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Purchasers at New Jersey Sheriff Sales Must Beware of Pending Tax Appeals
By Anthony L. Velasquez, Esq.
On September 8, 2014, the NJ Appellate Court issued a published decision in Princeton South Investors v. First American Title Insurance (A-850-12) upholding the denial of a title insurance claim that was brought by the buyer of a property at a Sheriff Sale. The buyer had claimed that at the time of the Sheriff Sale there was a tax appeal pending regarding the property, and this tax appeal -- and any resultant increase in tax assessment and amounts owed -- rose to the level of a title defect/ encumbrance that should be covered by its title insurance policy. The buyer claimed that while no taxes were owed at the time of the Sheriff Sale, any subsequent tax appeal decision and the amounts owed retroactively by virtue of such decision resulted in a “defect of title or encumbrance of property” that should be covered and borne by its title insurer. The Appellate Court rejected the buyer’s argument.
The conditions of the Sheriff Sale provided that the commercial property was being sold “subject to… unpaid taxes or assessments.” At the time of the sale, there were no delinquent taxes outstanding. But at the time of that sale, there were tax appeals pending that covered multiple prior tax years. The buyer claims it did not know of the tax appeals at the time of the sale, and this information was not passed along to the insurer when the policy was issued. There was no “tax search” ordered from the municipal tax office. (Existing case law provides that a municipality is estopped from seeking tax payments when a tax search ordered by a prospective buyer yields no disclosure of such assessments or outstanding taxes; but there was no search here requested by the buyer at the time of the Sheriff Sale.)
The Appellate Court engaged in a lengthy discussion of how property taxes are assessed and collected in New Jersey. In sum, taxes are not owed (and a municipal lien is not created by virtue of the applicable statute) until the taxes are actually “assessed”. In the present case, there were no delinquent taxes at the time of the Sheriff Sale and at the time the insurer issued the title policy; and “any potential taxes that might have arisen in the future, following a successful tax appeal, had not yet been ‘assessed’.” The title policy covers the buyer against risks that exist at the time the policy is purchased, but not against risks of defects that arise in the future. The policy does not insure against the imposition of taxes assessed after the date the policy was issued. The Appellate Court further disposed of the logic of the buyer’s argument:
The underlying issue in the tax appeals is the alleged under-valuation of plaintiff's property by the tax assessor. Accepting plaintiff's argument would mean that any time a property was assigned too low a value by the tax assessor, the property's title would be considered defective or unmarketable due to the risk of a tax appeal and a reassessment. But to intelligently insure against such a risk, a title insurer would have to research the assessed value of every property to be insured, and analyze its potential for a tax appeal and a higher revaluation. Plaintiff did not present an expert report to the trial court and cites no legal authority on this appeal to support the proposition that a title insurer has a duty to make such an analysis. Further, we consider it likely that imposing such a new obligation could drive up the cost of title insurance. See Shotmeyer [citation omitted](stating that "because insurance premiums and coverage provisions are based on predictable levels of risk, title insurers need to rely on certain consistent conditions in order to calculate premium rates reliably").
Pursuing plaintiff's argument further only reveals its additional weakness. Taxes do not actually become a lien on property until they are assessed. See N.J.S.A. 54:5-6. Until then, they are only a potential expense which the owner may have to pay in the future. Future assessments, however, cannot logically be considered a cloud on title, because taxes are a known, predictable, constantly-recurring phenomenon. Taxes will be assessed on plaintiff's property this year, next year, and on into the future ad infinitum. If a property's potential for the future assessment of taxes were considered a cloud on title, it would be impossible to pass marketable title to any property.
[Princeton South Investors, supra, slip opinion at 13-14.]
Finally, the Appellate Court cited out-of-state authority for the proposition that the mere prospect of future taxes is insufficient to create an encumbrance or other covered title defect under a policy of title insurance. As such, and for all the reasons stated by the Appellate Court, the tax appeals here did not render the buyer’s title unmarketable or constitute a defect or encumbrance for which the title insurer was responsible. The title insurance policy simply did not cover potential future taxes that might be assessed after the policy was issued.
For Sheriff Sale buyers, the lesson is clear: title insurance will not absorb tax amounts subsequently assessed -- even from tax appeals currently pending at the time of the Sheriff Sale inclusive of prior years. It is important to know of any such potential future tax liabilities (and potential future assessments for past years) at the time of the Sheriff Sale, and it is advisable that you obtain a tax search from the municipality and inquire as to any pending tax appeals so that you can assess your risk and bid accordingly.
 It was disputed whether or not the buyer knew of these tax appeals at the time of its bid. If the buyer knew of the pending tax appeals, the claim would likely be denied based upon a policy exclusion for known risks the insured voluntarily undertook without disclosing such risks to the insurer. But the Court was able to decide the case on other grounds, without reaching this factual question.