foreclosure.  To address the problem of these tenants being  
            forced out of their homes with little or no notice, this  
            legislation will require that in the event of foreclosure,  
            existing leases for renters are honored, except in the case  
            of month-to-month leases or owner occupants foreclosing in  
            which case a minimum of 90 days notice will be required.   
            Parallel protections are put in place for Section 8 tenants.

          It should be noted that the Act fundamentally changes the  
          obligations of subsequent owners of foreclosed properties  
          (usually the foreclosing entity) by modifying the general rule  
          that foreclosure extinguishes the lease of any tenant in the  
          property.  While the notice provided by this bill responds to  
          the situation where a tenant signs a lease shortly before the  
          sale of a foreclosed property - a sale that previously would  
          have extinguished the lease - the recent protection of those  
          leases under federal law changes the effect of this bill from  
          one that warns tenants of a situation that would extinguish  
          their lease to one that informs tenants of information about the  
          property they are renting.

          3.    Policy issues involved in informing tenants of pending  
            foreclosure in light of recent changes to federal law, and the  
            need to amend the bill to apply to all residential property  
           
           The provisions of this bill raise two policy issues: (1) the  
          benefits of providing notice to prospective tenants in light of  
          recent changes in federal law; and (2) assuming that the notice  
          would provide useful information, whether the provisions should  
          be extended to apartment complexes.



          a.   Benefits to tenants of proposed notice  

            Tenants in foreclosed properties are protected in several ways  
            under existing state law - tenants receive notice of the  
            pending foreclosure before their rental property is sold, and  
            tenants of foreclosed properties are allowed to stay in the  
            property for a period of time without an obligation to pay  
            rent (state law generally provides for 60 days, but federal  
            law extended that time period to 90 days).

            This bill seeks to increase tenant protections by requiring a  
                                                                      



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            landlord to give prospective tenants a written notice of  
            various conditions relating to foreclosure, including the  
            existence of an outstanding notice of default, or pending suit  
            to foreclose.  Unlike the notice required under existing state  
            law, this notification would be provided to prospective, not  
            existing, tenants and the notice would inform prospective  
            tenants of the existence of a notice of default (the first  
            step in the nonjudicial foreclosure process) as opposed to the  
            notice of sale (which tenants are notified of under existing  
            law and is provided at a minimum of three to six months after  
            the notice of default).  Staff notes that a notice of default  
            can be cured, and that much of the recent federal loan  
            modification efforts have been to assist those borrowers who  
            are in default.  As a result, it is important that any  
            prospective tenant who receives notice that their potential  
            rental property is in default understands that the notice of  
            default does not impact the landlord-tenant relationship,  
            including their obligation to pay rent, and that they do have  
            rights under state and federal law should the property be sold  
            at a foreclosure sale.  

            Also, from the perspective of a distressed homeowner seeking  
            to rent their property, the rental of that property may  
            represent the only way for them to make their mortgage  
            payment.  That homeowner may have lost their job, failed to  
            qualify for a loan modification, and moved out of their  
            primary residence in an attempt to rent the family home in  
            order to make their mortgage payment.  Considering that a  
            prospective tenant would be discouraged from renting a home if  
            they do, in fact, know that the home is in foreclosure, the  
            notice required by this bill would frustrate the leasing of  
            homes by those troubled borrowers.  Absent tenants, a  
            distressed homeowner would be unlikely to have sufficient  
            funds to pay the property's mortgage, resulting in the loss of  
            the home.

