After the recent passage of Senate Bill 1079 (“SB 1079”), significant changes to the nonjudicial foreclosure process will go into effect on January 1, 2021 for real properties containing 1 to 4 single-family residences. Establishing new rights for tenants and community groups, SB 1079 amends Sections 2929.3 and 2924 of the California Civil Code. Originally nicknamed “Homes for Homeowners, Not Corporations,” the new requirements and rights will fundamentally extend the foreclosure process, with the goal of allowing more foreclosed properties to end up in the hands of individuals and nonprofit organizations engaged in the development and preservation of affordable housing.
Right to Bid Post-Auction
Currently, nonjudicial foreclosure sales for real property are deemed complete and final when the auctioneer accepts the final bid and the trustee gives the purchaser a trustee’s deed.[1] SB 1079’s salient change disrupts this standard, providing “Eligible Tenant Buyers” and “Eligible Bidders” the opportunity to purchase the subject property after the trustee sale closes, unless the prospective owner occupant (defined below) is already the successful purchaser. If the prospective owner occupant is the last and highest bidder at the trustee sale, the sale is final. Otherwise, Eligible Tenant Buyers may purchase the foreclosed property by (i) delivering written notice of intent to place a bid to the trustee within 15 days after the trustee sale, and (ii) matching the last and highest bid price at auction. Eligible Bidders have the same right, but must exceed, instead of match, the last and highest bid price at auction.[2]
Who’s Eligible?
Eligible Tenant Buyers include any natural person who at the time of the trustee sale occupies the real property as their primary residence under a lease agreement as a result of an arm’s length transaction with the trustor prior to the recording of the notice of default against the property. The Eligible Tenant Buyer cannot be the Trustor’s child, spouse or parent. Eligible Bidders are defined to encompass more potential bidders, including the following:
- an Eligible Tenant Buyer;
- a “nonprofit association, nonprofit corporation, or cooperative corporation in which an eligible tenant buyer or a prospective owner-occupant is a voting member or director”;
- a “limited partnership in which the managing general partner is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable housing”;
- a “limited liability company in which the managing member is an eligible nonprofit corporation based in California whose primary activity is the development and preservation of affordable rental housing”;
- a community land trust;
- a limited-equity housing cooperative;
- “the state, the Regents of the University of California, a county, city, district, public authority, or public agency, and any other political subdivision or public corporation in the state”[3]; and
- “prospective owner occupant” – any natural person who submits an affidavit to the trustee affirming that he or she (i) will occupy the property as his or her primary residence within 60 days of the trustee’s deed being recorded, (ii) will occupy the property as a residence for at least one year, (iii) is not the mortgagor or trustor, or the child, spouse, or parent of the mortgagor or trustor, and (iv) is not acting “as the agent of any person or entity purchasing the real property.”[4]
Procedural Requirements
Procedural changes introduced by SB 1079 are important to note as well. Existing law currently requires that for deed of trusts secured by 1 to 4 single-family residences, the notice of sale contain specified notices to potential bidders and to the property owner. SB 1079 adds that the notice of sale also contain a specified notice to tenants regarding the tenant’s potential right to purchase the property.
SB 1079 also attempts to increase public awareness of foreclosure sales, requiring the lender or trustee to use a “good faith effort” to maintain up-to-date information regarding sales and postponements on a website, plus a telephone number that provides specified information on the implicated properties.
Finally, SB 1079 also prohibits a trustee from bundling properties for the purpose of sale, a common practice for lenders. Instead, each property is required to be bid on separately, unless the deed of trust or mortgage provides otherwise.
Increased Penalties and Post-Foreclosure Eviction Guidelines
SB 1079 can be characterized as a response to issues revealed by the 2008 downtown and the flood of nonjudicial foreclosure issues that occurred then. For example, owners of vacant residential property purchased through a foreclosure sale are required to maintain the property. SB 1079, responding to the frequent failure of purchasers in the past to monitor and maintain vacant foreclosed homes, has increased the maximum civil fine that government entities can impose – $2,000 per day for the first 30 days, up to a maximum of $5,000 per day thereafter, subject to the discretion of the governmental entity.
Lastly, SB 1079 also mandates compliance with recently enacted laws regarding the eviction of tenants, including relocation assistance and just cause eviction in the case of a post-foreclosure eviction.
Conclusion
Proponents look at SB 1079 as a necessary piece of the puzzle in fighting the California housing crisis. The goal is clear – avoiding a repeat of 2008, when corporations benefited from the foreclosure crisis and home ownership percentages suffered. On paper, there is little question that SB 1079 increases the likelihood of individuals (and not for profit corporations) owning residential properties post-foreclosure. However, naysayers forecast substantial litigation and the inevitable need for court involvement due to the ambiguities introduced by SB 1079. There is also worry that the additional uncertainty of a post-auction bidder will have a chilling effect at the foreclosure sales themselves, ultimately harming both lenders and homeowners. The full effect of SB 1079, which does not sunset until January 1, 2026, remains to be seen.
FOOTNOTES
[1] Millennium Rock Mortg., Inc. v. T.D. Serv. Co., 179 Cal. App. 4th 804, 809 (2009) (citing Miller & Starr, Cal. Real Estate (3d ed. 2000) Deeds of Trust, Section 10:206, p. 660 (Miller & Starr)).
[2] California Civil Code Sections 2924f(b)(8)(A), 2924m(c)(3)-(4).
[3] California Civil Code Section 2924m(a)(3)
[4] California Civil Code Sections 2924m(a)(1)(A)-(B), 2924m(a)(3)(B).