California Legislature Creates “Redemption Right” for Trustee Sales of Residential Properties

By Eric S. Pezold and David Rao

On September 28, 2020, Governor Newsom signed into law SB 1079 (the “Bill”), granting a right of redemption or first refusal to purchase a foreclosed residential property to tenants, buyers intending to use the property as their residence, local governments intending to use the property as affordable housing and other eligible buyers.

All one-unit to four-unit family dwellings (including investment or rental properties) are included under the Bill, which sunsets on January 1, 2026. If, at a trustee’s sale, a property is not sold to a Prospective Owner-Occupant¹, any one of the following individuals or entities (“Eligible Bidders”) may submit a bid to purchase the property up to 45 days after the trustee’s sale:

1. An Eligible Tenant Buyer²;
2. A Prospective Owner-Occupant;
3. A nonprofit in which an Eligible Tenant Buyer or Prospective Owner-Occupant is a voting member or director;
4. A California nonprofit corporation whose primary activity is the development or preservation of affordable rental housing;
5. A limited partnership or limited liability company in which the managing partner or managing member is a California nonprofit corporation whose primary activity is the development or preservation of affordable rental housing;
6. A community land trust;
7. A limited-equity housing cooperative; or
8. The State of California, the Regents of the University of California, or any county, city, or district local government, public authority or agency. Civ. Code § 2924m(a)(3)(A)-(I).

An Eligible Bidder must provide an affidavit to the trustee that they meet one of the conditions above and must send written notice of intent to place a bid no more than 15 days after the trustee’s sale. Civ. Code § 2924m(c)(2). The Eligible Bidder may submit a bid up to 5:00 p.m. on the 45th day after the trustee’s sale. Civ. Code § 2924m(c)(4).

The Bill requires that every notice of sale sent to potential bidders, tenants and the property owner include i) a website, and ii) a telephone number, both available 24 hours a day, 7 days a week, and free of charge to any potential bidder, with specified information about the properties to be sold. Civ. Code § 2924f(b)(8).

If the property is not sold to a Prospective Owner-Occupant, then no later than 48 hours after the trustee’s sale, the trustee or authorized agent must make the following information available on the website (and by telephone) listed on the notice of sale:

1. The date on which the trustee’s sale took place;
2. The amount of the last and highest bid at the trustee’s sale;
3. An address for the trustee (which is able to receive U.S. mail and overnight delivery). Civ. Code § 2924m(d)(1)(A)-(C).

The information must remain public and accessible for no less than 45 days after the sale. Civ. Code § 2924m(d)(4).

The Bill also imposes fines on new legal owners who fail to maintain any vacant residential property purchased at a foreclosure sale. A failure to maintain may include permitting excessive foliage growth, allowing trespassers or squatters to remain on the property or failing to prevent mosquito population growth in excess standing water. Civ. Code § 2929.3(b). Each day, a city or county may fine the new owner up to $2,000 for the first 30 days and then $5,000 for each day afterwards. Civ. Code § 2929.3(a)(3)(A)-(B).

Under prior law, a right of redemption arose only when a property was sold at a judicial foreclosure sale. See Code of Civ. Proc. § 729.010, et seq. The right of redemption essentially made the foreclosed property unmarketable during the one-year redemption period. SB 1079 will likely have a similar effect on foreclosed properties during the 45 days following the trustee sale, which will in turn result in fewer buyers and lower sale prices.