            On the other hand, the notice proposed by this bill could  
            provide useful information for an educated individual who  
            knows their rights under state and federal law.  Although  
            their lease would likely be protected under federal law, those  
            prospective tenants would be able to make the educated  
            decision to avoid the risks associated with renting a property  
            in foreclosure.  It should be noted that committee staff has  
            received reports of unscrupulous landlords signing tenants to  
            new leases right before the foreclosure sale when, prior to  
            the above federal law, those leases would have been  
                                                                      



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            extinguished by the foreclosure sale.  


          b.    Provisions of the bill should be amended to require notice  
          to all residential housing 

            This bill, sponsored by the California Apartment Association,  
            would omit apartments from the notice requirements by limiting  
            the bill's application to dwellings with one to four units.   
            In support of that limitation, the sponsor contends that the  
            mortgage crisis is predominantly about single-family homes,  
            that single-family homes are not measured by the amount of  
            rent collected, and that the purchaser of a foreclosed home  
            often terminates the existing tenancy.  

            Despite those contentions, apartments are not immune from  
            foreclosure.  The Associated Press' March 18, 2009 article  
            entitled Foreclosures force renting families onto street  
            reported:

               While the nation's default rate on apartment buildings is  
               still relatively low, it is rising quickly. Fannie Mae,  
               for example, said its delinquency rate was 0.30 percent  
               at the end of last year, double what it was at the end of  
               September, and almost four times the rate at the end of  
               2007.

               In Los Angeles, neighborhoods in the city's low-income  
               south and central areas are being walloped. In 2007,  
               buildings containing a total of 1,690 apartments were  
               foreclosed on. In 2008, owners lost buildings containing  
               4,789 apartments, according to the city housing  
               department.

               Marquez said complaints have flooded in to the city from  
               evicted tenants. Tenants rights group Inquilinos Unidos  
               (Spanish for Tenants United) has never seen as many cases  
               of tenant foreclosure evictions as in the past six  
               months, said organizer Silvia Sandoval.

               Most evictions stem from banks that don't want to be  
               landlords after foreclosing on properties, even if they  
               have to forgo rental income. Occupied properties entails  
               hiring a property manager, which is something banks are  
               generally reluctant to do, even in a normal real estate  
               market, said Dustin Hobbs, spokesman for the California  
                                                                      



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               Mortgage Bankers Association.

            It is unclear, from a public policy standpoint, why notice  
            should be required for prospective tenants of single family  
            homes but not be provided to prospective tenants of an  
            apartment complex.  If the information is needed to warn  
            tenants that their tenancy may be terminated - federal law now  
            mitigates some of the need for that information - on the other  
            hand, if the intent is to provide tenants with information  
            that is considered material and important, the bill should be  
            amended to apply to all prospective tenants, including those  
            in apartment complexes. 

            SHOULD THE BILL BE AMENDED TO REQUIRE THE DISCLOSURE TO APPLY  
            TO ALL RESIDENTIAL PROPERTIES?

             Suggested amendment:  

            On page 2, line 5, strike out ", not to exceed four units,"

            It should be noted that the above amendment would also  
            reaffirm that, from a public policy standpoint, potential  
            tenants of apartment complexes in California should generally  
            be granted similar rights as do tenants of single-family  
            housing.  (The present bill is based upon an Oregon statute  
            that applies a similar disclosure requirement to "a dwelling  
            unit in premises containing no more than four dwelling units."  
            That statute was enacted over 12 years ago and does not take  
            into account the recent housing crisis, changes in federal  
            law, or California's own policy choices. (See Ore. Rev. Stats.  
            Sec. 90.310.).)

          4.   Provisions of the bill require disclosure of items beyond  
            the scope of nonjudicial foreclosure  

          In addition to requiring notification of any outstanding notice  
          of default (the first step in the nonjudicial foreclosure  
          process), the bill would additionally require notification of:  
          (1) notice of trustee's sale; (2) pending suit to foreclose; and  
          (3) any pending proceeding to foreclose on a tax lien.  Despite  
          those additional items, the sponsor focuses on the part of the  
          bill that "require[s] property owners to rent a single family  
          home to disclose any outstanding 'notice of default' recorded  
          against the property."  As discussed above, that notice, by  
          itself, does not explain the meaning of a "notice of default,"  
          or inform the tenants of their significant rights under state  
                                                                      



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          and federal law.  

