Avoiding the Pitfalls of Tax-Deeded Property Disposition

The information contained in this article is not intended as legal advice and may no longer be accurate due to changes in the law. Consult NHMA's legal services or your municipal attorney.

Is your municipality ready to dispose of its tax-deeded properties? That’s great. Not only could your municipality recoup past due taxes, interest, and other expenses tied up in these properties, but also it could put unproductive properties back on the tax rolls or develop them for municipal use.

Before selling properties that the municipality acquired by tax collector’s deed or holding onto such properties for municipal purposes, there are several potential pitfalls that should be considered before proceeding.

Should the municipality retain a tax-acquired property without first negotiating an agreement with the former owners and lienholders?

No. Before keeping a property for its own use, the municipality should first attempt to compensate the former owners and lienholders for the difference between what the municipality is owed and the market value of the property. Pursuant to New Hampshire Supreme Court decision Polonsky v. Town of Bedford, 173 N.H. 226 (2020), as well as the United States Supreme Court decision Tyler v. Hennepin County, 598 U.S. 631 (2023), when the government sells a tax deed-acquired property, it cannot keep the amount generated from the sale beyond what is owed past due taxes, interest, costs, and penalty. If the sale of a property generates more than what the government is owed, these “excess proceeds” must be returned to the former owners and lienholders. Otherwise, the government violates constitutional prohibitions against the government taking private property
without just compensation.

The holdings of both Polonsky and Tyler are limited to those circumstances where the government sells a property rather than retains it. However, in support of its central decision, the United States Supreme Court in Tyler suggested that, even if the government keeps the property, it must still compensate the former owners for the difference between the value of the property and what the government is owed.

Under New Hampshire law, former owners and lienholders have an interest in a tax deed-acquired property to the extent its value exceeds the amount owed to the municipality. A tax-acquired property that a municipality wishes to keep permanently could have substantial market value because it may be situated in a central location, has desirable land characteristics, and/or is capable of development. If such a property were to be sold instead of retained, it likely would command a high price, resulting in excess proceeds for the former owners and lienholders.

Although the case law on this issue remains uncertain, if a former owner or lienholder were to challenge a municipality’s decision to retain a tax-acquired property without attempting to distribute excess proceeds, a court may determine that the municipality has failed to provide just compensation to the former owner or lienholder as required by the state and federal constitutions.

To avoid such lawsuits, a municipality should consider doing the following before retaining a tax-acquired property:

1. Analyze potential claims against the municipality. Working with municipal counsel, the tax collector, and the assessing department, municipal leadership and staff should evaluate each property the municipality wishes to retain, including: the length of time the municipality has owned the property, the total amount owed to the municipality, the property’s development potential, the property’s probable market value, and the like. If the municipality is owed more than the property is worth, or if the property is clearly undesirable (such as being adjacent to a landfill or transfer station), a former owner or lienholder may have little basis to claim that the market value of the property exceeds what the municipality is owed.

2. Contact the former owners and lienholders. Before a municipality decides to keep a property, it should contact the former owners and lienholders to discuss payment for excess proceeds. Even though the process is not amount of excess proceeds may be determined by calculating the appraisal amount and subtracting what is owed to the municipality for back taxes, interest, costs, and penalty pursuant to RSA 80:88 and RSA 80:90. When distributing excess proceeds to the former owners and lienholders, the municipality should obtain releases from all parties to protect itself from future litigation.

3. Attempt to buy the property at auction. Although counterintuitive, the municipality should also consider auctioning a property it intends to keep. At auction, the municipality may, subject to certain requirements, bid on the property along with private individuals. A well-advertised auction is a reliable way to generate market value for real estate and could protect the municipality from claims by formers owners and lienholders that it did not fairly assess the property. However, this process is risky because the municipality may be outbid and lose the property. In certain circumstances, the municipality may also be at a competitive disadvantage if the municipality’s high auction bid was published in the municipal budget or public meeting minutes.

Should the municipality sell tax-deeded properties with new restrictions future development?

Probably not. Tax-deeded properties are subject to the same zoning and building regulations as other similarly situated properties. Such properties generally should not be singled out and burdened by the addition of permanent municipally imposed restrictions on development or use.

Adding restrictions to tax-deeded properties likely will reduce the amount the property sells for, thus decreasing the potential amount of excess proceeds payable to the former owners and lienholders. Former owners and lienholders may later sue the municipality for failing to generate sufficient value for the property. Additionally, imposing new property restrictions may hamper the municipality by lowering the probability that it will fully recover what it is owed.

Certain temporary restrictions, however, may be appropriate. If a municipality acquires a tax-deeded property that is non-compliant with local regulations, a municipality may reasonably impose a remedial restriction requiring the new owner to bring the property into compliance within a certain timeframe.

