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.
Two years ago, we wrote an article for New Hampshire Town & City debunking the top ten myths of tax deeding. In this piece, we address five more common misconceptions about tax deeded properties and other municipal real estate that we have encountered representing New Hampshire municipalities as attorneys and auctioneers.
Myth 1: Municipalities can retain tax deeded properties indefinitely without fear of legal repercussions.
New Hampshire municipalities were once able to keep all proceeds generated from the sale of tax deeded properties that had been held for three years or more. In 2020, however, the New Hampshire Supreme Court held in Polonsky v. Town of Bedford, 173 N.H. 226 (2020) that this was unconstitutional, writing “when the municipality acquires property by tax deed that is worth more than the amount owed, the municipality is required to provide compensation to the former owner.” Three years later, the United States Supreme Court reached a similar conclusion in Tyler v. Hennepin County, 598 U.S. 631 (2023), holding in relevant part that the government could not “use the toehold of the tax debt to confiscate more property than was due.”
As a result of these decisions, municipalities are now entitled to keep only their back taxes, interest, cost, and penalty, and must return excess proceeds to the former owner(s) and lienholder(s) regardless of how long property has been under municipal ownership. Accordingly, municipalities must attempt to distribute excess value in tax deeded properties to the former owner(s) and lienholder(s) when selling or retaining such properties. (Note that this obligation probably also applies to properties taken before 2020 but remain municipally owned; supreme court civil decisions are generally presumed to have retroactive application.)
Considering the Polonsky and Tyler cases, municipalities should review their current tax deeded properties—including those held for fewer than three years—and determine whether they ought to be sold or converted into non-tax-deeded municipal real estate. For tax deeded properties the municipality intends to sell, the municipality can offer them via public auction, advertised sealed bid, or another statutorily approved method described in RSA 80:80 (such as hiring a real estate agent). For tax deeded properties the municipality intends to keep, the municipality should convert them into non-tax-deeded municipal properties upon vote of the town meeting or city council pursuant to RSA 80:80, V. Before conversion, the municipality should negotiate the conversion price with and obtain releases from the former owner(s) and lienholder(s) to protect itself from claims that the municipality did not provide sufficient compensation to these parties.
Myth 2: The process for selling tax deeded real estate and non-tax-deeded municipal real estate is identical.
The sale of tax deeded properties is governed by RSA 80:58 through RSA 80:91. At a high level, the municipality first approves selling tax deeded properties at town meeting or by ordinance. After such authorization, for each tax deeded property, the municipality sends various notices to the former owner(s) and other parties (such as mortgage lenders). Then, the municipality sells the properties by auction, advertised sealed bid, or other statutorily approved method pursuant to RSA 80:80. By contrast, sales of non-tax-deeded municipal real estate require different processes that depend on whether the municipality is a town or a city:
Towns: Sales of non-tax-deeded municipal real estate for towns is governed by RSA 41:14-a. As with tax deeded properties, the town first approves this method of sale by town meeting. For each proposed sale of municipal real estate, the governing body (such as the selectboard or town council) first solicits non-binding, advisory recommendations from (as applicable) the planning board, the conservation commission, the heritage commission, and the historic district commission. Once the governing body receives the above recommendations, it holds two public hearings on the proposed sale at least ten but not more than fourteen days apart. The governing body may then approve the sale no sooner than seven days nor later than fourteen days after the second
public hearing.
Cities: A city’s process for selling non-tax-deeded municipal real estate is comparatively straightforward. Pursuant to RSA 47:5, city councils have the power to approve and sell non-tax-deeded, city-owned real estate “whenever the interests or convenience of the city shall require it.”
Note that, if uncertainty exists about whether a certain parcel was acquired by tax deed or another method (which is not uncommon for properties acquired many years ago), a municipality should consider following the procedures of RSA 41:14-a or RSA 47:5 before proceeding with the sale to assure that it satisfies the applicable legal requirements.
Myth 3: All existing liens are extinguished when a property is taken by tax deed.
