Real Estate Tax Liens Attach to Persons, Not Just Property

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In 2013, the Pennsylvania legislature passed an amendment to the Municipal Claim and Tax Lien Law (Act No. 93 of 2013, the “Amendment”), designed to give municipalities and school districts improved means of collecting tax revenue. The Amendment permits a taxing district to enforce a claim for property taxes “as a lien against real property in the same manner and to the same extent as a judgment for money.” In other words, in addition to its ability to file a tax lien against real property, a taxing authority may file a claim for unpaid property taxes against the individual owner of the property.  Upon filing, the claim becomes a judgment lien on any real property owned by the delinquent taxpayer in the county where the claim is filed.  That judgment may be transferred to other jurisdictions where the individual owns property and may thus become a lien against those other properties.

At first glance, the Amendment appears significant for commercial real estate transactions, especially for title companies crafting insurance policies that may now have to take into account outstanding claims against individuals, not only against specific real estate.  If a title company’s or lender’s search does not uncover a personal judgment filed against the seller of property, then a purchaser may unknowingly acquire the property subject to a tax judgment lien.   If the search does reveal the personal judgment, then presumably the title company would require that the taxes be paid (even though they do not relate to the property for sale) and satisfaction of the tax deficiency be recorded.

In reality, the Amendment will likely have little practical effect on commercial real estate transactions.  First, even before the Amendment took effect in January 2014, most  title companies and lenders searched for judgments filed against the seller of real estate and addressed those judgments as part of their standard practice.  Title companies and lenders that have not adopted this practice should do so, and real estate purchasers and lenders should ensure that any title company they engage has done the same.

Second, in most instances the seller of commercial real estate is a special purpose entity (“SPE”)—a partnership, limited liability company, or other legal entity whose sole purpose is to hold title to a single piece of property.  Because SPEs generally only hold title to one parcel, a SPE seller would not likely be liable for failure to pay real estate tax on a parcel unrelated to the transaction.  If the SPE only owns the property for sale, then it is responsible for paying taxes only on that property, and any tax deficiency would appear in the title company’s search against the SPE /subject property. Thus, the result is the same as if the title agent had found the lien by searching the seller’s personal judgment record: pay the taxes to release the lien, or transfer the property with an exception to title.

In sum, although the Amendment will not likely have a major practical effect on commercial real estate transactions, parties to such transactions should take precautions to confirm that the property they are selling, buying, or insuring is either free of all liens (including personal judgments against the seller) or transferred with all parties aware of the liens. 

Topics:  Property Tax, State Taxes, Tax Liens

Published In: Commercial Real Estate Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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