BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 1191 (Simitian)
As Amended April 23, 2012
Hearing Date: May 1, 2012
Fiscal: No
Urgency: No
SK
SUBJECT
Landlord-Tenant: Disclosure of Notice of Default
DESCRIPTION
This bill would require a landlord who has received a notice of
default (NOD) to disclose that notice to any prospective tenant
prior to entering into a lease agreement for the property. This
bill would specify the remedies available for a violation and
the notice that must be given to prospective tenants.
BACKGROUND
California leads the nation with one of the highest rates of
foreclosure. According to RealtyTrac, in California, one in
every 303 housing units received a foreclosure filing in March
2012, and 48,422 houses received a foreclosure notice in
February alone. Tenants living in those homes have
overwhelmingly been impacted. A November 18, 2007 New York
Times article, "As Owners Feel Mortgage Pain, So Do Renters,"
noted "thousands of American families are losing their homes
without ever missing a payment. They are renters in houses
whose owners default on their mortgages - a large but little
noticed class of casualties."
In January 2011, Tenants Together released its third annual
report entitled "California Renters in the Foreclosure Crisis."
The report estimated that at least 38 percent of homes in
foreclosures were rentals and more than 200,000 California
renters were directly affected by home foreclosures in 2010
alone. Tenants Together further estimated that these numbers,
based on data from Foreclosure Radar, likely undercount the
(more)
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number of foreclosed homes that are in fact rentals. The report
indicated that the counties with the highest foreclosed rental
units (5,000 or more) were: Los Angeles, Riverside, Sacramento,
and San Bernardino. In those counties, 45,860 renters were
affected in Los Angeles; 18,823 in Riverside; 17,033 in
Sacramento; and 17,356 in San Bernardino. In San Francisco, 61
percent of foreclosed units were renter occupied. The report
listed other counties with comparatively high percentages of
renter-occupied foreclosed units including: Alameda (40
percent); Fresno (42 percent); Humboldt (42 percent); Mono (41
percent); Napa (40 percent); and San Mateo (41 percent). (See
"California Renters in the Foreclosure Crisis, Third Annual
Report," January 2011, Tenants Together, available at
http://tenantstogether.org/ .)
The impact of foreclosure on tenants has not gone unnoticed by
policymakers, and recent state and federal laws have been
enacted to provide tenants with additional time to move when the
home in which they are living is the subject of a foreclosure.
In 2008, the Legislature passed and the Governor signed SB 1137
(Perata, Corbett, Machado, Ch. 69, Stats. 2008), which requires
that tenants receive 60-days notice before they may be evicted
after the rental unit in which they are living is foreclosed.
These provisions sunset on January 1, 2013.
Federal lawmakers have also acted to protect tenants in
foreclosure situations. On May 20, 2009, President Obama signed
S. 896, Public Law 111-22, which included the "Protecting
Tenants at Foreclosure Act of 2009" (PTFA). The PTFA generally
requires a successor in interest in a property subject to
foreclosure to provide bona fide tenants with a 90-day notice to
vacate and, with limited exceptions, to honor the tenant's lease
until the end of the lease term. In 2010, the President signed
the Dodd-Frank Wall Street Reform and Consumer Protection Act
(Public Law 111-203), which extended the PTFA until December 31,
2014 and clarified that its protections extend to tenants who
have entered into leases before the date on which complete title
is transferred as the result of a foreclosure.
This bill is similar to AB 331 (Hall, 2009), which would have
required a landlord to disclose any of the following
circumstances to a prospective tenant before the execution of a
rental agreement: (1) any outstanding notice of default, or
notice of trustee's sale; (2) any pending suit to foreclose a
mortgage, trust deed, or vendor's lien under a contract of sale;
(3) any pending declaration of forfeiture or suit for specific
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performance of a contract of sale; or (4) any pending proceeding
to foreclose a tax lien. The author did not move AB 331 out of
this Committee.
This bill would similarly require a landlord who has received a
notice of default (NOD) to disclose that notice to any
prospective tenant prior to entering into a lease agreement for
the property.
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 the notice to be recorded at least 14 days prior to the
date of sale. (Civ. Code Sec. 2924f.)
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 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 residents of a property
subject to a foreclosure sale. (Civ. Code Sec. 2924.8.)
Existing law provides that tenants living in a rental unit at
the time the property is sold in foreclosure must be given
60-days notice before they may be evicted. This provision,
which does not apply if any party to the mortgage note remains
in the property as a tenant, subtenant, or occupant, sunsets on
January 1, 2013. (Code Civ. Proc. Sec. 1161b.)
