Arizona Tenant’s Claims Against a Landlord When a Home is Lost in a Foreclosure

Richard Keyt, Arizona Real Estate Lawyer

Unfortunately, far too many Arizona residential tenants have become innocent victims of the down turn of the Arizona real estate market. When a landlord cannot or will not pay amounts due on a loan secured by a lien on the real property, the lienholder will probably foreclose. The most common result of a foreclosure is that the innocent tenant is evicted by the new owner of the property.

A tenant who is evicted from an Arizona residence because of a foreclosure of the property may have a claim against the landlord for damages. The general rule is that if a tenant is not in default on a lease and the tenant is evicted because of a foreclosure, the landlord breached the lease because of the premature termination of the tenant’s right to occupy the residence and is liable to the tenant for the damages the tenant suffers because of the eviction.

Arizona Loan Default Law

Foreclosure Rule #1: The general rule is that the lienholder of a recorded lien that is in default has the right to foreclose and terminate the interest in the premises of everybody (including a tenant) who claims an interest in the premises that is junior to the lien being foreclosed. For example, if a first lien is recorded on April 1, 2008, and the tenant enters into a lease after that date, then when the first lien is foreclosed, the tenant’s right to occupy the premises terminates as of the moment and date of the foreclosure.

Translation: If the tenant leased the premises after the date the lienholder recorded its lien with the county recorder of the county in which the premises is located, the lienholder’s lien is senior to the tenant’s junior interest as a tenant and the tenant’s right to occupy the premises ends with the foreclosure.

Affect of Foreclosure on Senior Liens: When a lien is foreclosed, it has no effect on any interests in the land that are senior to the lien being foreclosed. For example, if a second lien if foreclosed, it has no effect on the first lien and the first lien remains valid and outstanding. Same is true with respect to a lease created before the lien was created and/or recorded. A tenant who leased the premises before the creation of the lien being foreclosed may be senior to the lienholder and the foreclosure may not affect the tenant’s right to occupy the premises after the foreclosure.

Caution: It is possible for a lease that is initially senior to an after acquired (junior) lien to become junior to the lien. If a written lease contains a clause that says the lease and the tenant’s rights automatically become subordinate to an after-acquired lien, then the lease causes an automatic re-ordering (subordination) of the lease and the lien with the result that the lease becomes junior to the lien. Sometimes a landlord who does not have an automatic subordination clause in a lease to ask the tenant to sign a subordination agreement. When this happens, the tenant is voluntarily agreeing to subordinate the lease to the after-acquired lien.

Foreclosure Rule #2: A tenant who has a written lease and who is evicted from a residence probably has legal rights and claims against the landlord. When a tenant signs a written lease with a landlord, the general rule is that the tenant has the first right to occupy the premises for the term of the lease, including any extensions provided under an option to extend the term. As long as the tenant does not default under the lease, the landlord is obligated to make the premises available to the tenant FOR THE ENTIRE TERM OF THE LEASE. In general, the only way a landlord can avoid liability to the tenant for damages for breach of the lease resulting from a foreclosure and eviction is if the lease contains provisions that terminate the lease in the event of a foreclosure.

Tenant’s Right to Damages from Landlord’s Breach of the Lease

The good news for an evicted tenant (I know there probably isn’t any good news) is that the landlord is probably liable to the tenant for damages arising from the eviction. If a landlord breached the lease because the tenant’s right to occupy the premises terminated with a foreclosure, the tenant has a claim for damages and may sue to collect. Damages ultimately are determined by the court, but may include the cost to enter into a new lease, moving costs, utility hook-up charges, higher rent incurred by the tenant for the remainder of the term for similar replacement premises and other items that can be proven and that are caused by the breach of the lease.

Damages for Retained Security Deposit

The tenant may also be entitled to damages arising from the landlord’s failure to refund timely the security deposit. Arizona Revised Statutes Section 33-1321.D and E provide:

D. Within fourteen days, excluding Saturdays, Sundays or other legal holidays, after termination of the tenancy and delivery of possession and demand by the tenant the landlord shall provide the tenant an itemized list of all deductions together with the amount due and payable to the tenant, if any. Unless other arrangements are made in writing by the tenant, the landlord shall mail the itemized list and any amount due, by first class mail, to the tenant’s last known place of residence.

E. If the landlord fails to comply with subsection D of this section the tenant may recover the property and money due the tenant together with damages in an amount equal to twice the amount wrongfully withheld.

Collection Reality

Now for the bad news (maybe). Although the landlord may be liable to the tenant for substantial damages if the tenant is evicted and the landlord breached the lease, the landlord will probably not roll over and spit out the money owed to the tenant. Here are some reasons why a tenant may have trouble recovering damages from a landlord:

  • The landlord does not have the money. It goes without saying that if the landlord lost the premises because the landlord could not pay a large sum of money to a lienholder, the landlord may not have the money to pay a damaged tenant either.
  • The landlord has the money, but will not pay the damages unless ordered to do so by a court.
  • To collect from the landlord, the tenant may have to sue the landlord and get a court order (a judgment) that the landlord owes the tenant money. A tenant can sue the landlord without using a lawyer (saves on lawyer fees) or hire an attorney (not cheap). If the tenant who hires an attorney prevails, the court has the discretion to award the tenant attorneys fees.
  • To collect the money won in court from the landlord, the tenant may have to use the legal process to enforce collection of the judgment (more money and possible attorneys’ fee). The collection process includes filing a lien on the landlord’s properties (if you can find other property in Arizona) and garnishing wages (if the landlord has wages available for garnishment and is employed in Arizona).
  • The landlord might file for bankruptcy and you would be in line with other creditors to get paid.

Caution: Do not throw good money after bad!

Tenants: Please Do Not Contact Richard Keyt. He Does Not Offer Legal Services Related to Tenant Problems with Landlords.