F. Foreclosure Proceedings Foreclosure Proceedings

• Jurisdiction: New York

F. Foreclosure Proceedings

Due-process considerations require that anyone with an interest in property be given notice and an opportunity to be heard before any judicial process may adversely affect a property interest.²⁰⁵⁶ Accordingly, if a tenant is not made a party to a foreclosure action, the tenant's rights are unaffected by any resulting judgment, and a purchaser may not dispossess the tenant at a foreclosure sale. ²⁰⁵⁷

Although a lease for a term exceeding three years must be recorded,²⁰⁵⁸ an unrecorded conveyance is void only against a subsequent good-faith purchaser for value.²⁰⁵⁹ Because a tenant's actual possession is notice to all the world of any right the tenant can establish, an unrecorded lease of a tenant in actual possession is not void against a purchaser in foreclosure. ²⁰⁶⁰

A mortgagee that seeks to avail itself of CPLR 1024 by effecting service on a tenant as a "John Doe" or "Jane Doe" must show that it made a genuine effort to ascertain the tenant's identity before resorting to CPLR 1024; if not, service is deemed defective and the court will not have personal jurisdiction over the tenant. ²⁰⁶¹

At the commencement of a foreclosure action, a plaintiff will typically file a notice of pendency with the county clerk "in a court of the State or of the United States in which the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property, except in a summary proceeding brought to recover the possession of real property." ²⁰⁶² That notice of pendency and the foreclosure proceeding itself must be filed in the same county as the location of the property that is the subject of the foreclosure proceeding.²⁰⁶³

A notice of pendency may be filed before an action or proceeding is commenced and, regardless when the notice is filed, the summons must be served within 30 days thereafter for the notice to remain effective.²⁰⁶⁴ The notice will be nullified if the summons is not served within the window period.²⁰⁶⁵ If a defendant dies within the 30-day period, but before service of a complaint, an extension of 60 days from a representative's authorization is given to serve the defendant's estate.²⁰⁶⁶ If more than one defendant is in the action, at least one defendant with "an ownership interest in the subject property" must be served in the window period for the notice to remain effective. ²⁰⁶⁷

Notices of pendency are public records available for inspection at the clerks' offices and reported by private services, but even if a party lacks actual knowledge of the filing, that ignorance is irrelevant because the principle underlying the doctrine of notice of pendency "'does not rest upon the presumption of notice but upon reasons of public policy.'" ²⁰⁶⁸

Some courts have held that foreclosure does not affect tenancies for a term of three years or less. Because leases for terms of three years or less need not be recorded under the filing statute,²⁰⁶⁹ the tenant is unlikely to know of the notice of pendency.²⁰⁷⁰ Under CPLR 6501, "[a] person whose conveyance or encumbrance is recorded after the filing of [a notice of pendency] is bound by all proceedings taken in the action after such filing to the same extent as a party." The term "conveyance" includes any lease with a term longer than three years.²⁰⁷¹ Nearly a century ago, the Court of Appeals defined an "encumbrance" as "[a]ny right existing in another to use the land, or whereby the use by the owner is restricted."²⁰⁷² Under CPLR 6501, parties in possession under unrecorded leases, particularly those for three years or less, cannot be removed due to foreclosure because "a lease for a term of less than three years is not capable of being recorded."²⁰⁷³ Other courts hold that a lease that is unrecordable is subject to a notice of pendency. ²⁰⁷⁴ However, leases may include other clauses that are unmistakably recordable documents, such as options to purchase, making the entire lease recordable.

Nonetheless, some authority supports the proposition that a month-to-month tenancy is terminated by foreclosure, even if the tenant is not named.²⁰⁷⁵ Most cases in which a leasehold acquired after the notice of pendency survives foreclosure are predicated on the leasehold's being given by a party with the power to grant an estate in the property. The terms of most judgments of foreclosure and sale expressly state that the mortgagors, and all those claiming under them from the date of the filing of the notice of pendency, are "'forever barred and foreclosed of all right, claim, lien, title, interest and equity of redemption'" in the subject property.²⁰⁷⁶ Accordingly, that mortgagor would lack the capacity to assign any right in the property after judgment. ²⁰⁷⁷

Tenants who fall within the statutory protections of rent-regulation or are recipients of federal Section 8 subsidies are insulated from foreclosure.²⁰⁷⁸ Foreclosure actions do not affect rent-regulated tenancies; foreclosure is not one of the statutorily defined grounds for eviction.²⁰⁷⁹ Additionally, if a mortgage is foreclosed against a cooperative corporation, the proprietary lessees become tenants and, if the cooperative is in a qualifying building, the apartments revert to their former rent-stabilized status. ²⁰⁸⁰

