MILLER & STARR
REAL ESTATE NEWSALERT
1
ARTICLE
THE PERATA FORECLOSURE BILL (SB 1137):
NEW RIGHTS FOR DEFAULTING BORROWERS AND TENANTS;
NEW COMPLICATIONS FOR FORECLOSING LENDERS
By Karl E. Geier*
Main Article, Volume 19, Number 1
Reprinted in part from
Volume 19, Number 1, September 2008
(Article starting on page 3 in the actual issue)
* Karl Geier is a shareholder in the Walnut Creek office of Miller Starr Regalia, and editor-in-
chief of Miller & Starr, California Real Estate, 3d Edition, Published by Thomson West.
On July 8, 2008, Governor Schwarzenegger signed into law Senate Bill
11371 (“SB 1137”), also known as the “Perata Mortgage Relief Bill” in
honor of its principal author, Senator John Perata of Oakland, California.
The statute, with exceptions, became effective immediately as urgency
legislation upon signature by the Governor.
The Perata Bill implements three categories of “protections” for bor-
rowers and tenants in foreclosure:
First, it imposes a mandatory notification, meeting and consultation
process that must be made available to the borrower by the foreclosing
lender prior to filing a notice of default under Civil Code § 2924.
Second, it requires tenants of residential property to be given a mini-
mum of 60 days’ written notice to quit before the tenant can be evicted
following foreclosure.
Third, it authorizes local governments to impose civil fines of up to
$1,000 per day for failure of a lender or other purchaser in foreclosure to
maintain vacant residential property in good condition and repair.
As discussed in this article, the Perata Bill reflects the Legislature’s de-
sire to take some action in response to the “foreclosure crisis,” not only
for the protection of borrowers in foreclosure, but also to remedy some
of the potential social impacts of blight and pubic health concerns arising
MILLER & STARR REAL ESTATE NEWSALERT
2 © 2008 Thomson Reuters/West
out of the foreclosure process. In the process of doing so, the Legislature
also may have created as many problems as it solved. The pre-foreclosure
consultation process burdens lenders with procedural hurdles, delays,
and the potential for recalcitrant borrowers to simply prolong their ten-
ure at the lender’s cost when there is no realistic possibility they can
afford their mortgages—and may be construed as compelling a lender
to offer a reduced payment plan or forbearance before being allowed
to foreclose, or else face a legal challenge to the validity of its notice of
default. The tenant protections may have given all residential tenants the
practical equivalent of guaranteed occupancy of their units for 60 days af-
ter all foreclosures, whether or not they have defaulted under their leases
before or after foreclosure. The onerous penalties for failure to maintain
the property may lead lenders to push the properties back into the rental
or resale market faster than they otherwise would do so. Of these possi-
bly inadvertent results of the Perata Bill, only the third can be considered
a predominantly beneficial result of the legislation.
Most of the provisions of SB 1137 affect all residential foreclosures,
not solely single-family, owner-occupied, or one- to four-family residen-
tial properties. Thus, the statute imposes rules applicable to apartment
projects as well as rural acreage with residential units and mixed use de-
velopment projects that include residential properties. None of the pro-
visions are dependent upon the type of lender or purchaser in foreclo-
sure, and they may be assumed to apply to all non-institutional lenders,
probably including seller-carryback note holders, as well as institutional
lenders. Some of the provisions may be construed as applying to non-
residential property, as well.
1. THE PRE-FORECLOSURE CONSULTATION AND WORK-OUT
PROCESS:
Under existing law, upon an event of default, the mortgagee or benefi-
ciary under a mortgage or deed of trust containing a power of sale may
file a notice of default meeting certain statutory requirements, and after
three months have elapsed, if the loan remains in default, proceed to file a
notice of sale and complete a foreclosure over an additional period of 21
days.2 Although certain notices required by the mortgage instrument may
be necessary before the lender can deem the borrower in default and file a
notice of default,3 previously there were no other statutory notification or
consultation requirements to be observed by the lender except for certain
“balloon payment mortgages” on one- to four-family residences.4
The Perata Bill changes this. Effective September 6, 2008,5 any notice
of default filed on “residential property that is owner-occupied under
a loan made between January 1, 2003 and December 31, 2007,” must
