When is time “up” in a tax foreclosure? by Anthony L. Velasquez

When is time “up” in a tax foreclosure? By Anthony L. Velasquez, Esq.

 

My legal career has spanned 21+ years and the majority of those years have been spent working in the area of NJ tax lien investments and tax foreclosures. I have represented persons being foreclosed, along with persons (or companies) that invest in tax sale certificates and are foreclosing. I have also had the opportunity to represent real estate investors, flippers and wholesalers who seek to acquire distressed properties and turn a profit. IN all of these phases of my career, there is one repeated question that arises time after time: When is time “up” in a tax foreclosure?

 

Many people believe that a property is “foreclosed” when a foreclosure complaint is filed with the Court. Others think it happens when a tax lien is “sold at a public sale”. Neither of these statements are correct.

 

In NJ, when property owners fail to pay their property taxes (or public water/ sewer) the municipality holds a public sale where a tax sale certificate is auctioned. (This article will not explain the auction process or the particulars.) The winning bidder is then issued a tax sale certificate against that property. It is a lien, and generally it is first in line and jumps all other liens, mortgages and judgments. (There are some rare exceptions, e.g. NJ Spill Fund liens.) It is recorded on the county books as a lien. It is not title to the property. Generally, it is used as an investment tool because it yields interest at a substantial rate – usually 18%. And each additional quarter that goes by permit the tax lien holder to pay subsequent taxes once they are delinquent, and those, too, earn 18% interest. There are also fees, costs and penalties added in many instances. But again, all of these charges are added to the “lien” – and it is just a lien and not a title right. It a essentially a “debt” that is “secured” by the property. So the public sale of the lien is not a foreclosure – it is merely a way for the municipality to keep operating and supplying its essential services (police, fire, schools, trash collection, etc.) when delinquent owners fail to pay. Instead of the municipality turning itself into a “collection company” the law provides that it can sell tax sale certificates to investors who will (1) give the money to the municipality so public services continue uninterrupted; and (2) act as private collectors for their own tax liens if they are not paid back by the owner within a certain period of time.

 

There are some exceptions (e.g. vacant properties allow foreclosures to occur quickly), but in general a tax lien holder must wait 2 years before they can file a tax foreclosure complaint to force an owner to pay back the debt. The filing of the complaint does not constitute a shift of title. It is only one of the first steps. Generally, the tax lien holder gives 30-day pre-foreclosure notice to the property owner. This allows an owner to avoid the legal fees of a foreclosure complaint which are triggered by law and added to the tax lien debt if the owner does not pay back the debt within those 30 days and before the lien holder files the complaint. Once the complaint is filed, it essentially says these three (3) things: (a) I am the tax lien holder and I hold the tax sale certificate against your property (identified); (b) You now owe me the redemption amount which is to be calculated by the municipal tax collector (with all costs/ fees/ penalties); and (c) You must either (i) pay me back by the date this Court establishes, or else (ii) judgment of the Court will be entered vesting me with title to your property. This establishes that the defendant still has the right to keep title to the property by paying the back-taxes. Indeed, the main thrust of investors is the stream of interest – although the right to acquire the property cannot be denied and has the dual purpose of acting as a massive incentive to force delinquent owners to pay along with acting as an incentive for investors who (every now and then) gain title to the property -- which is often a higher value than the value of the tax lien itself.

 

Once filed with the Court, the complaint is then served on the defendants including all persons with an interest in the property such as owners, mortgage holders, other lien holders, and even judgment creditors (although judgment creditors are merely provided “notice” and cannot legally do anything to “redeem” the taxes). Then the case generally defaults – because there are few if any “answers” or “defenses” to tax foreclosure cases. You either pay the taxes or else you are foreclosed. You cannot challenge the tax assessment here; that must be done before the county board of assessment and those procedures are separate and distinct from a tax foreclosure action, with strict timeframes for such challenges. So even if you file an “Answer” it will generally be marked as “Non-contesting” by the NJ Office of Foreclosure (a branch within the NJ Superior Court that handles tax foreclosures) and the case will roll forward in its normal course.

 

The Court then enters default after 35 days (assuming no answers were filed or all answers were marked non-contesting) and sets forth an OST – which stands for “Order Setting Time” and it means that the Court has established the time, date and amount that you must pay the back-taxes or else face foreclosure. The date is generally 60 days after the Order is entered. For example, the Court can enter an OST on May 1 that you pay X Dollars by July 1, or else judgment can be entered thereafter. This does not mean that judgment IS entered on that date of July 1. Again, the passage of the OST date DOES NOT result in title shifting to the tax lien holder. But it means that as of July 2 (in our example), if no redemption has been paid then the tax lien holder can file another application to the Court that essentially says: (a) the OST date established by the Court has passed; (b) no redemption was made; and (c) I now request Final Judgment. That application is done by Court motion.

 

Only after that motion is heard, decided and entered in favor of the tax lien holder is time “up”. This means that you can still redeem the taxes during the time period when that motion is pending, and at all points earlier in time. You can redeem up until Final Judgment is actually entered.

 

This time period includes the whole day when judgment is actually entered. In a 1978 case which remains good law and unchanged as of today (Landa v. Adams), the NJ Appellate Court was faced with a situation where Final Judgment was entered on the same date that redemption was tendered. It was faced with the question of which came first – the judgment or the tender of redemption? The decision made by the Court – and enforced today - is that property owners will be given the entirety of the day on which judgment is entered to tender redemption. If judgment is entered at 10am, and redemption is tendered a 3pm, it will still be timely redemption. But if they try to tender redemption the day after judgment is actually entered, it is too late. Title then passes to the lien holder, and the owner is stripped of ownership. There is no “Sheriff Sale” and there is no extended period of time to redeem, which is unlike the situation under mortgage foreclosure law in NJ. The Final Judgment is issued by the Court and it is taken to the County Clerk and recorded as a deed! It is, in fact, title to the property.

 

There is an exception to this rule – and it applies when there are federal liens that require the matter to proceed to Sheriff Sale just as in mortgage foreclosure cases. In those instances, the time to redeem is not “up” until the Sheriff Sale occurs and the extended redemption period has been exhausted – just as with NJ mortgage foreclosures. But about 90 percent (or more) of NJ tax foreclosures do not have such federal liens – so the general rule of when time is “up” is: the day after Final Judgment is actually entered. Until then, redemption will be considered “timely”.

 

Anthony L. Velasquez, Esq.

(*As with all tax foreclosure questions and procedures, you are advised to seek competent legal counsel for your particular circumstances.*)

Anthony L. Velasquez, Esq.

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