New Virginia Laws Of Which Creditors Should Be Aware

Posted on by Neil E. McCullagh in Creditors' Rights, Bankruptcy and Insolvency

Earlier this year, we highlighted Virginia’s recent changes to the required notice for a foreclosure on owner-occupied residential real estate. That article can be found here. In this article, we highlight additional new laws of which creditors should be aware.

I. New Protections for Renters of Foreclosed Single-Family Residences

Effective July 1, 2021, Virginia law includes new protections for renters of foreclosed, single-family residences. Under the new law, if a tenant is in the residence on the date of the foreclosure sale, then the purchaser acquires the residence subject to the rental agreement, and the tenant can occupy the residence for the remaining term of the agreement contingent upon his obligation to comply with the agreement and applicable law. Further, the purchaser must provide written notice of the same to the tenant.

The one exception is for a purchaser who acquires the residence for the purpose of occupying it as his primary residence. In that case, the purchaser can give the tenant a notice that the rental agreement is terminated and that the tenant must vacate the residence on a date at least ninety days after the date of the notice.

Until July 1, Virginia law provided that the foreclosure acted as a termination of the rental agreement, resulting in the tenant having only a month-to-month tenancy.

The new protections apply to any “dwelling unit” used as a single-family residence, which includes a manufactured home.

While similar to the federal “Protecting Tenants at Foreclose Act of 2009” (the “Federal Act”), which applies in Virginia, the new Virginia law is even more favorable to tenants. For example, while the Federal Act protects only a “bona fide tenant” - defined as one who (a) is neither the person who mortgaged the property, nor the spouse, parent, or child of that person, and (b) has a lease or tenancy that is the result of an “arms-length transaction” and pays rent that is not substantially less than fair market rent (or the rent that is reduced or subsidized based on a federal, state, or local subsidy) - the new Virginia law does not require that the tenant meet those requirements. The new Virginia law, therefore, seems to open the door to sham rental agreements that prevent the foreclosure purchaser from realizing the full value of the property. Court action, such as an unlawful detainer proceeding, may be appropriate when a sham arrangement is suspected.

Further, under the Federal Act, if the foreclosure purchaser then sells the residence to someone who buys it in order to use it as his primary residence (i.e., a subsequent purchaser), then the subsequent purchaser can terminate the rental agreement, subject to the requirement to give the tenant a ninety-day notice to vacate. Under the new Virginia law, however, it appears that only a foreclosure purchaser who acquires the residence in order to make it his primary residence can give the tenant a ninety-day notice.

The new law is contained in Virginia Code section 55.1-1237.

II. Shorter Statute of Limitation for Virginia Circuit Court Judgments

Virginia circuit court judgments are having their life spans shortened. Under current law, the statute of limitation to enforce a circuit court judgment is twenty years, and the judgment creditor may obtain one or more twenty-year extensions with court approval. In other words, subject to court approval, a Virginia circuit court judgment can be kept alive indefinitely. The statute of limitation to enforce a general district court judgment is ten years, unless the creditor dockets the judgment in the circuit court, in which case it is treated like a circuit court judgment.

However, the statutes of limitation were amended in Virginia’s 2021 legislative session. Under the new scheme, if a circuit court judgment is dated before July 1, 2021, it will have a twenty-year life span that can be extended twice, each time for a maximum of ten years. If a circuit court judgment is dated on or after July 1, 2021, it will have a ten-year life span that can be extended twice, each time for a maximum of ten years.[1]

In short, the minimum life span of a circuit court judgment is being shortened from twenty years to ten years, and the maximum life span is being shortened from an indefinite time to thirty years.

The ten-year extensions are obtained by recording a “Certificate of Extension” (the form of which is in the statute) in the clerk’s office in which the judgment lien is recorded. The certificate must be recorded before the judgment expires, and it must be signed by the creditor or his duly authorized attorney-in-fact or agent. Importantly, recording the certificate extends the judgment’s life span for 10 years only from the date the certificate is recorded, not from the last day of the judgment’s original life span.

The new law retains the existing special rule for actions against the personal representative of a decedent, namely that an extension has to be obtained within two years from the date the personal representative qualifies, can be for only two years, and there can be only one extension.

The new law also shortens the time in which the judgment creditor can sue to enforce its judgment lien against real estate that the judgment debtor has conveyed to a grantee for value. That time period is being shortened from ten years to five years from the date the deed from the debtor to the grantee was recorded.

The new law becomes effective January 1, 2022, except that the procedure for extending a judgment becomes effective July 1, 2021.

The new law is contained in Virginia Code section 8.01-251.

III. Judgment Amount Increased for Compelled Sales of Real Estate

Virginia law allows a judgment creditor to sue to compel sale of real estate owned in whole or in part by the judgment debtor in order to pay the judgment. Such lawsuits are an important tool for creditors. It is not unusual for such lawsuits to result in the debtor either voluntarily paying the judgment from other assets or agreeing to a consensual sale of the real estate in lieu of a judicial sale (since a consensual sale will likely bring a higher price than a judicial sale).

Historically, almost any judgment could be the subject of such a lawsuit. However, Virginia has now amended the law to provide that if the real estate at issue is the judgment debtor’s primary residence, then only judgments of more than $25,000.00, not including interest and costs, can be the subject of such a lawsuit.

The new law is contained in Virginia Code section 8.01-463 and becomes effective July 1, 2021.

IV. Need For Amended Deeds of Trust Curbed

Effective July 1, 2021, the need to record Amended Deeds of Trust will be somewhat curtailed. On that date, Virginia Code section 55.1-318.1 will become effective.

The new law provides, in sum, that a recorded deed of trust that states that it secures indebtedness and other obligations under a loan document and that it also secures indebtedness or other obligations under such loan document as it may be amended, modified, supplemented, or restated shall secure the loan document as it may be amended, modified, etc. from time to time without the need to record an amendment to the deed of trust, without regard to whether the amendment, modification, etc. constitutes novation and without losing the priority status of the deed of trust.

However, the new law also provides that recording an amendment is still necessary if the deed of trust secures residential real estate containing one or zero dwelling units, or if the amendment, modification, etc. (a) increases the aggregate amount of the principal secured by the original deed of trust, (b) changes or substitutes the noteholder, lender, or agent of any lender named in the original loan document, or (c) extends the maturity date of the indebtedness or obligation secured if the maturity date was set forth in the original deed of trust.

[1] A special exception is created for judgments based on unpaid child support.

About the Author

Neil E. McCullagh is an attorney who works with banks on a wide variety of issues, including lending, insolvency, workouts, creditors' rights, bankruptcy, and collections.

Spotts Fain publications are provided as an educational service and are not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel.