I have to say that foreclosure law is not my thing, but with that disclaimer in mind, I have to write about it anyway.
In Jefferson County, Kentucky, the standard notice of Commissioner's auctions for foreclosed upon properties (sometimes called a Handbill) contains the following language:
"The subject real estate shall be sold free and clear of all liens, encumbrances and interest of the parties hereto, except sold subject to:
A) Easements, restrictions and stipulations of record;
B) Any matters which would be disclosed by an accurate survey or inspection of the property;
C) Any current assessments for public improvements levied against the property."However, the 2009 Federal law, Protecting Tenants at Foreclosure Act (PTFA), as amended, (see: PTFA does NOT expire December 31, 2012), remains in effect until December 31, 2014. PTFA provides, in part:
" . . . . any immediate successor in interest in such property pursuant to the foreclosure shall assume such interest subject to . . . any bona fide lease entered into before the notice of foreclosure to occupy the premises until the end of the remaining term of the lease . . . . "
12 USC § 5220 note (Really. It's in the notes to that section)First. the notice of the Commissioner's auction is not accurate. By reason of PTFA the buyer at Commissioner's auction takes a rental property subject to any bona fide lease entered into before the sale (I have omitted a few PTFA details here).
Second. By reason of Kentucky's Uniform Residential Landlord and Tenant Act (URLTA) (see:Notes on Kentucky's URLTA - Security Deposits) a buyer of rental property at a Commissioner's auction might be obligated to refund a tenant's security deposit, when the time comes, without ever having collected it.
This potential undisclosed liability is the conundrum. In a negotiated sale of rental property, tenant security deposits are undoubtedly disclosed and resolved by negotiation. But in a forced sale after foreclosure? How are tenant security deposits accounted for?