Buying a Foreclosed Property With Tenants in BC: Who Actually Has to Move?

Buying a property through foreclosure can look like an opportunity. The purchase price may be attractive, the court-supervised process may appear straightforward, and a prospective purchaser may assume that obtaining title also means obtaining vacant possession.

When the property has tenants, however, that assumption can become expensive very quickly.

Foreclosure sits at an unusual intersection between British Columbia’s mortgage law, Supreme Court procedure and the Residential Tenancy Act. Buyers, landlords and tenants should all understand that the ordinary rules governing the sale of a tenanted property do not necessarily tell the whole story.

A foreclosure is different from an ordinary sale

In an ordinary sale of residential rental property, the sale itself does not end the tenancy. The purchaser generally becomes the new landlord and inherits the existing tenancy on its existing terms.

Foreclosure is different.

The Residential Tenancy Branch explains that, in a foreclosure, the mortgage between the property owner and the lender can take priority over the tenancy. A court may ultimately make an Order for Conduct of Sale dealing with possession of the property, including a date on which possession is to be delivered.

That does not mean, however, that a tenant simply loses all rights the moment foreclosure proceedings begin.

Section 94 of the Residential Tenancy Act provides that a court order made in a foreclosure or another proceeding affecting possession of a rental unit is not enforceable against a tenant unless the tenant was a party to that proceeding. At a very basic level, it means that a foreclosure petition should include tenants and occupants as parties to the proceeding, requiring service of court materials to ensure that anyone affected by the petition can take appropriate next steps.

That procedural point can be very significant.

What tenants should do when foreclosure papers arrive

Receiving foreclosure documents does not necessarily mean that a tenant must immediately leave.

A tenant should first determine exactly what has been served, whether they have been named as a party to the foreclosure proceeding, and whether any court order has actually been made dealing with possession.

Until the tenancy or the tenant’s right to possession has lawfully ended, rent should generally continue to be paid. Simply stopping rent because the owner is in financial trouble can create an entirely separate tenancy problem. The RTB specifically advises tenants that they remain responsible for paying rent during foreclosure proceedings.

If an Order for Conduct of Sale or another order dealing with possession is eventually made, its precise wording becomes important.

What purchasers should investigate before bidding

A prospective purchaser should not treat an occupied foreclosure property as though the occupants are merely people who will disappear on completion.

Before committing to the purchase, a buyer should determine:

• who is occupying the property;

• whether those people claim to be tenants;

• when their tenancy began;

• whether there is a written tenancy agreement;

• what rent is being paid;

• whether the tenants were added as parties to the foreclosure;

• whether the proposed order approving the sale deals with vacant possession; and

• what possession date, if any, the court is being asked to approve.

This is particularly important because foreclosure sales commonly provide purchasers with fewer contractual protections than an ordinary residential purchase.

The phrase “subject to court approval” should not be confused with “guaranteed vacant possession.”

What if the buyer actually wants to become the landlord?

Not every purchaser wants the tenants removed.

Sometimes an existing tenancy is an asset. The unit may already be producing income, the tenants may have an excellent payment history and there may be no reason to disrupt the arrangement.

Where the court process does not terminate the tenancy, a purchaser acquiring a tenanted property may simply become the new landlord.

That means the purchaser should obtain the tenancy agreement, rent ledger, condition inspection reports, information about deposits and other records before taking over the property.

And what if the purchaser wants to live there?

This is where foreclosure and residential tenancy law must be kept conceptually separate.

If the foreclosure order itself does not provide the purchaser with vacant possession and the tenancy continues after completion, the purchaser cannot simply change the locks because they now own the property.

They may instead have to rely upon the Residential Tenancy Act, including the statutory process for ending a tenancy for their own occupancy where the requirements of the Act are met.

In an ordinary sale, a purchaser intending in good faith to occupy a rental unit can in certain circumstances request that the seller serve a Three Month Notice for Purchaser’s Use after the sale is unconditional. Alternatively, after taking possession and becoming the landlord, the purchaser can use the landlord-occupancy process.

Whether that process is necessary following a foreclosure depends on what occurred in the foreclosure proceeding itself.

The practical lesson

For tenants, foreclosure papers should be taken seriously, but they should not be confused with an ordinary eviction notice.

For purchasers, “foreclosure” should never be treated as shorthand for “vacant property.”

And for the existing owner, once foreclosure proceedings have begun, promises made to either the tenant or a prospective purchaser about possession may involve issues beyond the jurisdiction of the Residential Tenancy Branch.

Foreclosures involving residential tenants are one of those areas where reading the tenancy agreement is only the beginning. The foreclosure petition, the parties named in the proceeding and the eventual court order may matter just as much.

Whether you are a landlord facing foreclosure proceedings, a prospective purchaser of a foreclosed property with tenants, or a tenant in receipt of foreclosure documents for the property you live in, knowing your rights is paramount. We recommend reaching out to our office and booking a consultation to discuss your situation and get the advice you need.