Michelle A. Mierzwa, Esq.
Wright, Finlay & Zak, LLP
California’s Senate Bill 1079 (the “Bill”) was passed by the Legislature at the end of August and signed into law by the Governor on September 28, 2020, despite vigorous industry opposition. The stated purpose of the Bill was to address the perceived “problem” of large investors buying and converting foreclosed properties to rentals, to the detriment of maintaining owner occupancy in residential neighborhoods. The amendments are intended to cover only residential real property comprised of one to four units; so larger residential buildings, vacant land and commercial properties containing no residential living units are outside the scope of the amendments. The amended statutes regarding the foreclosure process are effective January 1, 2021 and through January 1, 2026. As discussed further below, the Bill will significantly impact the foreclosure process on covered residential real property.
New Bundling Prohibition?
As described in the Legislative Counsel’s Digest of the Bill: “Existing law generally requires that if the property consists of several lots or parcels, they are to be sold separately unless the deed of trust or mortgage provides otherwise.” The Bill prohibits a trustee from bundling properties for the purpose of sale, instead requiring each property to be bid on separately, unless the deed of trust requires otherwise. However, what does this really mean for lenders? In summary, given that the prior language already provided that separate parcels should generally be sold separately, this amendment does not appear to do much. The primary difference is that the only way that properties can be bundled for sale together is if the deed of trust requires that they be bundled. Most existing deeds of trust do not “require” that properties be bundled together so they cannot be sold together going forward. For new loans, few lenders are going to want to obligate themselves at bundling properties by “requiring” it in their new deeds of trust1.
New Post-Auction Bid Process for Eligible Bidders
This portion of the Bill has the potential to substantially impact the non-judicial foreclosure process for lenders where the post-auction bid process is triggered. As described in the Legislative Counsel’s Digest of the Bill with respect to the post-auction process: “If a prospective owner-occupant is not the last highest bidder, the bill would grant eligible tenant buyers, as defined, and other eligible bidders, as defined, certain rights and priorities to make bids on the property after the initial trustee sale and potentially to purchase it as the last and highest bidder, subject to certain requirements and timelines.” What does this really mean for lenders and trustees?
New Civil Code section 2924m provides that a trustee’s sale is not final until certain possible outcomes are allowed. For every 1-4 residential property, if a prospective owner-occupant was the high bidder at the live auction, the sale becomes final to the prospective owner-occupant. In the absence of a prospective owner-occupant being the high bidder at the foreclosure sale auction, other eligible bidders can submit a non-binding Notice of Intent to Bid within 15 calendar days of the foreclosure auction, thereafter requiring the trustee to wait until 5:00 pm on the 45th calendar day following the auction to allow for the potential eligible bidder to remit the “bid” funds. However, if during this time period, a group of all eligible tenants bidding jointly through a representative (“tenant group”) submits a Notice of Intent to Bid and matches the last and highest bid at the foreclosure auction, the tenant group can “take” title to the property from the foreclosing lender or the initially-successful bidder by paying the equal amount of the high auction bid. If the necessary funds in the amount of the matching bid are remitted to the trustee within the 45-day period, the tenant group would be deemed the successful bidder and receive title to the property. If the tenant group does not remit the necessary funds, the highest of the other eligible bidders would be the successful bidder to receive the Trustee’s Deed. The foreclosure trustee is responsible for collecting Notices of Intent, supporting affidavits and bid funds to determine the high bidder in the post-sale auction process, without the lender’s involvement.
If a prospective owner-occupant is the high bidder at the sale or if the tenant group matches the high auction bid inside the 15-day period, there is no impact to the lender as compared with the traditional non-judicial foreclosure process. Similarly, if no prospective owner-occupant, tenant or other eligible bidder submits a Notice of Intent to Bid inside the 15-day period, the traditional high bidder process will ensue. In the foregoing scenarios, the foreclosing lender will be paid out of the sale proceeds, and the third party will take title via Trustee’s Deed Upon Sale within 18 days following the auction. However, there are several potential impacts to the lender if the alternative post-sale process is triggered within the 15-day period. First, if the post-sale process is triggered by a Notice of Intent to Bid within the 15-day period:
(1) the lender’s ability as the high auction bidder to obtain title to the REO property to commence rehabilitation and marketing will be automatically delayed, or (2) the lender’s ability to receive the third party’s foreclosure sale auction proceeds to pay off the loan may be delayed for at least an additional 45 calendar days following the sale auction, depending on the risk tolerance of the foreclosure trustee with respect to release of the sale proceeds. This extends the lender’s responsibility for payments to loan investors, insurers, property tax authorities, etc. and subjects the property to potential damage, vandalism, and governmental abatement citations during this extended period. Second, there is the potential for extended delay where the bidders at the sale auction or post-sale process fail to consummate their bids in light of the uncertainty or lack of knowledge of the new post-auction process, and the foreclosure sale must be renoticed. Third, additional care must be taken in determining the amount of the lender’s opening and final bid at foreclosure to ensure that the maximum bid amount takes into account the possibility of a post-auction bidder taking title to the property by placing a bid a minimal amount over the auction bid (or by the tenant group matching the bid). Finally, there is the potential for increased litigation risk as auction bidders and post-auction eligible bidders dispute their relative rights under this rushed, new, and in many ways unclear, statutory process.
Enhanced Restrictions on Post-Foreclosure Eviction Rights
The Bill creates new Civil Code section 2924n, which provides: “Nothing in this article shall relieve a person deemed the legal owner of real property when the trustee’s deed is recorded from complying with applicable law regarding the eviction or displacement of tenants, including, but not limited to, notice requirements, requirements for the provision of temporary or permanent relocation assistance, the right to return, and just cause eviction requirements.” What does this mean for lenders or prospective purchasers at foreclosure sales?