Existing federal law requires a successor in interest in a
property subject to foreclosure to provide a bona fide tenant in
the property with a 90-day notice to vacate. The successor in
interest must also honor the tenant's lease until the end of the
lease term unless the property is sold to a purchaser who
intends to occupy the home as his or her primary residence. In
that case, the tenant must be provided with a 90-day notice to
vacate (unless a longer period is required by state or local
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law). In addition, tenants of foreclosed properties must be
provided with 90-days notice to vacate if there is no lease or
the lease is terminable at will. These provisions sunset on
December 31, 2014. ("Protecting Tenants at Foreclosure Act of
2009," Public Law 111-22.)
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 who is in default under a
mortgage or a deed of trust and who has received an NOD to
notify a prospective tenant of that default in writing prior to
executing a lease agreement for the property. This provision
would apply only to single-family dwellings or a multifamily
dwelling not exceeding four units.
This bill would provide that a violation of the bill would void
the lease at the election of the tenant and entitle the tenant
to recovery of twice the monthly rent or twice the actual
damages, whichever is greater, and all prepaid rent from the
landlord.
This bill would specify that in lieu of the remedies described
immediately above, if the tenant elects not to terminate the
lease and the foreclosure sale has not occurred, the tenant may
elect to deduct twice the monthly rent from future rent
obligations.
This bill would provide that the required notice be in
substantially the following form:
The foreclosure process has begun on this property, and this
property may be sold at foreclosure. If you rent this
property, and a foreclosure sale occurs, the sale may affect
your right to continue to live in this property in the
future. Your tenancy may continue after the sale. In order
for the new owner to evict you, the new owner must provide
you with at least 50 days' written eviction notice or 90
days if required by any other provision of state or federal
law. However, some laws may prohibit eviction.
COMMENT
1. Stated need for the bill
The author writes:
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ÝM]any individuals sign leases on properties for which there
is a scheduled foreclosure sale, or for which the foreclosure
process has already begun. The scope of this problem is
potentially large in California; as of March 2012, there were
88,000 properties with a scheduled or postponed foreclosure
sale, and there were 93,000 properties that have begun the
foreclosure process but have not yet been scheduled for sale.
There are several risks associated with leasing a property for
which the foreclosure process has already begun. First, in
advance of the foreclosure sale, tenants often experience
decreased services from landlords facing financial
difficulties. For example, owners may fail to pay utilities,
or ignore requests for maintenance or repairs.
Second, after the foreclosure sale, tenants face a tremendous
amount of uncertainty. Tenants may not know to whom they
should send rent, or direct requests, regarding the property.
Similarly, tenants may not be aware of the protections
guaranteed to them under federal and state law, and so may
feel pressured to vacate the property, or to voluntarily
terminate leases through "cash for keys" offers.
Third, there are several circumstances where a tenant's lease
may be invalidated by the foreclosure sale. For example, if
the new owner intends to move into the property the tenant
will have only 90 days to vacate, regardless of the terms of
the lease. In addition, the federal Protecting Tenants at
Foreclosure Act excludes certain types of leases from its
protections, meaning that tenants may face eviction before the
lease concludes.
Fourth, in practice, it is especially difficult for tenants to
recover security deposits during or after a foreclosure. The
defaulting landlord may lack the financial resources to return
it, and the new owner - though legally obligated to return the
deposit - is often reluctant to do so. Finally, tenants in
recently foreclosed properties often face exposure to bad
actors. Tenant advocates report that their clients are
frequently subject to harassment and misinformation from
individuals seeking to remove tenants from recently foreclosed
properties.
Tenants Together writes in support, "This is an important tenant
protection bill. The fact that the foreclosure process is
underway is a material fact that should be disclosed to renters.
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A landlord's foreclosure has significant impacts on tenants and
their rights. Foreclosure may affect the length of the tenancy,
the housing conditions experienced by tenants, and the
likelihood that tenants get back their security deposits after
vacating. It is only fair that tenants be notified of
foreclosure activity so they can make an informed choice about
their housing."
2. Impact of Protecting Tenants at Foreclosure Act of 2009
As mentioned in the Background section above, after the
enactment of SB 1137, President Obama signed S. 896, P.L.
111-22, which included the "Protecting Tenants at Foreclosure
Act of 2009" (PTFA). At the time of the signing of the bill,
the White House's press release noted:
One of the often overlooked problems in the foreclosure
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.
