Are Tenants Required To Continue Paying Rent?

In most states, a foreclosure is accomplished by a sale on the courthouse steps (if no one bids, the lender keeps the property). In a few states, a judge can declare the property transferred over to the lender (this is known as a strict judicial foreclosure). But in every state, the owner needs to be informed, sometimes multiple times, that the axe is about to fall. It sounds like the "Notice of Intent to Foreclose" was your lender's formal announcement that negotiations are over and a sale (or judicial foreclosure) will take place. Because that sale or decree hasn't happened yet, the property is still yours and your tenants do have to pay their rent to you. After the foreclosure, the rent goes to the foreclosing lender or new owner.

As with many things in the law, there are exceptions. In states that allow tenants to withhold rent when the owner has not maintained the property in a "fit and habitable" condition, the tenants could stop paying rent if you (or the bank or new owner) neglect your maintenance responsibilities. Sadly, many landlords have failed to maintain property that they know they'll soon lose; and increasingly, banks and even new, institutional owners have let foreclosed properties lapse into disrepair (bankers and offshore trusts make poor landlords). You, of course, can't guarantee how the new owner will treat the property, but you can make sure that your tenants have no legitimate reason to withhold rent now by continuing to maintain the property.

Whether to begin eviction proceedings is another matter, and a delicate one. Keep in mind that after the foreclosure, these residents are almost surely going to be told to move, will incur moving expenses and inconvenience, and may end up with a comparable rental at a higher rent. In fact, they could sue you for the monetary consequences to them of your failure to deliver on your lease.

Schedule a time to talk with your tenants and explain the legal reality that you are, however fleetingly, still the owner. Do your best to assure them that you will not abandon your legal responsibilities as long as you own the property. But in view of the expenses the tenants will incur when the bank swoops in, you might offer to compromise on this last month or two of rent. If the residents refuse to meet you part way, you could point out that you are within your rights to file for eviction for nonpayment of rent. Even if you (or the bank or new owners) ultimately dismiss the case, the fact that such a case was filed may show up in tenant screening reports in the future, much to your tenants' disfavor. This consequence may spur them to compromise.