Change in the Law Offers More Challenges for Redemption of Tax Sale Certificates

By Stephen McNally, Esq. & Paige M. Bellino, Esq.

Our article entitled “Simon v. Cronecker-Alive and Well” (the “Simon Article”) was recently published in the Summer 2021 Edition of the New Jersey Land Title Association’s Newsletter, The  Advocate. The Simon Article offered our perspective on a troubling trend involving title agents who redeem tax sale certificates (“TSC”) in connection with a real estate closing while there is an active tax foreclosure action.  In accordance with the Simon decision, 189 N.J. 304 (2007), and the Statute, N.J.S.A 54:5-89.1 (“Section 89.1”), consent of the Tax Sale Certificate holder (“TSC holder”) or an application to intervene in the tax foreclosure action was required as a prerequisite to redemption.  The purpose of intervention was to offer Court oversight to assure that the purchase was for more than “nominal consideration” – the standard set in Section 89.1. The New Jersey Supreme Court, in deciding Simon, concluded that the investors who attempted to redeem without intervening would lose the benefit of the purchase and their interest would be subject to a constructive trust for the benefit of the TSC holder. Recently, the TSC holders in tax foreclosure actions have become extremely active, filing motions to have redemptions deemed invalid when the purchasers did not intervene in the tax foreclosure actions.  The Simon Article offered suggestions as to how the avoid having redemptions invalidated.

A change to Section 89.1, enacted very recently, has increased the likelihood of challenges to attempted redemptions, requiring even greater care in addressing tax foreclosures.  Specifically, Section 89.1 was amended to change the standard for redemption – requiring a purchaser to establish the purchase is for “fair market value” instead of “nominal consideration”.  The change provides greater incentive to TSC holders to challenge attempted redemptions, since the fair market value standard will be more difficult for purchasers to establish. At a minimum, it will require those buyers whose purchase is subject to tax foreclosure to retain an attorney to intervene.  Given that the standard is untested, such intervention applications will require fact witness and expert testimony as to the fair market value of a given property, as well as extensive briefing on the law.  The cost will inevitably result in purchasers walking away rather than incurring the costs. While the new law expresses that the intended purpose is to protect “…homeowners in foreclosure from an excessive low intervening offer…”, it is actually the homeowners who are likely to suffer, since they are likely cash strapped from the circumstances which left them unable to pay the real estate taxes in the first place.  The TSC holders will gain the greatest benefit, since the change to Section 89.1 will result in more tax foreclosures being completed and the properties going to the TSC holders, while the homeowners are left with nothing.   

If a title commitment does identify an open TSC and a lis pendens providing notice of a pending tax foreclosure, title agents should immediately contact their underwriters for direction.  The attorneys at McNally & Bellino, LLC stand ready and willing to assist title agents, buyers, sellers and their real estate agents whose transactions are subject to a tax foreclosure action.

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