Is Fannie Mae liable for returning a tenant’s security deposit after acquiring property through foreclosure?

UPDATED: May 18, 2011

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Is Fannie Mae liable for returning a tenant’s security deposit after acquiring property through foreclosure?

The condo I’m renting was acquired by Fannie Mae at foreclosure auction last week. The lease runs about another year. Fannie Mae has offered to continue that lease or enter into new 12 month lease. Is Fannie Mae liable for the return of my substantial deposit either now or at the end of the lease? The Dept. of Consumer Affairs says no because foreclosure automatically terminates a lease and the owner did not transfer deposit funds to Fannie Mae. Doesn’t a new owner take title subject to all terms of the lease? Does foreclosure automatically end lease? Even if I were to sue owner in small claims and win, my chances of collecting are slim to none.

Asked on May 18, 2011 under Real Estate Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

A foreclosure does automatically terminate a lease; the previous landlord no longer has possession, and so can no longer grant it. Foreclosures are treated completely differently than voluntarily transfers or sales or property; you are correct in that in that situation--a sale of the property--the new owner does take the property subject to all leases. However, that is not the case in a foreclosure.

You could sue the former landlord for your security deposit; he, she, or it is the entity which was holding your deposit and which is responsible for returning it to you. As you say, you may not practically be able to recover from the former owner--but the fact that the former owner can't pay doesn't mean that Fannie Mae now has to.

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