Arizona Residential Landlords in Foreclosure – Expanding the Duty to Notify Tenants

The Arizona Residential Landlord Tenant Act, A.R.S. § 33-1301 et seq., already requires landlords to provide written notice (with specific language) to tenants of a “potential foreclosure” on the property if a “foreclosure action” has been “initiated” at the time the parties enter into the rental agreement. A.R.S. § 33-1331. This obligation was added by the Arizona Legislature in 2010 in reaction to the flurry of foreclosures arising out of the recent real estate crash to protect tenants from entering into leases on properties that were already in significant financial distress and, indeed, in the process of being foreclosed on.

A landlord’s duty to notify a tenant of a foreclosure action under this statute will likely soon be expanded if Arizona House Bill 2281, which is working its way through the Arizona legislature right now, is enacted into law, as many expect it will.

The policy behind these mandated disclosures is obvious. A landlord in financial distress involving a property, especially a property in foreclosure, may be desperate to secure a tenant (any tenant) on just about any terms in an effort to capture some revenue from the property before it is lost. The landlord might even have good intentions, in whole or in part in doing so – believing that the revenue stream from the lease might even help the landlord cure the default and save the property from foreclosure. However, a residential tenant, oftentimes with limited or no experience with real estate transactions and rarely represented by counsel, should know that it might be accepting an invitation to a party that is about to end and in a bad way.

Why? “You can’t kick me out, I have a lease” is not much, if any, of a defense for a tenant in many instances. In most foreclosures, all “interests” in the property that are junior to the foreclosing party’s position are wiped out when the foreclosure action is finalized. And that usually includes any leases on the property. The new owner of the property (the lender or the purchaser of the property at the foreclosure) usually has no obligation to honor the lease. If the tenant can cut a new deal with the new landlord, the tenant can stay, but not necessarily on the same terms under the current lease (including the amount of rent, the term of the lease, and other terms that may have been critical to the tenant when it signed the original lease). If the new “landlord” and the tenant are unable to reach a new agreement, or the new owner simply has other plans for the property, out the tenant goes. By eviction if necessary.

House Bill 2281 working its way through the Legislature this session will expand this landlord duty to notify in a significant way. If enacted into law, which appears likely, Arizona landlords on many residential properties will now be required to provide notice to tenants of a potential foreclosure on the property regardless of when the landlord becomes aware of the potential foreclosure action – whether the landlord becomes aware of the action before the lease is entered into or after the lease is entered into. Given that a failure to notify a tenant of a pending foreclosure action subjects landlords to actions for damages, among other things, most Arizona residential landlords will soon have another issue to tackle and address when they find themselves in a dispute with their lender that escalates to the point where the lender initiates a foreclosure.

The takeaway for those who lease Arizona residential properties: ensure you give notice to any tenants whenever a foreclosure action on the property is initiated (within five days). Otherwise, the landlord might not only lose the property in the foreclosure, but also then be faced with claims from the tenant for any damages caused by the failure to provide timely and adequate notice.

Landlords on commercial properties will not be affected by this anticipated amendment to A.R.S. § 33-1331, which is an amendment to the Arizona Residential Landlord Tenant Act. Nor will landlords on “multi-family residential units consisting of four or more connected units” (larger apartment complexes, basically). A.R.S. § 33-1331 (C) (or, if H.B. is enacted as currently proposed, A.R.S. § 33-1331 (D)).