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Tenants Right's: What Happens to the Tenant -- Ant the Security Deposit -- After Foreclosure?

Say you're a tenant. You put up a hefty security deposit, and have dutifully paid rent for months or years. Suddenly, you find out the property was sold at a foreclosure sale and the new owner wants you to move out. What's worse, he won't refund your security deposit.

Or, say you're the purchaser at a foreclosure sale. Now you are getting stacks of letters from the prior owner's tenants, who are clamoring to get their security deposits back. What is the law?

Generally, a tenant has no legal right to possession after foreclosure under a Deed of Trust. This is because the purchaser at the foreclosure sale usually gets title that is superior to the possessory rights of a tenant. The tenant's right to possession will only be superior if his lease was recorded before the Deed of Trust was recorded. In Virginia, all interests arising after the interest foreclosed upon are destroyed when the property is sold at a foreclosure sale.

Accordingly, the new owner may choose to evict existing tenants or allow them to sign a new lease agreement. But what about security deposits? Virginia case law seems to indicate that the tenant will lose his right to get the deposit back once the property is sold at a foreclosure sale. This may come as a rude shock to many commercial tenants whose security deposits are in the tens of thousands of dollars.

A commercial tenant can protect his interests by recording the lease and by posting a Letter of Credit in lieu of a security deposit.