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)
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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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