While there may have been an argument that post-foreclosure evictions were not subject to the recently-enacted laws governing the eviction and displacement of tenants under 2019’s Assembly Bill 1482, this new section appears to end any dispute. Tenants occupying property transferred to a new owner through the non-judicial foreclosure process appear to be entitled to these protections, unless the landlord is otherwise exempt under the provisions of AB 1482. Exemptions include single family homes and condominium units if the owner is not a REIT, corporation or LLC in which at least one member is a corporation. That being said, it remains unclear if a non-exempt new owner would be required to comply with the new eviction restrictions with respect to the borrower who continues to occupy the property. Arguably, the borrower and his or her family members would not be considered tenants under an applicable lease. In any event, counsel should be consulted before moving forward with service of any notice to vacate/quit in light of these provisions of the Bill, existing local rent control restrictions and in light of the potential impact of Assembly Bill 3088’s COVID-related non-payment of rent restrictions.
What is the potential net effect of the new post-foreclosure bid process and the new eviction requirements? With the potential that an investor’s money could be tied up for 45 days, it is expected that fewer investors will competitively bid at foreclosure sales. Unfortunately, this will likely chill the bidding at the foreclosure sale, reducing the amount of excess proceeds and negatively affecting the unfortunate borrowers who just lost their properties. Further, the complicated post-sale bidding process coupled with the need to have cash on hand within 45 days of the sale is likely to scare off most interested owner occupant or tenant bidders. Add in that the unsophisticated eligible bidder will now have to comply with California’s rent control statute, it’s hard to envision any tenant or owner occupant willing to take advantage of the new laws.
Increased Penalties Related to Post-Foreclosure Residential Property Condition
As described in the Legislative Counsel’s Digest of the Bill: “This bill would increase the above-described civil fine to up to $2,000 per day for the first 30 days, and up to a maximum of $5,000 per day thereafter, subject to the discretion of the governmental entity levying the fine.” What does this mean for lenders?
The Bill amends Civil Code section 2929.3 to provide with respect to residential properties2 : “The maximum civil fine authorized by this section for each day that the owner fails to maintain the property, commencing on the day following the expiration of the period to remedy the violation established by the governmental entity, is as follows:
- Up to a maximum of two thousand dollars ($2,000) per day for the first 30 days.
- Up to a maximum of five thousand dollars ($5,000) per day thereafter.” [Emphasis added].
The Bill provides with respect to the notice periods prior to imposition of fines:
- If the governmental entity chooses to impose a fine pursuant to this section, it shall give the legal owner, prior to the imposition of the fine, a notice containing the following information:
- Notice of the alleged violation, including a detailed description of the conditions that gave rise to the allegation.
- Notice of the entity’s intent to assess a civil fine if the legal owner does not do both of the following:
- Within a period determined by the entity, consisting of not less than 14 business days following the date of the notice, commence action to remedy the violation and notify the entity of that action. This time period shall be extended by an additional 10 business days if requested by the legal owner in order to clarify with the entity the actions necessary to remedy the violation.
- Complete the action described in clause (i) within a period of no less than 16 business days following the end of the period set forth in clause (i).
- The notice required under this paragraph shall be mailed to the address provided in the deed or other instrument as specified in subdivision (a) of Section 27321.5 of the Government Code, or, if none, to the return address provided on the deed or other instrument.
- The governmental entity shall provide a period of not less than the time set forth in clauses (i) and (ii) of subparagraph (B) of paragraph (2) to remedy the violation prior to imposing a civil fine and shall allow for a hearing and opportunity to contest any fine imposed. In determining the amount of the fine, the governmental entity shall take into consideration any timely and good faith efforts by the legal owner to remedy the violation.”
Thus, the Bill substantially increases the potential fines for a lender’s failure to maintain property acquired through foreclosure by increasing the maximum daily fines for the first thirty-day period following the remedy period from $1,000.00 to $2,000.00 and by increasing the maximum daily fines after the thirty day period from $1,000.00 to $5,000.00. In sum, the Bill provides additional incentives (if any were actually necessary over the previously-existing fines of $1,000.00 per day!) for lenders who obtain title to property post-foreclosure to ensure that the property is properly maintained during the period it is marketed for resale.
In summary, the Bill contains several new provisions that substantially impact lenders during and after the traditional non-judicial foreclosure process. For additional questions about particular loans and properties in your portfolio that may be impacted by the Bill, please reach out to Michelle Mierzwa at firstname.lastname@example.org or Robert Finlay at email@example.com.
Michelle A. Mierzwa is a Partner in Wright, Finlay & Zak’s Compliance Division, providing state and federal compliance and regulatory counsel in the Western States. In 22 years of practice, she has resolved litigation through jury and bench trials and appellate practice, created a legal department for one of the largest foreclosure trustees in the West, coordinated compliance audits, and managed the California branch of a national law firm.
1) In addition, the rights of junior lienholders under Civil Code sections 2899 and 3433 may impact the requirement to sell real property security parcels separately.
2) While the post-sale bid process in Civil Code section 2924m is limited to one-to four-unit residential properties, the post-foreclosure fine provisions in Civil Code section 2929.3 relate to residential property of any size, not limited to one-to four-units. Civil Code section 2929.3: “(a) (1) A legal owner shall maintain vacant residential property purchased by that owner at a foreclosure sale once that sale is deemed final or acquired by that owner through foreclosure under a mortgage or deed of trust….” While this section applies to all sizes of residential properties, it does not apply to commercial properties.