HOW DELINQUENT PROPERTY TAX COLLECTION WORKS & HOW WE ENFORCE IT
The complex, lengthy and uncertain process of delinquent property tax collection and foreclosure in our community has contributed to the severe abandonment challenge that we currently face. Nonpayment of property taxes is among the best indicators of abandonment of real estate. Even if an owner has not abandoned real estate that is delinquent on taxes, nonpayment indicates severe stress and increased risk that abandonment will occur.
Most people understand that if a person doesn’t pay property taxes, they can lose their property. But the process by which delinquent property taxes are enforced is complex. In this Law Corner, we provide an overview of the delinquent property tax law and practice for Memphis and Shelby County, and we suggest that reform of delinquent property tax law and practices will be vital to addressing the challenges of those blighted properties at scale.
Enforcement Takes Time
The first thing to know about delinquent property tax collection is that it takes time for enforcement procedures to even begin.
In our community, the owner of a tax parcel is only delinquent on payment of taxes after failing to pay for two consecutive years. After those two years, the delinquent tax attorney files a single lawsuit against every delinquent parcel and its owner. An owner will receive notices that taxes are due, but no action in court is commenced until the third year of nonpayment. This means that if a person or company walks away from their real estate without looking back, paying no property taxes from the time of abandonment, nothing happens for almost three years. Imagine what three years of complete abandonment of a house or building in Memphis looks like, even without any vandalism. There will almost certainly be a combination of overgrowth of vegetation, unaddressed roof or window leaks, burst pipes, and other failed systems.
The Shelby County Trustee’s office is responsible for supervising the delinquent tax attorney who oversees the tax sale process. When the delinquent tax lawsuit is filed in the spring of each year, every delinquent tax parcel in the county – without exception – is listed in that lawsuit. The lawsuit identifies two claims: one against the person for the money owed for taxes, fees and penalties; and one against the property itself seeking enforcement of the tax lien. Tennessee law provides that the county or municipality may pursue both the money and the property in state court.
Owners named in the delinquent tax lawsuit who wish to keep their property may approach the Trustee and catch up their taxes or ask for a payment plan. Others may file for bankruptcy protection, contest the amount owed or raise some other legal issue. But many owners still will not pay. If the owner doesn’t pay once the lawsuit is filed, the court may enter a personal judgment against the owner and may order a sale of the property by tax sale auction.
Auctioning Title On Delinquent Properties
In Memphis and Shelby County, the annual delinquent tax lawsuit typically lists more than 15,000 properties, which presents a seemingly insurmountable practical and logistical challenge. A special circumstance unique to Shelby County is that thousands of properties are severely delinquent in taxes – some for more than ten years – but have never been placed in a tax sale auction. The minimum bid at a tax sale auction is established by law to be the total amount owed of taxes, fines, fees and penalties, and has no relation to the market value of the property. If there is no bidder at the auction, which usually means the property has no market value or that the minimum required bid at auction is greater than market value, the law requires the county to enter the minimum bid and take title to the property with few exceptions. Shelby County government is currently responsible for in excess of 4,000 such properties.
There are three or four tax sale auctions every year, each including three to five hundred tax parcels. To prepare for these auctions, the delinquent tax attorney must order and review a comprehensive and current title search for each property scheduled for the auction, notify all interested parties identified in the title search by certified mail or personal service, assess the current physical condition of each property, and calculate the minimum bid required at the auction. An owner who wants to have their property removed from the tax sale auction may do so up until the day before the auction by paying all or part of the delinquent taxes owed.
If an owner doesn’t pay, and if all other required steps are completed in time, then finally the property is placed in an online auction in which registered bidders may bid on it starting with the minimum bid. The high bidder takes title to the property subject to the owner’s right of redemption. This right of redemption allows the owner, in most cases up to a year after the tax sale is confirmed by the court, to pay back the high bidder’s purchase price plus 12% interest to get the property back.
The delinquent property tax collection process is established by state law, influenced by local policy, and played out in the courts. We believe there are many opportunities to improve the process, and that a sustained focus on pursuing such opportunities will be required to eliminate one of the most significant root causes of blighted properties in Memphis and Shelby County.
Barlow and Schaffzin co-direct the University of Memphis School of Law’s Neighborhood Preservation Clinic where they supervise law students handling Environmental Court lawsuits on behalf of the City of Memphis. Schaffzin is an associate professor of law and director of experiential learning and Barlow is adjunct faculty and part time staff attorney for the City. Barlow serves as President of Neighborhood Preservation, Inc. Together, Steve and Danny are proud to have launched a new law partnership this year, Barlow & Schaffzin PLC.
For more information please visit npimemphis.org