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Parties foreclosing on Chicago rentals face new obligations

Parties who acquire residential rental properties via a foreclosure or deed in lieu of foreclosure in Chicago are now required to provide an option to renew the lease or offer relocation assistance to a "qualified tenant." This is according to a new city ordinance that is reshaping tenant's rights in the wake of foreclosure. 

The ordinance, which was passed by Chicago’s City Council on June 5, will become effective 90 days after its passing date and will apply to "foreclosed rental property." 

Foreclosed rental property is considered a building that contains one or more dwelling units that are used as rental units, which can include a single-family home.

It is also includes a dwelling unit which is used as a rental unit and subject to the Illinois Condominium Property Act or the Illinois Common Interest Community Association Act if the legal or equitable interests in the building or unit were terminated by foreclosure under Illinois' Mortgage Foreclosure Law or if at least one owner of the rental units were occupied when the mortgagee became the owner. 

A qualified tenant who would be entitled to the protection of the ordinance is a tenant in a rental that has been foreclosed upon on the day the mortgagee became an owner with a "bona fide rental agreement" to occupy the rental unit as the tenant’s principal residence. 

In order for a rental agreement to be bona fide, it must be the result of an arm’s length transaction, provide for rent in an amount that is not significantly less than fair market value and not be with the mortgagor’s child, spouse or parent. 

Ordinance requirements guarantee the owner of a foreclosed rental property offers a qualified tenant a one-time relocation assistance fee of $10,600 or give them the option to renew or extend their lease. 

If the tenant decides to renew their lease, the renewed agreement must have an annual rental rate that is not more than 102% of the immediate prior year’s annual rental rate at least for the first 12 months.

The federal Protecting Tenants at Foreclosure Act of 2009 provides certain protections for residential tenants in foreclosed properties. The act was originally scheduled to expire in 2012, but was extended by the Dodd-Frank Act until the end of 2014. 

The PTFA permits state and local laws that 'give other additional protections for tenants'; however, it does not directly address preemption under the National Bank Act or the Home Owners Loan Act. The new ordinance could also be vulnerable to potential constitutional challenges. 

mhopkins@housingwire.com

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