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 (more) AB 331 (Hall) Page 2 of ? 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 AB 331 (Hall) Page 3 of ? 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. AB 331 (Hall) Page 4 of ? 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 AB 331 (Hall) Page 5 of ? 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 AB 331 (Hall) Page 6 of ? 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 AB 331 (Hall) Page 7 of ? 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 AB 331 (Hall) Page 8 of ? 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 AB 331 (Hall) Page 9 of ? 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. AB 331 (Hall) Page 10 of ? 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 AB 331 (Hall) Page 11 of ? 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. AB 331 (Hall) Page 12 of ? 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) AB 331 (Hall) Page 13 of ? **************