Collecting unpaid municipal charges and property taxes in Pennsylvania through estate sales can be risky
Selling mortgaged real estate to collect unpaid municipal charges and county property taxes under both the Pennsylvania Municipal Claims Act (MCA) and the Real Estate Tax Sale Law (TSL) can present pitfalls for the unwary . The greatest risk is that the property will be sold free and clear of the lien of the first mortgage holder, resulting in the loss of security to satisfy the outstanding mortgage loan.
Municipal Claims Act
The city, town, borough, and township’s collection of unpaid services or fees related to a specific parcel of real property is governed by the MCA. These charges include, but are not limited to, those related to sentencing proceedings; demolition and cleaning; sewer assessments; mandatory connections; and utilities and services such as garbage, water, electricity, and natural gas. Under the MCA, a city can file both a lien for unpaid amounts and a writ of saw face (a writ requiring a person to appear in court) to enforce the privilege. The writ is then served on the owner of the property, as in the case of a complaint in connection with a mortgage foreclosure.
Once judgment is obtained, a sheriff’s sale is scheduled and all parties with an interest in the property, including mortgage holders, receive notices of sale. Under the law and relevant case law, the first time a property is slated for sheriff’s sale due to a municipal claim, there is no risk that the property may be sold for divest from the holder of the first mortgage. However, if the property does not sell, the municipality may file a petition to sell free and clear of all liens and encumbrances, including the first mortgage, on the next continued or postponed sale date.
Tax Sale Act
The STL governs the collection of overdue property taxes for all counties other than Philadelphia and Allegheny. Unlike municipalities governed by the MCA, the county taxing authority does not sue to enforce its rights to collect overdue real estate. Instead, a number of delinquent tax properties are advertised and sold by the county’s Office of Tax Claims in what is known as an “upset sale”. These usually, but not always, take place in each county in September. A thwarted sale only has the effect of transferring the owner’s interest in the property to a third party. It does not relinquish any mortgage, privilege or charge. Therefore, an upset sale of property results in a new owner, but does not affect a mortgagee’s lien or pending foreclosure.
However, if the property does not sell in a surprise sale, a sale can be held free and clear of all liens in a “judicial sale” upon request of the Tax Claims Office and court approval. Judicial sales usually, but not always, take place in spring or summer. The application for sale of the property free and clear of all liens and encumbrances, together with the final order setting the date of sale, must be served on all interested parties, including mortgagees. The lack of regular service is a ground for annulment of the judicial sale.
To complicate matters, Philadelphia and Allegheny counties use the MCA process to collect unpaid property taxes, just as they would for other municipal claims. Philadelphia County generally conducts its sales through the city attorney. Both counties frequently sell tax liens to third-party investors, who then collect them. Because of these inconsistencies, it is important to monitor these proceedings more closely in these counties – particularly the petitions filed to sell the property free and clear of all liens.
Manley Deas Kochalski, LLC does not advise mortgagees to advance payment for non-assignment actions under the MCA or STL during a pending foreclosure. This is because it is difficult to add such advances to the amount of the judgment. However, any amount necessary to stop a judicial sale or other sale of assignment should be advanced as soon as possible to avoid possible loss of mortgage lien. Mortgagees are strongly advised to consult an attorney and closely monitor any pending sale under the MCA or STL.