Summertime is upon us, and for many investors, that means tax sale season is here. A tax sale – when the county (or City of St. Louis) auctions real estate parcels with unpaid property taxes – offers the opportunity to acquire a parcel at a price substantially below the value; however, there are many complexities with the tax sale process which can trip up the novice investor. Among those complexities is the insurability of title – after a tax sale purchaser receives a Collector’s Deed or Sheriff’s Deed (more on that below), can the investor sell it to a bona fide purchaser, and can that purchaser get title insurance?
In order to answer this question, it is important to understand that there are two processes for the sale of properties with unpaid real property taxes, and each process carries different rules (and opinions) as to the insurability of title. Most counties in Missouri – including St. Louis, St. Charles and Jefferson Counties, operate under the non-judicial formula prescribed by the Jones-Munger Act (Ch. 140, RSMo.). The City of St. Louis performs its judicial tax suits under the Municipal Land Reutilization Law (MLRL). Today’s article will focus on the issues surrounding tax suits in the City of St. Louis (stay tuned for a follow up summary of tax sale issues in the other counties).
In the City of St. Louis, after taxes are delinquent for three or more years, the Collector brings a suit in the circuit court to foreclose the lien of delinquent taxes. Six months after entry of the judgment of foreclosure, the Sheriff auctions the property to the highest bidder. The Sheriff will then appear before the court in a sale confirmation hearing, where the Sheriff present evidence that the sale price is adequate. Upon confirmation, the Sheriff issues a deed to the purchaser, and the purchaser is now in title…so as this was handled through the government and the courts, everything should be good, right? Unfortunately, title is most likely not insurable.
The reason title insurers pause at insuring tax sale purchasers is because of Due Process – the right of the former property owner to receive notice of the tax sale and defend their position may be improper. Under the MLRL, the city does not provide “personal service” of the tax suit to the property owner and lienholders; rather, they send notice via USPS certified mail. With “personal service”, a defendant is given notice of the suit personally – that is, someone (generally an officer of the court) hand-delivers the notice of the suit to the defendant, and can testify that the defendant had notice of the suit. With certified mail, anyone present at the time the mail is delivered can sign for the letter – there is no guarantee that the intended recipient actually receives the notice. In addition, the City has no obligation to confirm that the defendant received notice, even if the certified mail is returned.
Why is this a risk to title insurers? The prior owner of the property could later file suit to set aside the judgment and subsequent Sheriff’s Deed on the basis that they did not receive notice of the tax suit, and did not have a chance to defend their interest. The minute this case is filed, the title insurer would be obligated to defend title, thereby incurring legal costs and losses. In addition, any mortgage holder or other lienholder would have the same right to file a suit to set aside the judgment and Sheriff’s Deed.
The risks discussed here are subjective in nature; many title underwriters have a different opinion as to the full nature of the risk, but we are unaware of any major title insurer who will provide a title policy to a tax sale purchaser solely on the basis of the Sheriff’s Deed and tax suit…which begs the question – how does one get clear title? There are a few different options:
- Proof of personal service. If the tax sale purchaser can show that the prior owner and all lienholders received personal service, title policies can be given. However, the City does not provide personal service as the law doesn’t authorize that expense, so this option is theoretical, at best.
- Quit claim deeds and releases from lienholders. If the prior owner and all lienholders are willing to sign deeds and/or releases to relinquish their interest, title is insurable – but all must execute such deeds or releases.
- Quiet title suit. The tax sale purchaser brings suit in the circuit court, naming as defendants the prior owner and any lienholders. In the quiet title suit, each of these parties receives personal service, thereby eliminating the due process risk. Upon entry of the judgment quieting title in the purchaser’s name and expiration of the appeals period, title is insurable.
- Passage of ten (10) years from the date of the Sheriff’s Deed. Time heals all, and ten years is the magic number required for adverse possession – if the owner has had exclusive possession of the property (i.e., no one has come forward to claim a right to the fee simple title), nearly every title insurer will insure at that point.
Many have asked the question why the City cannot give personal service to its defendants; the issue is with the law. Until the statutes are changed to require personal service – which would add a great deal of cost – the tax suits will remain uninsurable in the current form. Leaders Title Company is an investor-focused title company ready to work closely with you and your clients to solve these insurability issues, and our sister law firm, Banjak & Associates, LLC is ready and able to assist with any judicial resolution necessary. Please contact us at any time if you wish to discuss further!
