Vol. 82, No. 8, August 2009
You awaken early one morning to someone knocking on your door. Opening it, you see a moving van and a sheriff’s car parked outside. “Hello,” a deputy announces. “County sheriff serving you with a writ of assistance. We have an order to remove you and your family from the premises.” You step aside as a moving crew enters. “But I’m paid up in rent,” you protest. “There’s got to be a mistake.” “You may be paid up,” replies the deputy, “but the owner isn’t. He’s been foreclosed on. This house was sold at auction and the confirmation sale was two weeks ago. Didn’t anybody tell you?”
Variations of the above scenario have been playing out in Wisconsin communities and nationwide. It is estimated that in the next four years more than 8 million American families will lose their homes through foreclosure.1 A record 12 percent of all mortgages in the United States were delinquent or in foreclosure at the end of the first quarter of 2009.2 Foreclosures in Wisconsin increased 20 percent from 2007 to 2008.3 Along with the increase in foreclosures has been an increase in the number of foreclosure-related evictions.4 Foreclosures automatically terminate most tenancies in Wisconsin.5
Given the financial straits of the defaulting landlord, tenants generally will lose their security deposits and any prepaid rent. Some tenants are unaware of the foreclosure until they are served with a 24-hour notice to vacate.
The Wisconsin Legislature, as well as Congress,6 recently passed laws to provide protections for tenants whose landlords are in foreclosure. This article covers the Wisconsin enactment, contained in 2009 Wisconsin Act 2 (the budget adjustment act), and refers to the new law as the Residential Tenants in Foreclosure Act.
Wisconsin’s Residential Tenants in Foreclosure Act
Wisconsin’s legislation, codified at Wis. Stat. sections 704.35 and 846.35, addresses problems faced by tenants whose landlords are in foreclosure by requiring that notice be given to residential tenants at various stages of a foreclosure and by providing other protections. Lawyers who represent lending institutions, tenants, landlords, or purchasers of foreclosed residential rental property need to be aware of this new law, most of which went into effect March 6, 2009.7
The Residential Tenants in Foreclosure Act created two new sections of the Wisconsin Statutes, section 704.35 and section 846.35. Both apply only to residential rental property. These sections work in tandem to protect prospective tenants and current tenants. The key provisions of Wis. Stat. sections 704.35 and 846.35 involve notice, an opportunity for extended possession, retention of rent for the last month in possession, and exclusion of certain information from the public access Consolidated Court Automation Program (CCAP) Web site.
There are two effective dates for the Act: March 6, 2009, for the provisions not pertaining to CCAP entries; and July 1, 2009, for section 846.35(4), which excludes certain information from CCAP. Sections 704.35(3) and 846.35 apply to foreclosure actions commenced on or after March 6, 2009. Section 704.35(2) applies to rental agreements entered into on or after March 6, 2009.8
Section 704.35 Requirements Apply to Property Owners
New section 704.35 falls within chapter 704, which is entitled, “Landlord and Tenant.” Section 704.35 states:
704.35 Residential rental property in foreclosure.
(1) DUTY OF LANDLORD TO PROVIDE NOTICE OF FORECLOSURE. If a foreclosure action has been commenced against residential rental property, during the pendency of the action and before the expiration of the redemption period, the owner of the property shall notify any prospective tenant in writing of all of the following:
(a) That a foreclosure action has been commenced against the rental property.
(b) If judgment has been entered, the date on which the redemption period expires.
(2) RENTAL AGREEMENT MUST VERIFY NOTICE OR IS VOIDABLE. Any rental agreement entered into between the property owner and a tenant during the pendency of the foreclosure action and before the expiration of the redemption period shall include a separate written statement, signed by the tenant, that the owner has provided written notice as required under sub. (1). A rental agreement that does not include the statement signed by the tenant is voidable at the option of the tenant.
(3) TENANT PROTECTIONS. The protections under s. 846.35 apply to a residential tenant if a foreclosure action is or has been commenced against the real property containing the dwelling unit occupied by the tenant.
Any rental agreement entered into while the foreclosure action is pending and before the redemption period expires shall include a separate written statement, signed by the tenant, that the owner has provided the required written notice. A rental agreement that does not include the signed statement is voidable at the tenant’s option.9
Section 846.35 Requirements Apply to Plaintiffs
Like section 704.35, the protections for tenants contained in new section 846.35 come into play when residential rental property is the subject of a foreclosure action. However, the requirements of section 846.35 apply to the plaintiffs in the foreclosure action, rather than to the owner or former owner. Section 846.35, “Protections for tenants in foreclosure actions,” falls within chapter 846, “Real Estate Foreclosure.” The notice requirement is contained in section 846.35(1)(a), which provides:
(1) NOTICES FROM PLAINTIFF. (a) If residential rental property is the subject of a foreclosure action, the plaintiff shall provide the following notices at the following times to the tenants who are in possession of each rental unit when a notice is given:
1. No later than 5 days after the foreclosure action is filed, notice that the plaintiff has commenced a foreclosure action with respect to the rental property.
2. No later than 5 days after the judgment of foreclosure is entered, notice that the plaintiff has been granted a judgment of foreclosure with respect to the rental property and notice of the date on which the redemption period ends.