The PTFA, which sunsets on December 31, 2014, generally requires
the purchaser of a home at a foreclosure sale to honor a bona
fide 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
PTFA also made a conforming change to federal provisions
relating to Section 8 tenancies for which California law already
requires a 90-day notice. (See Civ. Code Sec. 1954.535.) As a
result, currently federal law generally provides greater
protection to tenants than state law by providing additional
time (90 vs. 60 days) and imposes a requirement that the lease
be honored under certain circumstances.
It should be noted that the PTFA fundamentally changes the
obligations of subsequent owners of foreclosed properties
(usually the foreclosing entity) by modifying the general rule
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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 after an NOD has been
recorded and 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
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) the scope of the notice
requirements.
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 sale before their rental property is sold,
and tenants of foreclosed properties are allowed to stay in
the property for a period of time (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
landlord to give prospective tenants a written notice of the
existence of an outstanding notice of default. Unlike the
notice required under existing state law for a notice of sale,
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
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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 his or her property, the rental of the property may
represent the only way for him or her to make the mortgage
payment. The homeowner may have lost his or her 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 could be discouraged from renting a home if
they do, in fact, know that the home is in foreclosure, the
notice required by this bill could potentially frustrate the
leasing of homes by those troubled borrowers. Absent tenants,
a distressed homeowner could 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 to tenants who know 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.
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On this point, supporter Western Center on Law & Poverty notes
that the fact that foreclosure proceedings have begun on the
property is a "material fact Ýthat] is critical for tenants to
make an informed choice about whether to rent a particular
dwelling. Some tenants might be willing to live with the risk
that their tenancy may soon be interrupted. Others, for
example those with children in school, will want more
certainty that the dwelling will remain available to them for
the foreseeable future."
The author also writes on this point:
. . . ÝW]hile this notice could discourage tenants from
signing a lease, it is nonetheless an important fact about
the property. Tenants deserve to have this information
because, in many cases, they are entering into a lease that
will entail risks and challenges that other leases will
not. While landlords have a legitimate interest in renting
their property, tenants have a legitimate interest in
learning of this crucial fact; this legislation strikes a
balance by requiring a notice that is not overly
prescriptive or alarming.
It should also be noted that staff has received reports of
unscrupulous landlords signing tenants to new leases right
before the foreclosure sale (and thus collecting first and
last month's rent plus a security deposit) when, prior to the
above federal law, those leases would have been extinguished
by the foreclosure sale.
b. Scope of notice requirement
This bill would omit apartments from the notice requirements
by limiting the bill's application to a single-family dwelling
or a multifamily dwelling not exceeding four units. In
support of that limitation, supporter California Apartment
Association contends that the mortgage crisis is predominantly
about single-family homes and that the purchaser of a
foreclosed home often terminates the existing tenancy.
Despite those contentions, it is important to note that
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,
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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 Mortgage
Bankers Association.
RealtyTrac data also shows that there were 587 properties
undergoing foreclosure with five or more dwellings in select
cities at the end of February 2012 as follows: Los Angeles
had 212 such properties; San Diego, 29; San Jose, 37; San
Francisco, 53; Fresno, 86; Sacramento, 25; Long Beach, 37;
Bakersfield, 24; Riverside, 20; Stockton, 13; San Bernardino,
11; Modesto, 26; Moreno Valley, 10; and Roseville, 4.
At first glance, it is arguably 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, then prospective tenants in apartment complexes
should also be notified.
It is important to note, however, that tenants in apartment
complexes are protected by the federal Protecting Tenants at
Foreclosure Act (PTFA) and so, should those tenants enter into
a lease agreement for a unit in a property that is undergoing
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foreclosure proceedings-although they would not receive notice
of that fact prior to entering the lease-the PTFA does require
that their lease be honored. With respect to the bill's
exclusion of apartment buildings, the author writes that
"tenants in large multifamily properties are less likely to
face exposure to bad actors seeking to remove existing
tenants. Tenants in single-family homes or small properties
undergoing foreclosure may receive 'cash for keys' offers, or
misinformation regarding the legitimacy of their lease.
Larger multifamily properties are valuable because of their
potential to generate revenue through leases, and so successor
interests are far less likely to seek to remove existing
tenants."
In addition, the author writes, "providing this notice may
discourage prospective tenants from signing leases. Although
this problem exists for any property, it is most acute for
large, multifamily dwellings because those properties are
valuable only because of their potential to generate revenue;
a single-family home, or a property with just a few units, is
still valuable as a residence." The author also asserts that
"the foreclosure crisis is primarily limited to smaller
properties. According to DataQuick, only 0.43% of notices of
default filed in California in 2011 were for apartment
buildings with five or more units. In fact, there were more
notices of default filed for quadplexes (buildings with four
units) than for all buildings with five or more units
combined."
