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Due Diligence Issues in Commercial Real Estate Transactions, Part II: Impacts of a Tax Sale Certificate on Property Ownership
September 30, 2019
Due Diligence Issues in Commercial Real Estate Transactions, Part II: Impacts of a Tax Sale Certificate on Property Ownership

Due diligence is a comprehensive and critical component to any commercial real estate transaction.  In Part I of this series, we examined what tax sale certificates are and how they are acquired.  In this Part II, we will analyze the effect tax sale certificates have on acquiring clean title in a potential real estate acquisition.    

In Part I of this series, we examined what Tax Sale Certificates ("TSC") are and how they are acquired in New Jersey.  In this Part II, we will explore what a holder of a TSC can do to maintain priority lien position on the property as well as how it can acquire title to the property in question. 

Subsequent Taxes; Priority 

Taxes will continue to accrue on the property even after the sale of a TSC.  When this happens, the winning bidder of the TSC has the option to pay such subsequent taxes, but if not paid, another TSC may be sold at the next tax sale to a new lien holder.  Any subsequent TSC's issued and recorded will then hold priority over any prior TSC. 

Foreclosure Actions; Rights of a Property Owner

TSC holders who wish to take title to the property at issue must pursue and complete the foreclosure process.  The timelines for foreclosure vary based on whether a municipality or an individual is the holder of the TSC.  When a municipality purchases the TSC, the action to foreclose may be filed at any time after the expiration of six (6) months from the purchase date.  For all other third parties, the action can only be filed after the expiration of two (2) years from the purchase date.  See N.J.S.A. 54:5-86(a).   At any time after the requisite time period has expired, a TSC holder may begin proceedings to foreclose on the property.  This generally includes providing notice to the property owner (and any other lien holders on the property) and publishing a notice in a local newspaper listing the property involved, the owners of record, and the amount due.  If the foreclosure action is ultimately successful, the name on the deed is changed to that of the TSC lien holder.  However, the property owner maintains an on-going right to redeem the TSC and retain title to the property up to the date the foreclosure judgment is signed. 

As described above, the foreclosure rights of TSC holders pose a threat to potential purchasers of the real estate in question.  As such, it is critical that the potential purchaser engage in a thorough due diligence process - including a full title search - prior to purchasing the property.  In Part III, we will discuss how potential purchasers of real estate can address outstanding TSC's prior to taking title to the property. 

Attorneys in Parker McCay's Corporate and Real Estate practice groups handle a multitude of issues surrounding the sale, purchase, lease and financing of commercial, industrial and residential real estate. 

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