New Laws Protect Tenants at Chicago Foreclosed Properties
According to a report prepared and issued by the Lawyers’ Committee For Better Housing, nearly 17,000 Chicago apartment buildings containing almost 52,000 units were hit with foreclosure between 2009 and 2011, and well over 90% of the affected buildings contained only five units or less. The problem, as the Committee saw it, was self-exacerbating. Foreclosures lead to vacant and boarded-up buildings, thus diminishing the desirability (and value) of neighboring properties and triggering additional foreclosures. As a result, increasing numbers of tenants are displaced while apartment supply steadily decreases, forcing families to either “double up” or rent undesirable units. Meanwhile, unmanaged bank-owned apartment buildings fall further into disrepair and contribute to urban blight.
Regulations on Inheriting Tenants at Chicago Foreclosed Buildings
During its investigation, the Lawyers’ Committee also found that tenant protections associated with foreclosure laws were being neglected and that tenants were either unaware of their rights or too intimidated to exercise them. The federal "Protecting Tenants At Foreclosure Act" allows tenants to remain at a foreclosed property for the duration of a bona fide lease and requires that all tenants (including month-to-month tenants) be provided at least 90 days’ notice to vacate. Nevertheless, banks and management companies were openly trampling on these rights, often by posting signs or mailing notices informing tenants that the property has been foreclosed and mandating that they vacate the premises immediately or face forcible eviction. The bank owners were also offering “cash for keys” deals that required releases of legal rights (including the right to the return of the security deposit) and often also included preconditions enabling the bank-owner to wiggle out of its financial commitment.
Over and above the growing plague of boarded buildings and displaced tenants, the Lawyers’ Committee discovered an abundance of problems caused by the failure of landlords to inform their tenants (as required by law) that a foreclosure suit had been filed or by the failure of foreclosing lenders to notify tenants (as also required by law) of a change in property ownership or management. These omissions resulted in surprised tenants not having adequate time to plan a move and created difficulty when repairs were desperately needed and a new property manager could not be located.
In an effort to redress the wrongs, the Lawyers’ Committee proposed (and drafted) a new Chicago ordinance to ensure that tenants’ rights would be respected and that banks would be financially incented to keep their tenants in place following foreclosure. The proposed legislation was substantially revised and finally enacted into law on June 5, 2013, as the “Protecting Tenants In Foreclosed Rental Property Ordinance.” It took effect on September 3, 2013.
Broadly speaking, the ordinance accomplishes three things:
1) It requires the person who acquired the property through foreclosure to offer rent-controlled lease renewals or pony-up substantial relocation fees;
2) It requires the new property owners to notify tenants of their rights under the new law; and
3) It requires the new property owners to register the foreclosed property with the City of Chicago (and pay a $250 registration fee).
Meanwhile, a few months after the Chicago ordinance was passed, the State of Illinois enacted a new law that mirrors the federal Protecting Tenants At Foreclosure Act. The Illinois law is not nearly as draconian as the Chicago ordinance; It merely provides that persons who acquire residential real estate in foreclosure may only terminate bona fide leases (i) at the end of the existing lease term by no less than 90 days’ notice or (ii) in the case of month-to-month or week-to-week leases, by no less than 90 days’ written notice. It doesn't obligate the new owners to offer perpetual rent-controlled leases or fork over hefty relocation fees. And, under certain circumstances, it doesn't require new landlords to honor certain leases extending more than one year. The relevant provisions can be found at 735 ILCS 5/9-207.5, 5/15-1202.5, 5/15-1224, and 5/15-1225. It's highly inadvisable to take any action without thoroughly reading these portions of the Illinois statutes or consulting a lawyer first.
Persons who obtain residential real estate located outside of Chicago through foreclosure are bound by the federal and state laws, but not the Chicago ordinance. Those owners acquire title subject to bona fide leases and are required to provide 90 days’ notice of any intention not to renew. Easy enough! On the other hand, persons who obtain Chicago residential real estate through foreclosure need to deal with both the ordinance and the state and federal laws. For those persons, additional details about the new ordinance are provided below.