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4. Remedies for failure to disclose
Under this bill, a violation of the bill's notice requirements
would void the lease at the election of the tenant and entitle
the tenant to recover twice the monthly rent or twice the actual
damages, whichever is greater, and all prepaid rent from the
landlord. This bill would also specify that, in lieu of the
remedies described immediately above, if the tenant elects not
to terminate the lease and the foreclosure sale has not
occurred, the tenant may elect to deduct twice the monthly rent
from future rent obligations.
Opponents, various apartment associations, argue that the bill's
"proposed civil remedy far exceeds the alleged failure to
disclose the notice of default. NODs are the first among many
legal steps that must be followed prior to foreclosure. Failure
of a landlord to provide this preliminary notice to a
prospective tenant will entitle that person who becomes a tenant
to permanent lifetime rent reduction. . . . Even though a NOD
is cured, a tenant who takes possession and who does not receive
the notice is fully entitled to receive free rent. This is an
excessive civil remedy."
Opponents appear to misread the bill's provisions which would,
in lieu of the other remedies in the bill, permit a tenant to
deduct twice the monthly rent from future rent obligations. The
author points out that "a tenant pursuing the alternative remedy
in Ýthe bill] may refrain from paying rent for two months, this
is NOT a permanent or lifetime reduction. It is only a
reduction for two months. Twice the monthly rent or twice the
actual damages is a fair penalty. The penalty must be
sufficient to deter landlords from willfully failing to disclose
to earn a quick buck through a first and last month of rent
payment, and a security deposit."
5. Additional opposition arguments
The following apartment associations are opposed to the measure:
the Apartment Association, California Southern Cities,
Apartment Association of Greater Los Angeles, Apartment
Association of Orange County, East Bay Rental Housing
Association, NOR CAL Rental Property Association, San Diego
County Apartment Association, and Santa Barbara Rental Housing
Association. In addition to the arguments described above,
these apartment associations write:
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The bill will accelerate the foreclosure process because
landlords who would comply with this proposed change in law
would frighten prospective tenants from renting property
for fear of Ýlosing] their rental unit.
SB 1191 scares tenants from ever renting single family
or one-to-four properties where landlords are experiencing
difficulties.
Notices of default are issued for a variety of reasons
including the nonpayment of a mortgage, non payment of
insurance premium, and issuance of a nuisance abatement.
Many of the actions are cured yet the bill does not
recognize this fact.
The bill requires . . . no showing of disadvantage or
harm to the tenant.
6. Technical amendment
The following technical amendment is necessary:
On page 3, line 1, delete "50" and insert "60"
Additionally, the author has indicated that, because the bill is
not intended to undermine existing remedies, he is working to
better understand and address a concern raised by Western Center
on Law & Poverty that tenants retain all existing remedies for
failure to disclose a material fact prior to entering in a lease
agreement. These discussions are ongoing.
Support : California Apartment Association; California Public
Interest Research Group (CALPIRG); California Rural Legal
Assistance Foundation; EAH Housing; Housing Leadership Council
of San Mateo County; Legal Aid Society of San Mateo County;
MidPen Housing Corp.; National Housing Law Project; Neighborhood
Housing Services Silicon Valley; Non-Profit Housing Association
of Northern California; Palo Alto Housing Corporation; Tenants
Together; Western Center on Law & Poverty; One individual
Opposition : Apartment Association, California Southern Cities;
Apartment Association of Greater Los Angeles; Apartment
Association of Orange County; East Bay Rental Housing
Association; NOR CAL Rental Property Association; San Diego
County Apartment Association; Santa Barbara Rental Housing
Association
HISTORY
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Source : An individual
Related Pending Legislation :
SB 1473 (Hancock) would revise existing law's requirement of
60-days' notice to instead provide, in the case of a
month-to-month lease, for 90-days' notice for these tenants and
would specify that a tenant holding possession under a
residential lease of a rental housing unit at the time the
property is sold in foreclosure shall have the right to
possession until the end of the lease term. SB 1473 would also
require that a residential lease that is entered into after the
expiration of 75 days following a notice of default contain a
notice in English and the languages described in Section 1632
that alerts the prospective tenant that the foreclosure process
has started on the property and the property may be sold at
foreclosure in as soon as 20 days, which will terminate the
lease. The notice would also inform tenants that if they rent
the property, the new owner may evict them after a 90-day
eviction notice. This bill is currently pending hearing in the
Senate Appropriations Committee.
AB 2610 (Carter), which is substantially similar to SB 1473, is
currently pending hearing in the Assembly Appropriations
Committee.
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Prior Legislation : AB 331 (Hall, 2009) See Background.
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