A new Chicago ordinance requires mortgagees who acquire residential rental property through a foreclosure or deed in lieu of foreclosure to either provide an option to renew the lease or offer relocation assistance to a “qualified tenant.” The ordinance could face legal challenges.

The ordinance was passed by Chicago’s City Council on June 5, 2013, and becomes effective 90 days thereafter. It applies to “foreclosed rental property.” Such  property is defined as a building containing one or more dwelling units used as rental units, including a single-family home, or a dwelling unit 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 a foreclosure under Illinois’ Mortgage Foreclosure Law
• One or more of the rental units were occupied when the mortgagee became the owner

A “qualified tenant” entitled to the ordinance’s protections is a tenant in a foreclosed rental property 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. To be “bona fide,” a rental agreement must be the result of an arm’s length transaction, provide for rent in an amount that is not substantially less than fair market value, and not be with the mortgagor’s child, spouse, or parent.

The ordinance requires the owner of a foreclosed rental property to offer a qualified tenant a one-time relocation assistance fee of $10,600 or the option to renew or extend the tenant’s current rental agreement. The renewed or extended agreement must have an annual rental rate that for the first 12 months is not more than 102 percent of the tenant’s current rate, and for any subsequent 12 month period is not more than 102 percent of the immediate prior year’s annual rental rate.

Within 21 days of becoming the owner of a foreclosed rental property, a mortgagee is required to identify all tenants of the rental units and provide a written notice of their potential rights to relocation assistance or a lease renewal or extension. Within 10 days of becoming the owner, the mortgagee must register the property with the Chicago Buildings Commissioner.

Certain protections for residential tenants in foreclosed properties are provided by the federal Protecting Tenants at Foreclosure Act of 2009 (PTFA). The PTFA was originally scheduled to expire in 2012 but was extended until the end of 2014 by the Dodd-Frank Act. While the PTFA permits state or local laws that give “other additional protections for tenants,” 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.