Tax Sales and Title Insurance

Frequently, we here at DLT get asked about title insurance in regard to properties previously purchased at a tax sale. For title insurance underwriters, properties purchased at a tax sale can be problematic.

What is a Tax Sale?

A tax sale is a process that occurs when property becomes delinquent in the payment of associated real estate taxes. The purpose of the tax sale is to collect on the delinquency and to put the property back into productive use for the benefit of the community. A tax sale is the last resort when property owners fail to pay their real estate taxes and Tennessee law provides for specific procedures by which the tax sale process must occur.

The Issue

The big hiccup when it comes to tax sales is whether or not the owner of the property had actual notice of the tax sale. The 14th Amendment of the U.S. Constitution provides as follows in Section 1:

All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.

Meaning, in regard to the issue of tax sales, that an owner cannot be deprived of their real property without having notice of the tax sale proceedings and the opportunity to have a hearing regarding the tax sale before an impartial tribunal.

Tennessee law attempts to accomplish this through the use of certified letters in providing notice. If owners of real property are sent certified letters and signed the return receipt on the certified letter then, for title insurance purposes, they received sufficient notice of the tax sale proceedings and the due process requirement is fulfilled for underwriting purposes.

But, what happens if the return receipt is not signed by the owner? Typically, if the certified letter goes unclaimed or is signed by someone other than the owner and taxes remain delinquent, then notice of the tax sale is run in the local paper. This is referred to as notice by publication. However, as far as title insurance underwriters are concerned, notice by publication may not be sufficient to satisfy due process requirements so as to provide the purchaser with insurable title.

Example

The following example illustrates how problems with tax sales can arise when it comes to constitutionality:

Ms. Jones is an elderly widow who lives alone at 123 Main Street. She has two children who are both deceased and six grandchildren. Ms. Jones passes away without a will. Her grandchildren come to town for her visitation and funeral, then return to their homes and lives as usual. No resolution occurs as to Ms. Jones' estate or house. The taxes in turn go unpaid and the house falls into disrepair.

In following procedure, prior to the house being sold at public auction a certified letter is sent to Ms. Jones at the property address. The letter goes unclaimed and notice is run in the local paper stating that 123 Main Street owned by Ms. Jones is delinquent on taxes and will be sold by public auction if the taxes remain delinquent.

However, in accordance with Tennessee law, at the time of Ms. Jones' passing, since she died without a will, title to the property is vested in her heirs-at-law. This means that her six grandchildren each own a 1/6 interest in 123 Main Street. It also means that none of the property owners received notice of the tax sale proceedings (and they may not even realize they are owners). As a result, they were not afforded due process.

Redemption

When a tax sale occurs, there is a redemption period in which the original property owner can pay the bid price and the delinquent tax amount, plus interest, penalties and other applicable costs, to redeem the property. After the redemption period, the property is to be vested in the purchaser. Tennessee law attempts to cut off later attacks on the sale of land by way of tax sale by placing a limitation on how long a suit may be brought after the sale occurs. However, there is a concern that this state statute may deprive an owner of their due process rights provided by the U. S. Constitution. As far as many title insurance underwriters are concerned, the Constitutionality issue is enough of a concern to trump what the statute says. After all, title insurance is an assumption by the insurance company of risk of loss due to a defect in title to property and they don't want to assume the potential risks of participating in a lawsuit regarding a violation of Constitutional rights.

Quiet Title

If the return receipt from the certified letter containing notice of the tax sale is not signed by the owner of the property, most title insurance underwriters will require a quiet title action to be performed prior to the issuance of title insurance on the property. A quiet title action is a lawsuit used to establish ownership of property against potential adverse claimants. In a quiet title action a court will issue a declaratory judgment in respect to the rights of the parties as to the property in question. In effect, these are lawsuits used to clear up a cloud in title.

Practical Implications

Maybe you are purchasing property at a tax sale to repair and flip for profit. It is important to consider that your potential buyer may need to obtain a loan and their lender will require a lender's title insurance policy. Or, as another example, maybe you are wanting to pay cash at a tax sale and then obtain a loan to build on the property. Again, your lender would require a lenders title insurance policy. The amount of time and costs associated with getting the title to property insurable will vary depending on the situation and the way the proceedings (if necessary) progress.

However, practically speaking, purchasing property at a tax sale, or purchasing property previously purchased at a tax sale, means that there may be some additional time and costs that should be considered. A quick flip could turn into 4 to 6 months of litigation and expenses. Even the easiest of quiet title actions can have several months of procedural steps and waiting periods.

Landlord/Tenant Obligations and URLTA Applicabilit...
Real Estate Transfer Taxes
 

Comments

No comments made yet. Be the first to submit a comment
Already Registered? Login Here
Guest
Thursday, 17 June 2021