          5.    Recovery of twice the actual damages or twice the monthly  
            rent, and all prepaid rent if a tenancy terminates as the  
            result of a circumstance the landlord failed to disclose  

          This bill would also provide that if the tenancy terminates as a  
          result of a circumstance that the landlord failed to disclose,  
          as required by this bill, the tenant may recover twice their  
          actual damages or twice their monthly rent, whichever is  
          greater, from the landlord.  The tenant may additionally recover  
          all prepaid rent.

          The Consumer Attorneys of California, in support, state that the  
          above provisions "amplif[y] the protections afforded to  
          California consumers." Given that federal law now generally  
          requires a subsequent purchaser to take the property "subject  
          to" the rights of a tenant under their lease, it is unclear how  
          often a tenancy would terminate in a manner that triggers the  
          recovery of damages.   

          6.    Opposition by the Apartment Association, California  
          Southern Cities 
             
          The Apartment Association, California Southern Cities, opposes  
          the bill unless the bill is amended with the following  
          provisions that seek to help landlords and prospective tenants  
          understand the foreclosure process.  The Apartment Association,  
          California Southern Cities describes their amendments as  
          follows:
          "
                 Provide meaningful disclosure to a prospective tenant by  
               EXPLAINING the impact of a foreclosure sale on a  
               residential rental unit.  Failure to explain a foreclosure  
               action[] will all but assure that a prospective tenant will  
               seek another rental unit and hasten the foreclosure  
               process. 
                 Comport with the disclosure language in SB 1137 (Perata)  
               a major piece of new law relating to foreclosures that  
               became effective July 1, 2008.
                 Track federal law, Protecting Tenants at Foreclosure Act  
               of 2009, which became effective May 21, 2009. In pertinent  
               part, it requires a lender or buyer who acquires title  
               through a foreclosure sale, to give at least a 90-day  
               notice to terminate a tenancy and otherwise give the tenant  
               full right to remain in tenancy until a lease ends. 
                                                                      



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                 Provide greater clarity when the disclosure is required  
               to be made."

          7.   Text of the Protecting Tenants at Foreclosure Act of 2009  

          For committee reference, the text of the Protecting Tenants at  
          Foreclosure Act of 2009, as signed by President Obama on May 20,  
          2009, is below:

                  TITLE VII--PROTECTING TENANTS AT FORECLOSURE ACT

          SEC. 701. SHORT TITLE.

               This title may be cited as the `Protecting Tenants at  
          Foreclosure Act of 2009'.

          SEC. 702. EFFECT OF FORECLOSURE ON PREEXISTING TENANCY.

          (a) In General- In the case of any foreclosure on a  
          federally-related mortgage loan or on
          any dwelling or residential real property after the date of  
          enactment of this title, any immediate successor in interest in  
          such property pursuant to the foreclosure shall assume such  
          interest subject to--
            (1) the provision, by such successor in interest of a notice  
            to vacate to any bona fide tenant at least 90 days before the  
            effective date of such notice; and 
            (2) the rights of any bona fide tenant, as of the date of such  
            notice of foreclosure ---
               (A) under any bona fide lease entered into before the  
               notice of foreclosure to occupy the premises until the end  
               of the remaining term of the lease, except that a successor  
               in interest may terminate a lease effective on the date of  
               sale of the unit to a purchaser who will occupy the unit as  
               a primary residence, subject to the receipt by the tenant  
               of the 90 day notice under paragraph (1); or
               (B) without a lease or with a lease terminable at will  
               under State law, subject to the receipt by the tenant of  
               the 90 day notice under subsection (1),
                                                          except that nothing under this section shall affect the  
               requirements for termination of any Federal- or  
               State-subsidized tenancy or of any State or local law that  
               provides longer time periods or other additional  
               protections for tenants.
          (b) Bona Fide Lease or Tenancy- For purposes of this section, a  
          lease or tenancy shall be
                                                                      



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          considered bona fide only if-
            (1) the mortgagor under the contract is not the tenant; 
            (2) the lease or tenancy was the result of an arms-length  
            transaction; or
            (3) the lease or tenancy requires the receipt of rent that is  
            not substantially less than fair market rent for the property.
          (c) Definition- For purposes of this section, the term  
          `federally-related mortgage loan' has the same meaning as in  
          section 3 of the Real Estate Settlement Procedures Act of 1974  
          (12 U.S.C. 2602).

          SEC. 703. EFFECT OF FORECLOSURE ON SECTION 8 TENANCIES.

          Section 8(o)(7) of the United States Housing Act of 1937 (42  
          U.S.C. 1437f(o)(7)) is amended-
            (1) by inserting before the semicolon in subparagraph (C) the  
            following: `and in the case of an owner who is an immediate  
            successor in interest pursuant to foreclosure during the  
            initial term of the lease vacating the property prior to sale  
            shall not constitute other good cause, except that the owner  
            may terminate the tenancy effective on the date of transfer of  
            the unit to the owner if the owner-
               `(i) will occupy the unit as a primary residence; and
               `(ii) has provided the tenant a notice to vacate at least  
               90 days before the effective date of such notice.'; and
            (2) by inserting at the end of subparagraph (F) the following:  
            `In the case of any foreclosure on any federally-related  
            mortgage loan (as that term is defined in section 3 of the  
            Real Estate Settlement Procedures Act of 1974 (12 U.S.C.  
            2602)) or on any residential real property in which a  
            recipient of assistance under this subsection resides, the  
            immediate successor in interest in such property pursuant to  
            the foreclosure shall assume such interest subject to the  
            lease between the prior owner and the tenant and to the  
            housing assistance payments contract between the prior owner  
            and the public housing agency for the occupied unit, except  
            that this provision and the provisions related to foreclosure  
            in subparagraph (C) shall not shall not affect any State or  
            local law that provides longer time periods or other  
            additional protections for tenants.'.

          SEC. 704. SUNSET.

          This title, and any amendments made by this title are repealed,  
          and the requirements under this title shall terminate, on  
          December 31, 2012.
                                                                      



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          Support  : California Association of Realtors (CAR);  
          Assessor-Recorder of the City and County of San Francisco;  
          Consumer Attorneys of California; Non-Profit Housing Association  
          of Northern California (NPH); Western Center on Law and Poverty;  
          California Rural Legal Assistance Foundation

           Opposition  :  Apartment Association, California Southern Cities
                                        HISTORY
           
           Source  : California Apartment Association

           Related Pending Legislation  :

          SB 127 (Calderon, 2009), would provide greater information to  
          prospective bidders about properties sold at a trustee's sale,  
          require a mortgagee or trustee to make specified disclosures on  
          an Internet Web site or in a 24-hour telephone recording at  
          least one week before the scheduled sale of a property, require  
          a beneficiary to provide an opening bid to a trustee at least  
          one week prior to the first scheduled sale date, and require a  
          trustee to provide a list of liens and encumbrances on a  
          foreclosed property and to charge a reasonable fee for that  
          information, as specified. This bill is at the Assembly desk.

          SB 120 (Lowenthal, 2009), would apply certain tenant protections  
          to after a foreclosure sale.  This bill is in the Assembly  
          Judiciary Committee.

           Prior Legislation  :

          AB 1333 (Hancock, 2008), would have provided that the legal  
          owner of real property must pay the utilities provided to a  
          property or its tenants following a foreclosure under specified  
          circumstances.  This bill was vetoed.

          SB 1137 (Perata, Corbett, Machado, Chapter 69, Statutes of  
          2008), provided, among other things, that tenants of foreclosed  
          properties receive notice that their home is in foreclosure, and  
          receive a 60-day notice to quit, as specified.

           Prior Vote  :

          Assembly Judiciary Committee (Ayes 10, Noes 0)
          Assembly Floor (Ayes 76, Noes 0)
                                                                      



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