REQUIRED READING: Every foreclosure represents a significant property preservation challenge. Servicing professionals and property preservation experts understand that while a foreclosure might feel like an ending, it is also, in many ways, a beginning: the start of an often long and complicated process of property maintenance and management, complete with legal, logistical and financial pitfalls for those that do not proceed with care.
The challenges of property preservation are a significant and, perhaps, underappreciated piece of the foreclosure puzzle. While property preservation is a catchall term that encompasses a wide range of post-foreclosure maintenance and upkeep priorities, it is most commonly used to refer to the basic process of cleaning, protecting and maintaining an unoccupied or partially occupied property in order to prevent significant loss of value.
The nuts and bolts of the process are fairly straightforward. What is somewhat trickier, however, are the subtleties that can arise in complex and sometimes confusing circumstances.
For example, what are the servicer's and its agents' rights and responsibilities? What can and should they do if the property is still occupied? What are the essential property preservation best practices? And, how can servicers limit their legal and financial exposure while simultaneously protecting their investment? It is well worth taking the time to review property preservation basics: what to do, what not to do, and when and how it is appropriate to proceed.
Rights and responsibilities
Typically, a servicer's agent will visit the property post-foreclosure to secure and, when necessary, winterize the home. That process includes everything from draining water pipes, closing and locking any open doors and windows, and dealing with any remedial issues relating to the property's condition. In some cases, that process might be as simple as locking a door and turning off the water, but in other cases – especially when dealing with dilapidated or abandoned houses that might not be up to code or might be in violation of a local ordinance – a more in-depth response may be required to prevent further deterioration and avoid fines or condemnation.
The boilerplate language that appears in every standard residential deed or mortgage (and many commercial deeds/mortgages) actually does an admirable job of outlining the basic legal property preservation rights and responsibilities of both borrowers and the lender. First, the borrower shall ‘maintain the property in order to prevent the property from deteriorating or decreasing in value due to its condition.’
In the event of a foreclosure or property abandonment, the lender ‘may do and pay for whatever is reasonable or appropriate to protect lender's interest in the property and rights under this security instrument, including protecting and/or assessing the value of the property, and securing and/or repairing the property.’
But what does ‘securing and/or repairing the property’ entail? According to the boilerplate language, ‘Securing the property includes, but is not limited to, entering the property to make repairs, change locks, replace or board up doors and windows, drain water from pipes, eliminate building or other code violations or dangerous conditions, and have utilities turned on or off.’Â
Those basic principles are quite clear. Unfortunately, the real-world application of those ideas is often less black-and-white. With policies, procedures and legislative and regulatory framework differing from state to state (and sometimes even within states from one jurisdiction to the next), it is all too easy to make a misstep that exposes the lender to legal and/or financial liability.
A great many of the most common issues surround another seemingly straightforward statement found in the standard deeds and mortgages: ‘The lender or its agent may make reasonable entries upon and inspections of the property.’
What constitutes ‘reasonable’ can vary significantly depending on local laws and regulations, and property preservation dos and don'ts are very different when people and/or possessions remain on the premises.
First things first
One of the first things a bank will do when a property enters into a real estate owned (REO) portfolio is to send someone out to the property. If the property is unoccupied, the property preservation professional is free to proceed with basic measures for maintenance and security.
If it is apparent that the home is still occupied, the servicers are typically not permitted to proceed. It is important to consult with a local attorney in the relevant jurisdiction to ascertain how, when and if they are permitted to proceed with property preservation measures in the event of current occupancy.
One misstep can cause headaches going forward. In Missouri, for example, there are some counties where, if the bank's agent changes any locks with occupants still potentially on-site, the local authorities will subsequently not execute a lockout. Here are some general guidelines on how to proceed if the following occurs:
The property is not occupied. If neither persons nor possessions are still present, the bank is authorized to engage in property preservation and secure/prepare the property for marketing. One frequently occurring complication is when the property preservation agent arrives and finds property or possessions remaining in the home. While rules vary, the agent is usually permitted to take reasonable steps to secure the property (change the locks, for example).