For example, if a structure on the property is dilapidated and requires removal, the municipality could either (1) pay for the structure’s removal and hope to recover those costs from the proceeds generated from the sale of the property, or (2) require the purchaser to pay to remove the structure within a certain time period (e.g., six months, one year) following the sale. The latter scenario is probably preferable because, although the bids likely will be lower to account for the cost of removal, the municipality protects itself from the sale not generating sufficient proceeds to cover its past due taxes, interest, costs, and penalty. Additionally, the amount of excess proceeds will be roughly equal regardless of whether the municipality or the purchaser pays to remove the structure, meaning that the municipality will not unduly expose itself to lawsuits from the former owners and lienholders. Put another way, by imposing a temporary restriction like the one above, the municipality is not devaluing the property—it is, instead, shifting certain costs from itself to the purchaser.

Should the municipality sell adjacent tax-deeded properties together or separately?

It depends. Whether to sell adjacent lots together or separately rests on several factors that should be thoroughly analyzed before the sale.

If the adjacent properties were owned by the same former owner, and it is reasonably likely that selling them together will generate a higher amount than selling them separately, then selling the properties together is probably appropriate. For example, if a tax-deeded waterfront lot has no road access but for a contiguous tax-deeded lot, or if there are multiple tax-deeded lots in an undeveloped subdivision, selling the properties together as a single package is probably preferable: (1) the purchaser benefits because he or she will be acquiring a more desirable piece of real estate, (2) the municipality benefits because, assuming the properties sell for more together than they would have separately, it is more likely to recover what it is owed, and (3) the former owners and lienholders similarly benefit because, if the real estate sells for a high amount, they have a greater chance of receiving a substantial excess proceeds distribution.

If the adjacent properties were owned by different former owners, however, the properties generally should not be sold together. Allocating the sale price between two or more properties for reimbursing the municipality may prove difficult. Moreover, following the sale, former owners and lienholders may complain that they didn’t receive their fair share of the excess proceeds.

Nonetheless, as described above, selling two or more adjacent properties together that were previously held by different owners could be the preferred course of action if it will likely result in higher total sale value. Although challenging, a municipality may be able to calculate fair and accurate distributions after considering the assessed values of the properties, the amounts owed by each former owner, and other factors. Before moving forward with such a sale, however, municipal leadership and staff should consult with municipal counsel, the tax collector, and the assessing department to determine the best approach.

Should a municipality sell tax-deeded properties by auction, sealed bid, or another method?

Nowadays, auctions are generally the safest approach for selling tax-deeded properties.

Under RSA 80:80, municipalities are permitted to sell tax-deeded properties by sealed bid or by auction. Additionally, municipal leadership may, after making an “affirmative finding that disposal by a method other than sealed bid or public auction is in the public interest,” authorize by a warrant article or ordinance to dispose of tax-deeded properties by an alternative method—such as selling to abutters.

RSA 80:80, however, has not been updated since Polonsky and Tyler. Before those decisions, municipalities often did not need to consider the interests of former owners and lienholders because, in certain instances, municipalities could keep all proceeds from the sale of tax-deeded properties. Now, municipalities may invite litigation from former owners and lienholders if they do not make a concerted attempt to achieve market value when selling tax-deeded properties.

Sealed bids often result in low values because advertising is limited. Many times, municipalities market sealed bids themselves and largely limit advertising to within the local community. Following the Polonsky and
Tyler decisions, this may no longer be considered sufficient when selling tax-deeded real estate. Similarly, alternative methods of sale may be challenged for failing to achieve market value. As with lending institutions selling foreclosed homes, auctions conducted by licensed auctioneers are generally the safest method for municipalities selling tax-deeded properties. Auctions are widely considered a viable method for determining what the market is willing to pay for an asset. Further, because auctioneers typically tie their compensation to what the properties sell for, they are incentivized to obtain the highest possible values. Auctioneers, consequently, advertise extensively to generate widespread bidder interest. But even if the properties do not yield high values at auction, the process by which the properties were marketed shields the municipality
from accusations that the sale process was deficient.

Although rare, properties sometimes fail to sell at auction. If this occurs, the municipality is in a better position to dispose of these properties by sealed bid or an alternative method. Because the municipality has already attempted to secure the highest possible price for the property at auction, a former owner or lienholder would have difficulty asserting that the municipality did not do enough to secure appropriate value for the property.

Summary
Following the Polonsky and Tyler decisions, disposing of or keeping tax deeded properties poses a unique set of considerations for municipalities. Municipal leadership and staff are well-served to consult legal counsel and tax officials before selling or retaining tax-deeded properties.

Richard D. Sager and Weston R. Sager are partners at Sager & Smith, PLLC and co-owners of NH Tax Deed & Property Auctions. Both are dual-licensed attorneys and auctioneers with experience in municipal law, real estate law, and auction law. Rick may be reached at rick@sagersmith.com or rick@nhtaxdeedauctions.com, and Weston may be reached at weston@sagersmith.com or weston@nhtaxdeedauctions.com. The information contained in this article is not intended as legal advice or as a legal opinion.