by Mark Manoil, January 29, 2010

Arizona property tax lien purchasers, by virtue of their Certificate of Purchase, are given a first right to purchase subsequent delinquent tax years on the same property and have those amounts added to their tax certificate, earning the same interest rate.  In some counties, however, the action is actually a requirement, inasmuch as the failure to pay subsequent delinquent taxes (“subtax”) will expose the holder’s CP to being re-sold at the next auction along with the next delinquent year.

Single Certificate v. Multiple Certificate Counties

This latter treatment of subtaxes, i.e., making them a mandatory condition of retained ownership of the CP through subsequent tax auctions, is a policy set by the local county treasurer under an option given by state law.  The requirement is not imposed in Maricopa or Pima Counties, the largest tax lien markets in Arizona. In these, tax liens for different tax years may be sold and held by different tax lien investors.  The existence of separate CP’s creates special strategic considerations when approaching foreclosure of any one of them.

Basic Legal Considerations

The right to redeem (pay off) a tax lien is very broadly granted under Arizona law. It explicitly includes in the class of potential redeemers CP holders of different years. (The lien “may be redeemed by: 1. The owner. 2. The owner's agent, assignee or attorney. 3. Any person who has a legal or equitable claim in the property, including a certificate of purchase of a different date.”)

The second premise to keep in mind is that recovery of attorneys’ fees and costs in the foreclosure action for the CP holder, is conditioned upon the party redeeming the tax lien having previously been served with process (i.e., the Summons and Complaint) in the foreclosure action, prior to the act of redemption.  If redemption occurs prior to service of process, the statutory basis for recovery of fees and costs will not be present.

One Certificate of Purchase cannot foreclose the others on the same property: instead of there being priority of first in time, first in right, different year property tax liens enjoy parity with one another.  The foreclosure of any one does not extinguish the other tax liens on the property. Instead, the first to foreclose takes title “subject to” the others.

Strategic Choices

Thus, if you are a CP holder in a county that will issue Certificates to other buyers for other tax years, and you have not subtaxed your CP, you or your representative will have strategic decisions to make at the time you commence foreclosure on your lien. Among your choices:

1. Ignore the existence of the other Certificates (and their holders) and try to process your tax foreclosure as quickly as possible.
2. Serve the other Certificate holders as additional parties in the action.  Even though their interest as tax lien holders cannot be extinguished through the tax lien foreclosure, if served they are “on the hook” for the plaintiff’s attorneys’ fees and costs if they decide to redeem the tax lien which is in foreclosure.
3. Redeem the other Certificate(s) promptly to eliminate that holder’s right of redemption.

Each of theses choices involves risk for the investor.

In the first case, not drawing attention to the foreclosure may enable it to occur without other CP holder’s attention and interference through redemption of the tax lien at issue.  Upon completing the foreclosure, the plaintiff could then pay off the other tax liens, or the property would remain liable for them.  If, however, another certificate holder on the same property exercised its right of redemption as to the CP in the foreclosure, the plaintiff would stand to lose any amounts paid for attorneys’ fees and costs in the lawsuit.

The second choice is more defensive.  By serving other CP holders on the property with notice of the lawsuit, the foreclosing plaintiff would have a claim for attorneys’ fees and costs if another Certificate holder redeemed the lien at issue in the case.  However, by explicitly putting the other CP holders on notice of the action, they would essentially be invited to observe the suit’s progress. Once the likelihood of foreclosure had been demonstrated by the original foreclosing lienholder, they might be tempted to redeem the tax lien, even if they also had to pay the fees and costs.

The last choice is the most defensive: through redemption of the other year liens on the property, the rights of redemption of those holders to redeem the lien in foreclosure would be eliminated.  However, there would be no assurance of reimbursement for amounts paid to redeem those other years, in the event a different party (say, the property owner) redeemed the tax lien at issue in the foreclosure. Certain legal theories for recovery might be available, but would probably not be cost effective to prosecute.

Simple Alternative

These difficult choices can be avoided entirely by simply exercising the right to subtax after purchasing a Certificate of Purchase.  The CP holder is given the right, as of June 1st each year, to add on the subsequent delinquent tax year (if there is one) after the delinquent tax year evidenced by the CP.  As mentioned above, those subtaxes bear interest at the same rate at the which the CP was issued.