If at all possible, however, the lender/agent should not completely exclude the occupant from access. One possible solution is to not change all the locks, at least not until the former occupants have had a chance to remove their things or until the timeline expires and the due process for disposing of the remaining possessions can take place. As a general guideline, if borrowers have a right to access their personal property, the lender should make sure that they are able to do so.
The property is still occupied. In some cases, pre-foreclosure, the lender may be able to file suit compelling the occupant to maintain or preserve certain aspects of the property. Realistically, however, little can be done until the foreclosure is official. Unfortunately, if the home is still occupied post-foreclosure, lenders' options do not improve dramatically.
Lenders and/or their agents cannot lock the occupants out or bar them from the home and, typically, cannot winterize the property and perform other maintenance. Lenders can start addressing past-due utility debt or clearing up obvious hazards, such as overgrown bushes obscuring a stop sign.
Another possibility is to work to clear citations, but even then, there are limitations and complexities. If a lender removes what appears to be junk in a yard, for example, they may expose themselves to claims from the former owner related to the removed items. The most important thing to do in this circumstance is to initiate eviction proceedings, assuming the lender has the legal right to do so.
Courts have generally held that banks have the right to engage in basic property preservation measures – but they have to do so in the right way. The pitfalls of overstepping property preservation boundaries or engaging in unauthorized maintenance/security activities can be significant. If lenders improperly lock out occupants, or accidentally destroy or remove property/possessions, they may be exposing themselves to unnecessary liability, even if they were acting in good faith and thought that the property was unoccupied.
The aggrieved party may file a lawsuit seeking damages/compensation for everything from the expense of the lockout/locksmith, to property damage/loss/deprivation, and even attorney's fees. Damages may be punitive or even criminal in nature if the violation is willful or malicious or is considered to rise to the level of destruction of property, trespassing or another more serious crime. While those instances are both rare and extreme, lenders' costs to defend themselves in litigation are clearly not worth the trouble.
There are two legal concepts that come into play here: conversion (permanent deprivation of personal belongings that have been destroyed, damaged or compromised) and trespass to chattels (short-term, deprivation from personal belongings that causes harm). One of the reasons that lenders are so vulnerable to property-related legal claims is the infamous ‘diamond in the rough’ scenario, where a claimant can make fantastic claims based on even a small amount of damage.
First and foremost, servicers should choose a property preservation vendor/agent carefully. They should make sure that they are protected in the sense that vendor mistakes do not extend to servicer liability, and that the lender will not be on the hook for any awards or attorney's fees that might result from vendor actions or inactions.
When in doubt, do not change the locks. Then, ensure that any outside maintenance concerns that might draw a citation are promptly addressed (e.g., grass is too high, broken windows need to be boarded up, siding is falling off), as those citations can impact the servicer pre- and post-foreclosure.
Next, maintain open lines of communication with local regulatory authorities. Generally speaking, the servicer can contact the issuing authority and discuss warnings, citations or fines. Frequently, those agencies are flexible and willing to work with servicers, and an update or planned resolution can prevent further regulatory action.
Then, get the utilities turned back on. Often, that means paying any unpaid utility bills. Sometimes that will be complicated because some bills/liabilities reset after foreclosure. Lenders can document transfer of ownership to establish an accurate billing period. One complication is that some liens against the property can persist through foreclosure (a ‘super priority lien’), and those have to be addressed before ownership can be transferred. Smaller lenders will often tack the price of the lien onto the sale price, but larger lenders will usually clear the lien before putting the property on the market.
In general, every servicer's goal should always be to preserve the property and protect the asset while minimizing potential exposure and liability. Doing things the right way while adhering to basic best practices is the best way to accomplish that goal.
Benjamin C. Struby is an associate attorney at Millsap & Singer LLC, based in Chesterfield, Mo. He can be reached at firstname.lastname@example.org.