Understanding NJ Tax Lien Foreclosure

TaxesAll municipalities in New Jersey are required by statute to hold annual sales of unpaid real estate taxes.  By selling off these tax liens, municipalities generate revenue.  Tax sales are conducted by the tax collector; third parties and the municipality bid on the tax sale certificates (“TSC”).  At the conclusion of the sale, the highest bidder pays the outstanding taxes and becomes the holder of the TSC.  The TSC must be recorded with the County Clerk to become a lien against the real estate.

 

The holder of a TSC does not own the property.  Rather, the TSC holder owns a lien against the property in the amount paid for the TSC plus interest which continues to accrue.  It is not uncommon for purchasers to obtain interest rates of 18% on their principal purchase.  For the holder of the TSC to become the owner of the property, the tax lien must be foreclosed.  Foreclosure of a TSC extinguishes the right of the property owner or any mortgage holder to redeem.  When a municipality purchases the TSC, the action to foreclose the right of redemption may be filed at any time after the expiration of six months from the date of sale; for all others, the complaint to foreclose can be filed at any time after the expiration of 2 years.  See N.J.S.A. 54:5-86(a).  This post discusses only those tax sale foreclosures completed by individual, non-municipal TSC holders.

 

The Plaintiff in a tax sale foreclosure must, at least 30 days prior to filing its complaint, give written notice of its intention to foreclose as well as the amount necessary to redeem.  See N.J.S.A. 54:5-97.1.  The notice must be served by certified mail/ return receipt requested on all parties whose interest in the property appears of record and who are entitled to redeem the TSC.  The notice must also be filed with the Office of the Tax Collector.  Without proof that the notice has been served, the plaintiff will not be entitled to collect search fees, counsel fees or other related fees in its foreclosure action.

 

If the TSC is not redeemed within the 30 day notice period, the Plaintiff may file its complaint pursuant to R. 4:64-1(f).  The plaintiff must name as defendants all parties with a recorded interest in the property, whether by virtue of a mortgage or other lien.  The complaint must specify the parcels affected, the last known owner(s) of the property, and the amount necessary to redeem.  Service of the complaint is made by certified mail/ return receipt requested rather than by the Sheriff or by Process Server.  If redemption is made after the filing of the complaint, redemption is made as to the subject parcel only, presuming that notice was filed in the tax collector’s office, and is subject to the fixing of fees and costs.  See N.J.S.A. 54:5-98.  Redemption is made at the office of the tax collector unless otherwise directed.  Only the defendants named in the complaint have a right to redeem.  This redemption right is only transferrable in limited situations.  Redemption of the TSC can be made through midnight on the date of the final judgment only if a notice of intention to foreclose was properly filed in the office of the tax collector.  Once redemption is made, an Affidavit of Redemption must be filed.  An Order dismissing the foreclosure action will also be entered as to the parcel redeemed.  See R. 4:64-6.

 

However, if a defendant files an answer to the foreclosure complaint which sets up the defense of invalidity – of the tax lien, the proceedings to sell the tax lien, or the foreclosure itself – those issues will be severed as to the subject parcel and the Court will try those issues separately.  See R. 4:64-6.  All tax sale certificates and the foreclosure proceedings are deemed valid unless their validity is challenged by a defendant.  N.J.S.A. 54:5-100.

 

Upon the resolution of all issues, or upon default for failure to answer or otherwise move as provided by the Rules of Court, and upon a showing that all subsequent municipal liens on the subject parcel have been paid current to the date the complaint was filed, a Court will enter judgment in favor of the plaintiff.  See N.J.S.A. 54:5-99.  The entry of judgment terminates the right to redeem in the described land.  See N.J.S.A. 54:5-104.  The judgment is then recorded and the Plaintiff becomes the owner in fee of the subject parcel(s).

 

These judgments are almost never vacated, and there are very few arguments for opening the judgments.  In many cases a negligible tax sale certificate amount will cut off several thousand dollars worth of equity for an owner or an inattentive mortgagee.

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