FLS Friday Forum is a free write-in column authored by Brian R. Fellner on topics of law affecting community associations. To submit a question, email Mr. Fellner at bfellner@flslawyer.com. All posts are for informational purposes only and do not constitute legal advice. Only your individual attorney can provide assurances that this information is applicable or appropriate to your particular situation. Nothing hereunder creates an attorney-client relationship between any reader and the author.
Our HOA received a notice about a “tax sale” on a property within the Association. What does this mean for us? Do we need to do anything?
–– Greg, an HOA board member in Maryland
Great question; I get some version of this very often. It is a somewhat lesser understood area of the law, but a few quick points are helpful to orient Board members and help them understand what it means for their association. I will address this in Maryland terms, though the general concept holds true across most jurisdictions (including the District of Columbia).
TAX SALE BASICS: THE AUCTION
When the owner of a piece of real property (condo unit, townhouse, single family home) fails to pay the taxes on it, the County or other governing district places a lien against the property. That lien is first in priority, ahead of the mortgage, condo liens, everything (because the government always gets paid). It gives the holder the right to foreclose and wipe out all junior liens, taking title to the property. It is only in the amount of the property tax for a given year – often somewhere between $2K and $8K.
The County has no interest in foreclosing all of these liens, especially for the relatively low amounts due on them. Plus they don’t have the bandwith or personnel to do it. So instead, they auction them off at a “tax certificate sale.” This is an open auction, usually held once a year, where any buyer (usually required to register in advance) may submit bids on the tax certificate. There are several entities that buy these in bulk as investments and then walk through this process in both Maryland and the District of Columbia. The bidding process is set by the county or other jurisdiction; often bidders have to submit a spreadsheet or maximum and incremental bid.
TAX SALE BASICS: REDEMPTION
The successful bidders at that tax sale are then buyers who own a lien that has first priority on the property. They must wait 6 months from the date of the tax sale, after which time that bidder can file an action to foreclosure the right of redemption on that property. But wait – what the heck does that mean?
The owner of the property (who failed to pay the property taxes) as well as any other lienholder or interested party may “redeem” the property, meaning that they may repay all the back taxes, along with fees and interest (the interest varies by county but is generally between 8% and 18%). They may do so anytime before the action to foreclose the right of redemption is filed, or even after it is filed, or at any time right up until the final judgment is entered.
TAX SALE BASICS: FORECLOSING THE RIGHT OF REDEMPTION
The right of redemption can usually be filed no sooner than 6 months after the tax sale and ordinarily up to two years after the sale. The tax sale purchaser files their action to foreclose the right of redemption just like any other court case. That is step one; step two is serving process on all interested parties. For tax sale purposes this means any and all lienholders or other parties that may have an interest in the chain of title for that property. This usually includes the owner, the mortgage company, any junior lenders (like on a HELOC or second mortgage), judgment creditors, front foot benefit entities, and of course any HOA or condominium whose documents allow for the creation of a lien against the property.
The purchaser has to prove service through any of a couple of means on each of these possible parties to demonstrate to the court that they all had an opportunity to redeem the property if they wanted to. This is because once the final order foreclosing the right of redemption is issued, the case is over and will not be reopened except in extremely rare circumstances. Plus unwinding the whole transaction once the property has changed hands is a logistical nightmare. So the court demands that the purchaser clearly prove that they have notified everyone who even might have an interest in advance.
Once they have proven that, though, there is not much else to the process. The court reviews the evidence and if all the i’s are dotted, the judge will issue an order foreclosing the right of redemption. For all intents and purposes, that is the ballgame; the tax sale purchaser is now the new owner.
If redemption takes place during the pendency of the action to foreclose the right of redemption, that tax sale purchaser is entitled to receive reimbursement for its attorneys’ fees in getting to that point as part of the redemption. In other words, if the owner wants to keep his property and pay the back taxes, but the action has already been filed, it is going to be a lot more expensive.
Extremely important for HOAs and condominiums is this provision, which was long fought about and provided for by case law, but was codified and provided much-needed clarity in 2016: “Once a judgment is granted, the plaintiff immediately becomes liable from the date of judgment for the payment of assessments or fees charged by a homeowners association or a condominium association due and payable from the date of the judgment.” So on the date that the order foreclosing the right of redemption is issued, that tax sale purchaser becomes responsible for all HOA or condo assessments from that date forward. They do not have to do a traditional settlement or even record a deed for this to be true; they are liable.
But I still don’t know what this means for my association
Good point! Now that you have some background and my scintillating breakdown of the process, we are ready to talk about impact on your association. (remember that this is not legal advice; these are just examples of common situations).
If a property within the Association goes into this process and your HOA or condominium is notified, you have two main options.
First, you can REDEEM: At any point during the foreclosure period prior to the final order being issued, the owner of the property, as well as any other secured party (such as a mortgage lender or a homeowners association) has the right to “redeem” the property, meaning they pay all the taxes due, plus any fees that have accrued, including interest. Note that this does not give the redeeming party ownership of the property; it simply stops the tax sale purchaser from proceeding and keeps the nonpaying owner on title. So the Association may consider redeeming the property. There is a fairly nuanced analysis to do here that involves considering assessment amount due, other liens on the property, condition of the property, status of the record owners, and more. Suffice it to say that in a few instances it makes sense to redeem, but in a large majority of cases the association should consider the second option.
The second option I refer to as MONITOR: The case is likely to be resolved by the owner “redeeming” the property by paying the tax lien amounts to the tax sale purchaser and the purchaser then dismissing the case. Alternatively, the mortgage lender may intervene and redeem. It is also possible of course that the foreclosure is granted and a new owner goes on title, but that is simply the best result for the association and intervening or redeeming would be cost prohibitive or otherwise unwise. In all of these cases there is really no true action for the HOA to take. As they say, sometimes the winning move is not to play. But be sure your board has adequately considered its options before defaulting to this one.
The third option is to LITIGATE: In extremely rare instances, there will be an irregularity with the process. Perhaps the taxes were calculated wrong, or already paid, or the tax sale purchaser is actually fraudulently representing that they own the tax lien when they do not. In those extremely uncommon instances, the association may wish to litigate the issue.
TAX SALE OF HOA COMMON AREAS
The discussion above deals with tax sales on individually owned private property within an HOA or condominium. If, on the other hand, actual property of the HOA or condominium – such as the common areas, entrance ways, easement properties, or other real property owned by the association – goes into the tax sale process, the board should immediately contact its community association attorney to discuss, as there are several rights, obligations, and important decisions to be made.