3. When the confirmation of sale hearing has been scheduled, notice of the date and time of the hearing.
Notices may be given by personal service under 801.11(1) or by certified mail with return receipt requested.10 If an envelope sent by certified mail, return receipt requested, is returned to the plaintiff unopened, notice is not considered complete.11 Failure to provide notice may result in a court award to the tenant of $250 damages, plus reasonable attorney fees.12
Mark A. Silverman, Temple 1982, is a staff attorney and housing-law priority coordinator at Legal Action of Wisconsin. His caseload is devoted exclusively to the representation of low-income people with housing problems. Previously he worked in private practice and at the Guest House Homeless Shelter.
In addition to lack of notice, another problem tenants face when renting from a landlord in foreclosure is the loss of their security deposit and any prepaid rent. (For example, if a landlord requires that the final month’s rent be paid up front, along with the security deposit and the first month’s rent, the final month’s rent is considered prepaid). Section 846.35(2)(a)2. permits a tenant to retain rent in an amount equal to the security deposit during the last month in possession. When the tenant remains in possession after the sale is confirmed, the rent must be at the same rate that applied immediately before the confirmation.13 Presumably, this means that the rent would be paid to the purchaser at the sheriff’s sale, not to the previous owner.
A vital piece of the Act is the provision that allows a tenant whose tenancy was terminated as a result of a foreclosure judgment and sale to retain possession of the rental unit for up to two months after the end of the month in which the sale was confirmed.14 Without this protection, tenants could be required to pack all their belongings, search for a new apartment, submit applications to prospective landlords, pass credit, background, and reference checks, hire movers or rent a truck, and make the move to the new home within the short time provided by the court or sheriff. This right to extended possession, however, may be waived by the tenant in writing.15
Finally, section 846.35(4), which became effective July 1, 2009, addresses the problem of landlords refusing to rent to tenants who were removed from a residential property as a result of a mortgage foreclosure. Under section 846.35(4), no information in a civil action, including a writ of assistance, writ of restitution, or entry of judgment of eviction, concerning the removal of a tenant from residential rental property may be included in CCAP, which is accessible to the public through the circuit court public access Web site, if the removal results from a mortgage foreclosure of the residential rental property.
Attorneys representing residential tenants whose landlords are in foreclosure must first check the status of the foreclosure action. While CCAP is a good place to start, in cases in which there are multiple foreclosure actions against the same defendant, it is necessary to review the court file to determine which of the actions affects the client’s rental property. With the information obtained from CCAP and the court file, an attorney then may contact the plaintiff’s attorney, notify the court that there are tenants occupying the subject property, appear at hearings (if necessary), and invoke the protections of sections 704.35 and 846.35. Of course, tenants should be advised of their potential claims under section 846.35(1)(c) ($250 in damages and reasonable attorney fees) and whether the rental agreement is voidable under section 704.35(2). While most rental agreements will terminate eventually as a result of the foreclosure, it may be advantageous for a tenant to declare the rental agreement void earlier than the end of the redemption period or confirmation hearing. Tenants should be advised not to pay rent to the former owner. This happens all too often, particularly when the tenant was not aware of the foreclosure. Instead, tenants should pay their rent to the new owner, if the new owner enters into a rental agreement.
Landlords’ attorneys, on the other hand, should advise their clients of the notification provisions of section 704.35(1) and that any rental agreement entered into before the redemption period expires must include a separate written statement, signed by the tenant, that the owner has provided the rental notice.16 A rental agreement that does not include the statement signed by the tenant is voidable at the option of the tenant.17 This means that a landlord in foreclosure cannot rent the subject property (before the redemption period expires) with a completely oral rental agreement, without the risk that the rental agreement will be considered void.18 Since standard rental agreement forms do not contain the wording required by section 704.35(2), lawyers should advise their landlord clients who are in foreclosure to add this language to any new rental agreements or to addendums.
Attorneys representing banks or other plaintiffs in foreclosure actions must ascertain whether the subject of the action is residential rental property.19 This may require some investigation. Written notices must be provided to the tenants in possession at three stages of the foreclosure, as described above. One way to ensure compliance with section 846.35(1) is to give the notices by personal service. A less expensive method is to give the notices by certified mail with return receipt requested. If the notice is returned unopened, notice is not considered complete. At that point the plaintiff’s attorney may want to consider personal service. Attorneys should advise their clients of potential liability for failure to provide notice. If the plaintiff acquires the subject property at the sheriff’s sale, the plaintiff needs to be aware of the extended-possession protections of section 846.35(2) and that the protections may be waived by the tenant in writing.20 Such a waiver could be obtained, for example, by an offer to pay the tenants a sum of money in exchange for their agreement to vacate the premises at an earlier date.
Of course, the purchaser of property at a sheriff’s sale will not necessarily be the foreclosing plaintiff but instead might be someone who was not a party to the foreclosure action. Such nonparty purchasers should be informed that residential tenants in the property may retain possession for a time after the confirmation hearing, pursuant to section 846.35(2).
The Residential Tenants in Foreclosure Act ameliorates the hardships of residential tenants facing the unexpected loss of their home because of the property owner’s foreclosure. The Act accomplishes this by requiring notice to tenants at various stages of the foreclosure action, by allowing tenants to retain rent for their last month in possession, by permitting tenants to remain in possession for up to two months after the month of the confirmation of sale, and by excluding certain information from the public access CCAP Web site. These protections are important in good economic times and bad. Residential tenants can now answer the unexpected knock on the door without the fear that it is the sheriff and a moving van.