The Chicago Foreclosure Relocation Assistance Fee
Under the new ordinance, the owner of any building acquired through judicial sale or deed in lieu of foreclosure is required to pay a one-time relocation assistance fee of $10,600 to a “qualified tenant,” unless the owner offers the tenant an option to either renew or extend the current lease (written or oral) at an annual rate that, for the first twelve months, does not exceed 102% of the current annual rate and which, for any successive twelve-month period, does not exceed 102% of the previous year’s rate. (A “qualified tenant” is a person who occupies the apartment as his principal residence under a bona fide lease for something not substantially less than fair market value and who is neither the mortgagor nor a member of the mortgagor’s immediate family. Consult the ordinance for details.)
If the new owner is determined to bid a tenant adieu, it must (under federal and state law) respect the term of any existing lease and provide the requisite 90 days’ notice of intent not to renew. Then, of course, it must pay the relocation assistance fee. If and when an owner pays the fee (payment must be made by certified or cashier’s check), it may deduct all accrued unpaid rent not validly withheld or deducted by the tenant under federal, state, or local law. The owner may not make any other deductions from the relocation fee, including deductions for property damage or any other alleged breach of the rental agreement. In addition, the owner remains obligated to refund any security deposit to which the tenant may be entitled. An owner who violates the relocation provisions of the ordinance may be held liable for double the relocation assistance fee and reasonable attorneys’ fees.
The obligation to pay a relocation assistance fee remains in effect until the party that obtained the property through foreclosure sells the property to a bona fide third party in an arm’s length transaction. In other words, owners who acquire property at foreclosure are incented to resell it as quickly as possible in order to unlock its full economic potential, as owners of rent-controlled properties have little incentive to invest in capital improvements. Moreover, nothing in the new ordinance prohibits an owner from exercising any right to evict a tenant for cause, and tenants so evicted do not qualify for the relocation assistance fee.
If (and this is presumably a rare scenario), the new owner offers to extend or renew a tenant’s lease on a rent-controlled basis and the tenant declines that offer, then no relocation fee need be paid, and the owner may act to obtain possession of the apartment at the expiration of the existing lease and upon proper advance notice (under state and federal law).
Notice to Tenants Affected by Chicago Foreclosure
No later than 21 days after a new owner acquires a residential property through foreclosure, it is required to make a “good faith effort to ascertain the identities and addresses of all tenants” at the foreclosed property and notify each of them that, under certain circumstances, they may be eligible for relocation assistance. The exact wording of the notice is set forth in the ordinance, so there’s really nothing left to the new owner’s imagination. The notice apprises the tenants of their rights and spells out the penalties for non-compliance.
The notice is required to include the name, address, and telephone number of the owner or property manager now responsible for maintaining the building, and it must be served by either personal delivery on the tenant, leaving the notice with a person age 13 or older who resides at the premises, or sending a copy to the tenant by first-class or certified mail, return receipt requested. The owner is also required, within 21 days of acquiring the property at foreclosure, to post the notice “on the primary entrance” of the rental property. Owners may not lawfully collect any rent, whether in advance or arrears, from any tenant who has not received the notice required by the ordinance.
Registration of Foreclosed Rental Property in Chicago
The owner of any property acquired through foreclosure is also required to register the property with the City of Chicago not later than ten days after acquiring title. The registration requires disclosure of, among other things:
- the new owner’s address, the property address, and the number of rental units at the property;
- the names and addresses of all known tenants (identified through an affidavit, presumably to ratchet up the administrative burden);
- the name, address, and telephone number of the owner’s agent for the purpose of managing the property or collecting rents; and
- the name, address, and telephone number of a natural person who resides or, maintains an office, in Cook County and who is designated to accept service of legal process in connection with any violations of the municipal code.
The registration fee is $250. Finally, if and when the property is sold to a third party, the owner is required to notify the city accordingly within 10 days.
