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How Lenders Can Avoid Losing Their Collateral by Paying Off the Borrower’s Property Tax Obligations
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How Lenders Can Avoid Losing Their Collateral by Paying Off the Borrower’s Property Tax Obligations

May 24, 2021 Banking & Financial Services Industry Legal Blog

Reading Time: 5 minutes


In Florida, if a property owner (borrower) fails to pay its property taxes, the amount owing may become a lien on the property. If this happens, the tax lien will become superior to the lender’s mortgage lien. Fla. Stat. § 197.122(a). This may be troublesome for lenders because the property may then be sold for taxes, which will eliminate the lender’s mortgage lien. This may leave some lenders wondering how it can protect their mortgage interests, if the borrower is delinquent in paying its property taxes.

property taxes tax lien property tax obligations tax certificate tax deed sale

How Do Property Taxes Result in Loss of Collateral?

If the borrower is delinquent in paying its property taxes, a tax certificate may be sold for the past-due taxes, which could lead to a tax deed sale of the collateral.  First, the tax collector will provide the property owner with notice, electronically or by postal mail, by April 30th, if tax payment has not been received. The notice will provide that, if payment is not received, a tax certificate may be sold. Fla. Stat. § 197.343(1). Before selling a tax certificate, the tax collector will be required to publish the address of the property and the amount of delinquent taxes due, along with date of the proposed tax certificate sale, in a local newspaper. Fla. Stat. § 197.402.

Next, on the sale date, the tax collector will sell a tax certificate for the amount of taxes due.  Fla. Stat. § 197.432.  The person who bought the certificate will have the right to collect the tax debt from the property owner, plus interest.  If, however, the amount of taxes owed is less than $250, the tax collector will not sell the lien at a public tax lien sale. Instead, the tax collector will just issue the tax lien certificate to the county where the property is located.

Finally, if the tax certificate is not satisfied within 2 years, the holder of the tax certificate can force the sale of the property through a tax deed.  Fla. Stat. § 197.502 (“The holder of a tax certificate at any time after 2 years have elapsed since April 1 of the year of issuance of the tax certificate and before the cancellation of the certificate, may file the certificate and an application for a tax deed with the tax collector of the county where the property described in the certificate is located.”)  The tax certificate holder will apply for a tax deed, and the tax collector will schedule a public auction and provide notice to certain parties, including lienholders of record.  A public auction will be held at least 30 days after the tax deed notice is published.

The lender’s mortgage lien will be eliminated and the property is sold free and clear of the mortgage.  Fla. Stat. § 197.552 (“Except as specifically provided in this chapter, no right, interest, restriction, or other covenant shall survive the issuance of a tax deed, except that a lien of record held by a municipal or county governmental unit, special district, or community development district, when such lien is not satisfied as of the disbursement of proceeds of sale under the provisions of s. 197.582, shall survive the issuance of a tax deed.”)

Avoiding a Tax Deed Sale

The lender, like the borrower, can redeem tax certificates by paying off the amount owed, plus all interest, costs, and charges, at any time after the tax lien certificate is issued and before a tax deed is issued, unless full payment for a tax deed has been made to the clerk of the court. Fla. Stat. § 197.472(1).  If the lender (mortgagor) receives notice that the borrower is delinquent in paying its property taxes, the lender may want to protect its mortgage interests by paying off the borrower’s delinquent tax obligations and adding the amount paid to the debt balance.  If the lender pays off the tax certificates, plus any interests and costs, before the date scheduled for the tax deed sale, the sale will not go ahead.

What if the Property is Sold at a Tax Deed Sale?

After the property is sold at a public auction tax deed sale, the lender has the right to redeem the property pursuant to Section 702.05 of the Florida Statutes. If the lender timely redeems the property, it can receive reimbursement from the borrower by adding the amount paid to its mortgage lien, with interest at a rate of 10% per year. Fla. Stat. § 702.05.

Conclusion

If a borrower is delinquent in paying its property taxes and there is a tax lien on the property, it is important for lenders to act promptly, if they want to protect their mortgage interests. Lenders are able to pay off the amount owing, plus interests and costs, before a tax certificate is sold at a tax deed sale. If, however, a tax deed is issued, the lender will have an opportunity to redeem the property.


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