Don’t Let Sneaky Errors Sabotage Tax Deeds

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.

Municipal officials and employees in New Hampshire spend a lot of time thinking about property taxes. What they may not spend enough time thinking about, however, are tax liens and tax deeds. In particular, they may not be paying nearly enough attention to the many complicated procedural steps involved in tax billing, liens, and deeds which, if not followed correctly, can doom the process from the start. In a state so heavily reliant upon property tax revenue, it behooves each municipality to eliminate as many procedural errors as possible so that tax deeds, the most powerful tool in the box for recovering delinquent taxes, can be used effectively.

A tax deed is significant. It transfers complete ownership of the property “in fee simple absolute” to the town or city and takes it away from the delinquent taxpayer. RSA 80:91; Burke v. Pierro, 159 N.H. 504 (2009); First NH Bank v. Town of Windham, 138 N.H. 319 (1994). It extinguishes outstanding mortgages and can even, in some cases, take priority over an IRS lien. RSA 80:77-a; 26 U.S.C. §§ 6323, 7425. However, none of these things will happen unless the tax billing, liening, and deeding processes are conducted properly.

The reason the process is so critical is that, by taking a tax deed, a town or city seizes ownership of private property. Under Part I, Article 12 of the N.H. Constitution and the Fifth Amendment to the U.S. Constitution, this is a big deal. It can only occur under very specific, controlled circumstances that give the property owner every opportunity to avoid it and to recover the property or the excess value of the property over what they owe. Each aspect of property taxation is governed by a statute that explains what to do, how to do it, and when, and it is all designed to give the taxpayer the information and time to cure any delinquency. When there are mistakes at any point in the process, courts can (and do) invalidate not only that step but also everything that occurred after it. See Olson v. Town of Fitzwilliam, 142 N.H. 339 (1997).

What makes this trickier is that mistakes may have occurred years, even decades, before they are discovered. They may be uncovered when it is time to take property by tax deed and someone reviews the file. A mistake could be found when a municipality prepares to sell property that was taken years earlier by tax deed, or when a former owner (or their heir) realizes what has happened and sues to recover the property. In many cases, these issues cannot be fixed after the fact. Mistakes are often expensive, resulting in lost tax revenue, lost interest and costs, and extra attorney’s fees to resolve problems, quiet title to property, and defend lawsuits.

So what, you think – the law limits the amount of time a tax deed can be challenged in court, right? Well, yes and no. RSA 80:78 says “no action, suit or other proceeding shall be brought to contest the validity of an execution of the real estate tax lien or any collector’s deed based thereon after 10 years from the date of record of the collector’s deed…” However, this statute of limitations (and the similar statute that applies to the traditional tax sale process in RSA 80:39) may not apply if the notification requirements which are designed to give the taxpayer the opportunity to pay the taxes or challenge the tax deed were implemented incorrectly. See J&N Fieldstone Supply, Inc. v. BHC Dev. Corp., 146 N.H. 500 (2001).

What Could Go Wrong?

Here is a (non-exhaustive) list of procedural requirements that must be occur over the course of several years to result in a valid tax deed:

• Tax bills sent to the correct parties at the correct addresses: RSA 73:10; RSA 76:10-:11.
• Notice of impending tax lien: the municipality’s automatic tax lien expires one year from October 1 following the assessment of the tax unless it is “perfected.” Notice of the impending execution of a tax lien must be sent to all owners at least 30 days in advance, including all required information, return receipt requested. RSA 80:59-:60.
• Affidavit of tax lien: the tax collector issues to the municipality, and within 30 days thereafter records in the registry of deeds, an affidavit of all tax liens which must include the names of owners, description of the property, total amount of the lien, and date and place of execution of the lien. RSA 80:61 and :64.
• Notice of tax lien to mortgage holders: within 60 days after execution of the tax lien, all mortgage holders must be sent notice of the lien with all required information. RSA 80:65-:66.
• Notice to NH DHHS: if there is a lien on property for old age assistance, notice must be given to the Commissioner of DHHS within 60 days after execution of the tax lien. RSA 80:68.
• Notice of impending tax deed: at least 30 days before executing a tax deed, notice must be sent to all owners and mortgage holders, return receipt requested, including all required information about the property, amounts owed, redemption rights and process, and a warning of the loss of legal interests in property. RSA 80:76-:77-a.
• Notice to IRS of impending tax deed: notice must be sent at least 25 days prior to executing a tax deed to avoid automatic IRS priority over municipal interests. 26 U.S.C. §§ 6323, 7425.
• Recording the tax deed at the registry: RSA 80:78 (10-year statute of limitations does not begin running until the date on which tax deed is recorded).