Similarly, because Section 8 is intended to provide stable, affordable low-income housing, Section 8 tenancies survive foreclosure and may be terminated only if good cause can be shown and notice has been given under the requirements of Section 8.²⁰⁸¹ If the foreclosure plaintiffs or purchasers, or their agents, have indicated to Section 8 tenants that they would be unaffected by the foreclosure or otherwise treated as tenants, any right to terminate the housing assistance payment (HAP) contract and lease might be lost. ²⁰⁸²

On May 20, 2009, Congress enacted the Protecting Tenants at Foreclosure Act (PTFA), applicable to foreclosures "after the date of enactment of this title."²⁰⁸³ The Act protects the holders of bona fide leaseholds in any dwelling, residential real property, or property subject to a federally related mortgage loan²⁰⁸⁴ not otherwise protected from eviction under federal, state, or local laws.²⁰⁸⁵ A leasehold is bona fide under the PTFA if it results from an arm's-length transaction and if the rent charged is not substantially less than fair market rent, unless it is government subsidized. A leasehold by the mortgagor's child, spouse, or parent will be deemed not bona fide, regardless of the terms.²⁰⁸⁶ Because Congress did not define "dwelling" or "residential real property," the courts will look to the definitions set out in local laws in applying the PTFA.

If the leasehold was created before the foreclosure notice and was subject to a foreclosure action after the May 20, 2009 effective date of the statute, the tenant will be entitled to complete the term of the lease unless the purchasers intend to occupy the unit as their primary residence. Statutory or month-to-month tenancies or leaseholds are entitled to at least 90 days' notice before they may be terminated on the ground of owner's use.

On Dec. 15, 2009, the Mortgage Foreclosure Law²⁰⁸⁷ was enacted, creating a new RPAPL 1305. Like the PTFA, RPAPL 1305 gives tenants who reside in foreclosed properties and pay rents not substantially less than the fair-market rents the right to remain in occupancy for the remainder of their lease terms or 90 days, whichever is greater, unless the successor in interest to the property intends to use that unit as a primary residence. The law applies to actions in which a judgment of foreclosure and sale is issued after Jan. 14, 2010. Only permissible foreclosure defendants will be entitled to PTFA notice.

The PTFA was initially set to expire on December 31, 2012, but its expiration date was extended to December 31, 2014, by the Dodd-Frank Wall Street Reform and Consumer Protection Act.²⁰⁸⁸ The New York statute has no sunset provision.

Although a tenant must be named as a party to any foreclosure action, there are, practically speaking, no defenses a tenant may interpose to the action. And because the issue of possession is generally not addressed in the foreclosure action, Supreme Court, where foreclosure actions are heard, is unlikely to consider affirmative defenses relating to a tenant's statutory status in a foreclosure action, except where the foreclosing party is seeking a writ of assistance,²⁰⁸⁹ the common law procedural equivalent of a local court's warrant of eviction under RPAPL Article 7. By the same token, a tenant that fails to assert a defense in a foreclosure action will not be barred from raising that defense in any subsequent eviction proceeding. ²⁰⁹⁰

A condition of some mortgages is an assignment of the rents or leases to the lender if the borrower fails to pay. The lender will seek to enforce this provision by serving on the tenants a letter to attorn. A contractual assignment clause does not, however, give a mortgagee standing to commence and prosecute landlord-tenant proceedings.²⁰⁹¹ Moreover, a mortgagee in possession of the premises, or who is the assignee of rent, may be liable for any repairs that must be made to the premises during foreclosure. ²⁰⁹²

The mortgage determines whether the mortgagee is legally in possession. If the mortgage provides that a mortgagee gains possession once the mortgagor has defaulted and a formal demand has been made, the mortgagee will be liable for repairs during foreclosure.²⁰⁹³ Similarly, if the mortgage provides for an assignment of rents upon the default of the mortgagor, and the mortgagee asserts this right, the mortgagee will stand in the shoes of the owner during foreclosure and will be liable for any repairs. ²⁰⁹⁴

If permitted by the mortgage, a mortgagee may move the court to appoint a temporary receiver²⁰⁹⁵ to collect rents for the benefit of the mortgagee. A receiver is recognized as having standing to bring a...