Alerts and Updates

New Jersey Tax Sale Law Gives Purchaser of a Tax Sale Certificate a Tax Lien on the Underlying Property

June 30, 2014

The court found that as a matter of legislative intent, a tax sale certificate secures the obligation to pay municipal taxes, thus creating a tax lien.

The New Jersey Supreme Court, in In re: Princeton Office Park, L.P. v. Plymouth Park Tax Services, LLC, determined that under the Tax Sale Law, N.J.S.A. §§ 54:5-1 to -137, a purchaser of a tax sale certificate acquires a tax lien, not a lien securing the property owner's obligation to pay the amount owing to redeem the certificate. New Jersey law has long recognized that a purchaser of a tax sale certificate acquires a lien, but the particular type of lien acquired had not been plainly specified before the decision in this case.

In Princeton Office Park, a corporate property owner became severely delinquent on its tax payments, resulting in a public auction of its municipal tax liens. At auction, a purchaser made the winning bid and was issued a tax sale certificate. The issuance of the tax sale certificate set the amount the property owner could pay to redeem the certificate, and under New Jersey tax law, this redemption amount accrued interest at a rate of 18 percent.

The property owner did not redeem the certificate, and after two years, the purchaser initiated a tax lien foreclosure action. While this action was pending, the property owner filed for bankruptcy. Under the Bankruptcy Code, when a Bankruptcy Court formulates a reorganization plan, it must determine the rate of interest for a "tax claim" by reference to nonbankruptcy law; it cannot use its discretion to reduce the interest rate for "tax claims." In contrast, a Bankruptcy Court may reduce the interest rate for other liens that are not classified as "tax claims." In this case, the Bankruptcy Court considered the purchaser's lien not to be a "tax claim" and thus reduced the 18-percent interest rate to 6 percent. The purchaser objected, contending that the lien it acquired from the tax sale certificate was a tax lien, and that the Bankruptcy Court could not reduce the interest rate for its lien. The Bankruptcy Court and U.S. District Court for the District of New Jersey both found that the underlying obligation secured by the purchaser's lien was not the obligation to pay taxes to the municipality, but was instead the property owner's obligation to pay the redemption amount to the purchaser.

On appeal via a certified question from the U.S. Court of Appeals for the Third Circuit, the New Jersey Supreme Court rejected the lower court's ruling. The court found that as a matter of legislative intent, a tax sale certificate secures the obligation to pay municipal taxes, thus creating a tax lien. The Tax Sale Law was intended to aid municipalities in raising revenue by making tax sale certificates an attractive investment. Under the Tax Sale Law, when a property owner becomes delinquent on taxes, the municipality obtains a continuous lien on the land. Subsequently, when a tax sale is held to enforce that municipal lien, the lien passes to the purchaser through issuance of the tax sale certificate, and the purchaser acquires an interest in the tax and in the municipal lien for that tax. The language of the Tax Sale Law itself enforces this interpretation, as it uses the term "tax lien certificate" as an alternative for "tax sale certificate." Additionally, the Tax Sale Law states that a property owner's tax delinquency survives the sale of a tax sale certificate.

The holding in this case appears to be a positive development for municipalities in New Jersey and purchasers of New Jersey tax sale certificates. Tax sale certificates have become a more attractive investment vehicle because they create tax liens that are not subject to interest rate reduction by bankruptcy courts, providing more security to purchasers. Because of this protection, investors may be more interested in purchasing tax sale certificates, and municipalities may raise more revenue. For banks and other parties with non-tax liens, however, this holding may be a negative development. Because it requires that tax sale certificate holders receive the statutorily determined interest rate in bankruptcy proceedings, other lien holders' interests rates might be reduced by a greater amount than the Bankruptcy Court would otherwise have determined in order to compensate for the additional amount owing to the tax lien holders. By making tax sale certificates more attractive, the holding also may create more competition for the certificates.

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