Mistakes in any of these steps often go unnoticed until much later and, at worst, may prevent the municipality from ever collecting the taxes. “Because the power to tax arises solely by statute, the right to tax must be found within the letter of the law and is not to be extended by implication.” Pheasant Lane Realty Trust v. City of Nashua, 143 N.H. 140, 143 (1998). This principle leads to some unfortunate problems for towns and cities:

• Not Taxing a Parcel at All: Occasionally, municipalities “lose track” of a parcel. This might happen when the tax map is updated, or when there is an error updating information after a subdivision, or when property transfer information is put into the system incorrectly. No one notices at the time and eventually everyone forgets that it is an orphan parcel. If a municipality discovers that a piece of property has “escaped taxation,” it has legal authority to impose that tax on the owner, but only if they do it before the end of the year for which the tax is assessed. RSA 76:14. They can never go back and assess the taxes for prior years.
• Taxing the Wrong People: Remember, the whole system is based on the premise that people must be given notice of the taxes that are assessed on their property, notice of any delinquency, and an opportunity to fix the problem. If the wrong person is listed in the tax system as the owner or the person to be taxed, this means the true owner is not getting the tax bills, lien notices, and deed notices, and may never be considered “on notice” that bills are being issued but not paid.

Municipalities have only a limited time to fix this mistake before they lose the ability to assess the tax to the right person. If property has been taxed to the wrong person, the municipality may abate those taxes and impose them on the correct person – but only until the end of the year for which that tax was assessed. RSA 76:14. If the wrong person was taxed in prior years, that cannot be corrected, so those taxes might never be collected.

• Not Notifying All Owners: If there are multiple owners of a parcel, notices sent to some but not all of them do not satisfy the statutory requirement of providing notice to all of the owners and giving them an opportunity to fix the problem before they lose their property. This means a tax lien would not be valid or enforceable as to an owner who was not sent the notice, and neither would any tax deed based on that lien. See Olson v. Town of Fitzwilliam, 142 N.H. 339 (1997). At least one superior court has also ruled that a single notice of impending tax lien sent to husband and wife property owners at the same address, with both names on the notice itself but only one name on the envelope, was only effective as to the spouse whose name was on the envelope. It did not affect the interests of the other spouse.

How could this happen? Sadly, there are many ways. Names can be missed when entering information into the tax system from deeds and PA-34 Forms (Inventory of Property Transfer). Names can also be missed when entering information from the Notice to Towns and Cities (RSA 554:18-a) regarding people who have inherited real estate, and the form itself may contain errors. Mistakes may have occurred when transferring older, paper records into the electronic system. In some cases, the information may all be in the system but difficult to use properly. Assessing software may not list all of the names (showing an “et al.” or something similar), or may list them on multiple lines which may not be noticed. Software has also been known to generate only a single notice and use only the first name if multiple owners are all listed on the same line. However, regardless of what the software does, the municipality’s obligation under the law to notify all owners is the same.

• Not Notifying Mortgage Holders: If a tax deed is taken properly, it should extinguish any outstanding mortgages. However, if notice of the tax lien and notice of the impending tax deed are not both provided to the mortgage holder as required, this does not happen. The tax deed would likely be ineffective as to the mortgage holder and significantly impact the municipality’s ability to recover the delinquent taxes, interest, and costs. See Fannie Mae v. Town of Fremont, 141 N.H. 156 (1996). This might happen if the town or city did not have a title search performed just before sending notices or if they relied on an old search.
• Unknown owners: Sometimes, a municipality knows a parcel exists but cannot figure out who owns it. These tend to be long-standing problems that get shuffled from one person to the next in the office. The goal, obviously, is to assess and collect taxes on all taxable properties, but if no action is taken, these parcels can escape taxation indefinitely.

