Tax Sales Certificates: The “Other” Foreclosure

Most of us are familiar with the traditional property foreclosure situations resulting from a mortgage default, generally caused by failing to make monthly mortgage payments. However, in New Jersey, like most states, a different, lesser known form of property foreclosure routinely takes place pursuant to New Jersey’s Tax Sale Certificate Law.
Most property owners know about their obligation to pay annual property taxes to the municipality in which the property is located. Less well known are the ramifications of a failure to pay property taxes over an extended period of time. Ultimately, the municipality acquires a lien in the amount of the unpaid taxes against the property in question. The lien amount will grow consistent with the accrual of additional amounts unpaid by the taxpayer. However, the remedies available to the municipality do not stop at this point.

In an effort to “encourage” citizens to pay taxes so as to allow the municipality to acquire revenues (which ultimately benefit the entire municipality), the tax collector is permitted to conduct the sale of a “Tax Sale Certificate” at which the municipality, or any third person, may bid. The bid represents the amount of the unpaid taxes, plus all costs and interest due from the taxpayer for the deficiency. At the sale, prospective buyers bid to purchase the Certificate, offering to pay interest on the Certificate up to the statutory maximum amount of 18%. After the sale, the successful bidder will pay the municipality its outstanding taxes, and becomes the “holder” of the Tax Sale Certificate. If the property owner, following the sale, wishes to “redeem” the Certificate – in other words, cure the tax deficiency and return the situation back to normal – the taxpayer must reimburse the successful bidder for the amount of money the bidder paid the Municipality in outstanding taxes, plus the amount of interest, if any, that the bidder pledged during the successful bid.

For example, if outstanding taxes due on the property are $10,000.00, and the successful bidder bid 10% interest, the redeeming property owner would have to reimburse the bidder the $10,000.00 in property taxes paid to the Municipality, plus an additional $1,000.00 in interest. In this manner, the “professional,” or knowledgeable, Tax Sale Certificate Purchaser reaps a profit from the tax sale process.

However, the Tax Sale Certificate Purchaser does not actually “own” the property. In order for that to occur, the Purchaser must foreclose the tax lien in order to “cut off” all other interested parties right of redemption. Upon foreclosure judgment, the property owner (or other party in interest), will lose the ability to redeem the Certificate, and restore his or her property ownership (this is a rare occurrence when there is an existing mortgagee who will usually pay the taxes rather than lose the security for its loan). However, there are statutory limitations on the ability to foreclose a Tax Sale Certificate. If the successful bidder was the municipality itself, a foreclosure action can be brought at any time six months following the sale date. If the successful bidder is someone other than the municipality, i.e., the professional Tax Sale Certificate purchaser, the purchaser must wait two years from the date of sale before bringing a foreclosure action. However, once a foreclosure judgment is obtained, barring fraud or other impropriety, the original property owner will be divested of his or her ownership in the land, which will be turned over to the successful bidder.

Thus, the recalcitrant property owner who has failed to pay property taxes for some time should take warning. The normal protections and inclination against forfeiture imbedded in the mortgage foreclosure setting, are generally absent in the Tax Sale Certificate forum. Since the monies at stake are not private loan funds, but rather, public funds generated from tax revenues, the Courts are more inclined to strictly construe the Tax Sale Certificate Law in favor of the municipality to insure the integrity of the property taxing system.

James M. Maggio is the Senior Associate
at WJ&L, LLP practicing primarily in the
Business & Corporate area.

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