Tips for Understanding Tax Deeds and Tax Certificates
In the past few months, several clients have contacted me with questions regarding property that had been obtained through tax deeds. For example, one client contacted me to discuss property that had been purchased from an individual who obtained the property through a tax deed sale two years earlier. At the recent purchase, the client had obtained an owner's title policy; however, there was an exception to this policy for anyone claiming by, through or under the prior owner whose title to the property had been disgorged by the tax deed sale. My client intended to develop the property into a multi-unit residential complex and wanted to be certain that they could provide clear title to the eventual third-party purchasers.
Prior to a property being sold at auction via a tax sale, several things must have occurred or, in some cases, not occurred. By way of example, let's say that “Adam” is an individual who owns a 10 acre tract of vacant land in Lee County, Florida. After the 2008 real estate crash, Adam fell on hard times and failed to pay the 2008 ad valorem taxes due and payable on March 1, 2009. On April 1, 2009, the taxes for Adam's property were deemed delinquent and the tax collector, as required by law, advertised Adam's property (along with other delinquent properties) once a week for three consecutive weeks for the sale of a tax certificate on the delinquent 2008 taxes. Once the delinquent properties had been properly advertised, the tax collector established an on-line auction for a tax certificate for the delinquent 2008 taxes.
In the days of old, auctions for tax certificates and, ultimately, tax deeds were held on the Courthouse steps . . . typically, at 8:30 a.m. on Friday mornings. Nowadays, these auctions are held on-line through websites operated by and between the Tax Collector's office and the Clerk of Court.
On-line bids for tax certificates are made starting at 18% with subsequent bids at 0.25% lower; the winning bidder being the individual bidding the lowest interest rate [in the event two or more bidders bid the same “lowest” interest rate resulting in a tie, the bidder who entered the lowest interest rate first is deemed the "winning" bidder]. In our example, “Barbara” won the bid for the tax certificate for Adam's delinquent 2008 taxes with an interest rate of 11%. Once the certificate is issued to Barbara, Adam can redeem the certificate (by paying the face value plus accrued interest and fees) up until the date a tax deed is issued to retain possession of his property.
Tax certificates are valid for seven years from the April 1 delinquency date; in this case, Barbara’s tax certificate will be valid for seven years from April 1, 2009. Under limited circumstances, such as bankruptcy and foreclosure actions, this deadline can be extended.
If Barbara's certificate has not been redeemed, or if Barbara has not applied for a tax deed prior to the expiration of her tax certificate, then her tax certificate will become null and void and she will lose her "investment" in Adam's property.
Barbara must wait two years from the April 1, 2009 delinquency date to apply for a tax deed by virtue of her unredeemed tax certificate. Barbara must submit an application and pay the statutory fees in order to subject Adam's property to a tax deed auction. Once the tax deed application and required fees have been submitted to the Tax Collector, the Tax Collector obtains an ownership and encumbrance (title) report and forwards the entire package to the Clerk of Court. The Clerk of Court will advertise the tax auction and will notify all persons having an interest in Adam's property, as identified in the ownership and encumbrance report. If none of the parties having an interest in Adam's property redeem Barbara's tax certificate (and all other tax certificates on Adam's property) prior to the auction date, then the property will be sold via an on-line auction.
“Charlie” is the winning bidder of the on-line auction. Prior to the auction, Charlie submitted the on-line application along with the required deposit and bid on the property. Within 24 hours of winning the bid, Charlie delivered the outstanding balance due, along with the amount due for documentary stamp taxes and the Tax Deed recording fee. Assuming Adam does not redeem all of the outstanding taxes, interest and other charges due, the Clerk of Court will issue a Tax Deed to Charlie; and Barbara will receive a reimbursement of the amount she paid for the tax certificate along with the interest that accrued under the certificate. While Charlie is now deemed the fee simple title holder to what was formerly Adam's property, he does not own it free and clear, just yet.
[In the event that no one submitted a bid large enough to cover the face value of the tax certificate, accrued interest and other charges relating to Barbara’s tax certificate and her application for a Tax Deed, Barbara would be deemed the “winning” bidder and title to the property would have been transferred to Barbara via a Tax Deed.]
Florida law provides several safeguards to prevent the unlawful or mistaken divesting of a landowners' property. In cases involving foreclosure of a lien or the sale of property due to delinquent taxes, state law requires that the land owners who are in danger of losing their property are entitled to notice at several different points of the proceedings. Failure to receive proper notice will allow a divested landowner to challenge the validity of the tax deed. Generally speaking, this right to challenge will exist for 20 years from the date of issuance of the tax deed; however, if the new owner takes certain steps as prescribed by Florida Statutes Sections 95.191 and 95.192, this time limit (or “statute of limitations”) can be reduced to 4 years.
In addition, certain title rights and liens of third parties will survive a tax deed conveyance; in other words, not all third party rights are wiped out by virtue of the tax deed.
All of this explains why my client, described at the beginning of this article, needed to take additional steps to ensure that their development of the newly acquired property would not be thwarted by a legal challenge to their title. In this case, we recommended that the client file an “Action to Quiet Title”. Assuming the action is successful, my client will be able to have the title company delete the problematic exception to title and move forward with the proposed development.
Tax Certificates and Tax Deeds can be quite messy affairs. Do your best to avoid becoming an “Adam” by paying your property taxes in a timely manner. Remember, if you believe your TRIM notice depicts an inflated value for your property (thus resulting in excessive tax liability), you only have a 60-day opportunity to challenge the assessment; so, contact your real estate attorney immediately. If you want to be a “Barbara” (tax certificate holder) or a “Charlie” (tax deed recipient), the lesson is to do your homework before moving forward; otherwise, you could walk into an expensive legal minefield.