It may be possible to return such a parcel to taxpaying status by taxing it to “owner unknown,” eventually taking the property by tax deed, and selling it to a new owner. This is what one town did in the 1980s. After the owners of a large tract began selling off small portions of the land in the 1960s, the Town lost track of the remainder parcel and did not notice it until a new tax map was completed in 1981. The tax collector made great efforts to locate the owner: she searched the available tax warrants, assessment records, and other documents in the Town offices, and went so far as to send letters of inquiry to abutting landowners. Although these efforts helped locate the owners of a number of other parcels, it did not work for this parcel. The Town then began taxing the lot to “owner unknown” at the property address. When the taxes were not paid, all required lien and deed notices were sent as well. The Town eventually took the property by tax deed, sold it to a new owner, and recovered the delinquent taxes from the proceeds. In ruling that the Town had satisfied its obligations under the statute, the NH Supreme Court noted that “due process simply required the town to undertake reasonable efforts, not Herculean ones, to determine the identity of the owner of this property.” Kakris v. Montbleau, 133 N.H. 166 (1990).  (The fact that the true owner failed to inform the Town that they were not being taxed at all on their 20+ acres of land for 20 years, despite receiving regular bills for another 2-acre parcel they owned, did not help.)

• Bills and Notices that Fail: A town or city may have difficulty notifying the owner or mortgage holder for a wide variety of reasons: the addressee may have moved and left no forwarding address (or the forwarding request has expired), they may be deceased, the property may be unoccupied/vacant, a certified mailing may not be picked up or signed for, or the address may be a post office box, to which certified mail cannot be delivered. Is sending the notice enough to satisfy the municipality’s obligation under the law, or does the notice actually have to reach the intended party?

According to the US Supreme Court, actual notice of the taxes, lien, or deed is not required. What the US Constitution requires is “notice reasonably calculated, under all the circumstances, to apprise interested parties.” Jones v. Flowers, 547 U.S. 220 (2006). This doesn’t let municipalities off the hook, however. When a notice is returned, the government has good reason to know that the intended recipient is no better off than if the notice had never been sent. In that case, a municipality has an obligation to take additional “reasonable” steps to reach the person. “What steps are reasonable in response to new information depends upon what the new information reveals.” Jones, 547 U.S. at 234.

• Mistakes in the Tax Lien Affidavit: The tax lien affidavit which is delivered to the municipality by the tax collector and recorded at the registry of deeds is a central part of “perfecting” the municipal tax lien for delinquent taxes. If it does not accurately list the parcels, owners, lien amounts, and date/place of execution of the lien, it will not be effective and the lien will expire “one year from October 1 following the assessment” of those taxes. RSA 80:19, :61, :64. In addition, RSA 80:64 requires the affidavit to include a certification by the tax collector that the information it contains is true. This means the signature/notary block cannot merely include an acknowledgement that the tax collector is the one who signed it; it must also state something to effect that “the undersigned officer swore that the foregoing affidavit was true to the best of his/her recollection, knowledge, and belief.”
• Recording the Tax Lien Affidavit or Tax Deed Incorrectly: The purpose of recording the tax lien affidavit at the registry of deeds is to give the world (including the owner, mortgage holder, and any prospective owners and mortgage holders) constructive notice of the fact that the municipality has a lien on a specific piece of property owned by a particular person for delinquent taxes. Recording the tax deed serves the same purpose and puts the world on notice that the municipality has taken ownership of the property. Failure to record at all will render the affidavit ineffective and it cannot be used as the basis for a tax deed later. See RSA 80:64. Failure to record the tax deed will mean that the 10-year statute of limitations for challenging the deed will not begin to run. RSA 80:78.

Recording a document with errors can be just as problematic. For example, when a town’s tax records listed the wrong party as the owner, the town took the property by a tax deed with an incorrect reference to the party being taxed. The true owners’ names never appeared in the deed to the town or any other documentation. More than a decade later, the true former owners challenged the tax deed. The town argued that the suit could not proceed because it was barred by the 10-year statute of limitations. However, the court ultimately determined that the 10-year period never began to run because the tax deed was recorded “outside the chain of title,” meaning it included no information that connected it to the true former owners. As a result, the tax deed could not have provided constructive notice to the former owners. The town had also disposed of all of the records relating to the tax lien and deed in reliance on the 10-year statute of limitations, so there was no way to prove that the former owners had received any kind of notice or that the Town had acted reasonably to try to locate them. As a result, the town was not protected by the statute of limitations and the litigation continued. See J&N Fieldstone Supply, Inc. v. BHC Dev. Corp., 146 N.H. 500 (2001).

