Investors Beware: Foreclosure Evictions Can Be Timely And Costly
Many investors purchase foreclosed properties at a trustee's sale by submitting a bid at a verbal auction. The winning bidder acquires the property by paying off the remaining balance on the foreclosing loan. Although this can be an attractive means of purchasing property at a price far less than the fair market value, the new owner may face obstacles if the previous owner, occupants, or tenants refuse to vacate the premises. Generally the new owner will have to commence eviction proceedings to gain possession of the property. Before commencing legal action, however, the new owner should make sure they follow the necessary procedures for successfully winning their case.
The first step in this process is making sure that the new owner's title to the property has been duly perfected. Generally title is duly perfected upon recording of the deed with the County Clerk. In California, title is deemed perfected on the actual date of the sale if the trustee's deed is recorded within 15 calendar days after the sale.
The next step is determining what type of notice to serve upon the occupants of the property. If the previous owner of the property or his or her household refuses to vacate the premises then California requires the new owner to serve them with a Three Day Notice to Quit. This notice requires the previous owner to vacate within three days. If the previous owner refuses to vacate within three-day time period, then the new owner can proceed by filing a lawsuit for unlawful detainer to have them removed from the premises.
If the premises are occupied by tenants who reside on the property pursuant to a rental agreement, then California law requires the new owner to serve them with a 30 Day Notice to Quit. This notice can be served upon the tenants regardless of the length of their lease because in most cases the sale of the property effectively destroys the lease. If the tenants fail to vacate the premises upon the expiration of the notice, then the new owner can proceed by filing an unlawful detainer action.
If, however, the residents recorded their rental agreement with the County Clerk prior to the foreclosure proceedings, then the existing lease is not extinguished and the new owner remains bound by all the terms and conditions of the lease. In this scenario if the new landlord wishes to terminate the tenancy of the residents, and they are on a month-to-month lease, then the landlord can serve them with a 30-Day Notice to Terminate Tenancy if any of the tenants or residents have occupied the unit for less than one year. If the residents have been residing in the premises for more than a year, then they must be given a 60 Day Notice to Terminate Tenancy.
Taking Possession of Foreclosed Property Through Eviction
After determining that an eviction action is necessary the new owner should consider filing a Prejudgment Claim of Right to Possession with their lawsuit. This is particularly important since there is a possibility that unknown occupants may be residing in the premises. A prejudgment claim puts those who were not named in the lawsuit on notice that they must fill out the prejudgment claim form served with the summons and complaint if they claim a right to possession of the property. Upon filling out the form and filing it with the court, the individual adds themselves as a defendant to the lawsuit. If the individual fails to fill out the form and file it with the court they are prevented from later claiming that they had a valid right to possession of the property.
Another important element of an unlawful detainer action is requesting the appropriate amount of damages in the complaint. Monetary damages are generally awarded on a per diem basis. If the previous owner or tenants fail to vacate upon the expiration of the notice that was served upon them, then the court will grant daily damages for every day that they remained in possession of the premises until the day the new owner obtains possession. To ensure that the new owner is requesting the appropriate amount of damages they should ascertain the market rental value of their newly acquired property.
Once the unlawful detainer action has commenced, the new owner should be aware of the possible defenses the defendants can allege that can cause a delay in the eviction process. The occupants could allege that the property was not properly foreclosed on and that the necessary procedures leading up to the sale were not followed. If the previous owner claims that they are still the rightful owners of the property they could file a separate lawsuit to quiet title or a wrongful foreclosure action alleging an illegal or fraudulent sale of the property. Once the separate lawsuit is filed, a stay or restraining order could be imposed in the unlawful detainer action until the court resolves the separate allegations and makes a determination as to which party has title to the real property.
In this particular circumstance, either party has the option of filing a Motion to Consolidate both the unlawful detainer action and the separate lawsuit filed by the occupants. If the motion is granted, the court would order a joint hearing or trial on any or all of the matters at issue in the lawsuits in order to avoid the unnecessary delay and costs in adjudicating two separate lawsuits. The new owner could also request the court to order the occupants to place the daily rental value of the property in escrow until the cases have been resolved.
An occupant could further delay the unlawful detainer action by filing for bankruptcy. The filing of a petition for bankruptcy immediately stops the eviction action. Before the new owner can continue with the eviction they must go to bankruptcy court and obtain relief from stay. Obtaining such relief terminates the stay in the eviction action and permits the new owner to proceed with the unlawful detainer to obtain possession of the premises.
As a rule of thumb, investors should familiarize themselves with not only with the pre-foreclosure rules but also with the challenges they may face post foreclosure. By doing the right homework and understanding the legal process in evicting the occupants, the new owner can reduce the possibility of losing an unlawful detainer action in court. An educated investor can thus enjoy the benefits of a lucrative investment by following the right procedures from the start.
Kimball, Tirey & St. John LLP is a full service real estate law firm representing residential and commercial property owners and managers. This article is for general information purposes only. Before acting, be sure to receive legal advice from our office. If you have questions about this article, please contact Puneet Singh at 800.525.1690. For past alerts and articles on other related topics, please consult the resource library section of this website.