What Can We Do?

Errors in one or more of the categories discussed above are likely to be lurking in every municipality, and more are waiting to occur every day. While not all of them can be fixed after the fact, some of them can be, and it is certainly possible to reduce new errors and problems. How? A bit of extra care, some education for everyone in the office, and some reasonable efforts to investigate can all help. Here are a few suggestions:

• Everyone must exercise significant care when recording property transfer information in the assessing/tax systems. Municipalities should receive copies of all deeds from the registry and the PA-34 Form (Inventory of Property Transfer). All names should be entered carefully and completely (middle initials count!). When a deed includes information like “f/k/a” (formerly known as) or “d/b/a” (doing business as), it can be an important clue to tie parties and names together. Deeds can be confusing at times and can convey title in a variety of forms and configurations. Some documents that look like they might be transferring ownership of property actually aren’t. There may be questions about which property is involved and how much of it is being transferred. If anything is confusing, someone should ask questions and potentially consult the municipal attorney for advice. It is often much less expensive to obtain legal advice up front than it is to pay to clean up the mistake later.
• If anyone in the municipal office learns of possible changes in ownership due to divorce, death, etc., they should follow up on it. All staff should know to bring things like that to the attention of someone who can do something about it, and that person should take steps to investigate. Particularly in smaller communities, it may be quite effective to simply talk with the people who might know something.
• When an owner is deceased, the municipality can look for information about changes in ownership and mailing addresses by attempting to contact family members, searching obituaries online, searching public records, searching the registry of deeds for death certificates and related information, and can search probate records.
• When properties are listed as “owner unknown” in the system, a municipality can take proactive steps to solve the mystery by conducting some research to find the true owner. This might include searching municipal records (land use as well as assessing) and the registry of deeds. Looking at records for abutting parcels can sometimes yield clues, such as plans or legal descriptions that indicate who owns the adjoining lands. Letters can be sent and inquiries made to abutting owners. Notices can also be published in the newspaper asking for information about the ownership of the land. In some cases, it may be worth it to ask the municipal attorney or a real estate attorney to look into the matter. Investing a little bit of money up front may save money later and could help return the property to taxpaying status. 
• It is worthwhile to determine what the tax/assessing software does with multiple owner names to be sure that notices and bills are generated for each owner properly, for the correct address, and with all names on the envelope and notice if multiple owners are at the same address.
• Encourage everyone in the office to ask questions if any piece of information looks odd or they think it may be a typographical error.
• When taxes become delinquent and lien notices are prepared, it can be a good idea (if the office has the capacity) to check public records to confirm that the names and addresses are correct and complete.
• An updated search for mortgage holders should be run every time lien and deeding notices are being sent. The search should not be limited to the time period after the current owner took title, because older, unreleased mortgages may still be valid and enforceable.
• The template used for tax lien affidavits should be reviewed to be sure it includes a certification that the report of liens is accurate, not merely an acknowledgment that the tax collector is the one who signed it.
• If the notice of impending deed is returned, some other attempt must be made to contact the owner before the tax deed is executed. The easiest step is to send the notice again via first-class mail, which does not need to be signed for. Many people will not collect a certified letter; however, if first-class mail is not returned, there is a rebuttable presumption that it was delivered. Notice might be posted on the front door of the property, or mailed addressed to “occupant” on the envelope. Even if the person is not at that address anymore, there is an increased chance that someone will open the letter and inform the owner. The municipality can contact family or friends, if known. Searches can be run on social media, in probate records, the registry of deeds, or in other public records. If all else fails, notice by publication might be used, although this is only adequate when it is not reasonably possible or practical to give a more adequate warning. This may be an area where legal or other professional help is called for.
• Keep records of every step, all attempts to locate owners, and every attempt to provide notice. Scan every scrap of paper that is relevant, including notices, copies of envelopes properly addressed, certified mail receipts, copies of returned mailings, records and notes of internet searches and other attempts to find owners, information about probate estates, copies of notices published in areas where relatives may reside, and notes on conversations with local people and relatives. If there is no proof of these efforts, it may be difficult to defend the municipality’s actions later. This is even more true when the issue is raised years or decades after the events occurred.

A tax deed is the best remedy towns and cities have to recover delinquent taxes. Investing some effort in the details today will increase a municipality’s ability to use it effectively tomorrow.