According to New Hampshire Supreme Court caselaw, a tax deed creates a “new and paramount title to the land in fee simple absolute” and “devest[s] . . . all other liens thereon or titles thereto.” See, e.g., Burke v. Pierro, 159 N.H. 504 (2009); First NH Bank v. Town of Windham, 138 N.H. 319 (1994). Viewed in isolation, this language suggests that all liens are extinguished when a property is taken by tax deed. There are, however, several notable exceptions to this rule:
- First, mortgages could survive a tax deed if the municipality failed to provide notice of an impending tax deed to mortgage lenders as required by RSA 80:89. According to the New Hampshire Supreme Court, such notice to mortgage lenders is necessary pursuant to principles of fundamental fairness and procedural due process. See, e.g., First NH Bank v. Town of Windham, 138 N.H. 319 (1994). Further, even though the statute of limitations for challenging tax deeds contained in RSA 80:39 ostensibly severs a mortgage lender’s recovery ten years after the tax deed was recorded, a mortgage lender could still mount a successful challenge even after this period has elapsed. Cf., e.g., J & N Fieldstone Supply, Inc. v. BHC Dev. Corp., 146 N.H. 500 (2001).
- Second, federal tax liens may survive a tax deed if notice was not provided to the IRS at least twenty-five days before the municipality took the property. See 26 U.S.C. §§ 6323, 7425. Even if such notice was provided, the IRS retains the ability to redeem the property for 120 days after the tax deed was recorded. See 26 U.S.C. § 7425.
- Third, certain other federal liens (such as HUD mortgages) cannot be extinguished by tax deed. According to recently enacted New Hampshire Bar
Association Title Examination Standard 9-46, such federal liens will not be terminated unless a “judicial sale” occurs. See also 28 U.S.C. § 2410; Show Me State Premium Homes, LLC v. McDonnell, 74 F.4th 911 (8th Cir. 2023). Because the tax deeding process is not overseen by a court, it is not considered a judicial sale. This means that these federal liens may survive a tax deed even though the municipality provided proper notice to federal lienholders in accordance with RSA Chapter 80.
If a municipality believes that it did not send appropriate notice to mortgage lenders before taking a property by tax deed, or if a tax deeded property appears to have one or more federal liens, it should contact municipal counsel to develop an appropriate strategy before proceeding with the property’s sale or conversion. Fortunately, however, simply because a possible surviving mortgage or other lien is discovered in connection with a tax deeded property does not mean that the property cannot be sold. For certain properties, liens could have expired by operation of law, or the lienholder might be willing to negotiate a discharge and release. Even if a lien on a tax deeded property likely would survive a transfer to a third party, the best option may be to disclose the issue and move forward with the sale—potential purchasers might be willing to assume the risk of negotiating a discharge and release after acquiring a tax deeded property, particularly if the lien amount is modest in relation to the property’s overall value.
Myth 4: If the certified letter notifying a property owner of an impending tax deed is undeliverable, the municipality is not required to perform additional actions before taking the property.
When a municipality sends a certified letter informing a property owner of an impending tax deed, the return receipt (also known as the “green card”) may come back unsigned or otherwise marked as undeliverable. When this occurs, the municipality should undertake additional reasonable efforts to contact the property owner.
In 2006, the United States Supreme Court held that although actual notice of an impending taking of real estate for non-payment of taxes is not required, the government must attempt “notice reasonably calculated, under all the circumstances, to apprise interested parties.” See Jones v. Flowers, 547 U.S. 220 (2006). This includes actions beyond what is mandated by state statutory law.
Consequently, when certified mail of an impending tax deed is unsigned or undeliverable, a municipality should also attempt to contact the property owner using some combination of the following methods:
- Sending a notice via first-class mail
- Mailing a notice that is addressed to “occupant”
- Posting a notice on the property of the impending tax deed
Conducting reasonable attempts to obtain the property owner’s current contact information (e.g., searching social media, running public records searches, and reaching out to the property owner’s known family members and acquaintances) - Providing notice by publication in one or more New Hampshire newspapers. (Note, however, that courts disfavor this method because few people regularly read published legal notices.)
Additionally, if a municipality suspects that the property owner has died, it should try to confirm whether the property owner is still alive, and, if the owner has passed away, the municipality should attempt to identify and contact relatives of the deceased by (among other possible methods):
- Reaching out to known family members and acquaintances of the property owner
- Conducting online obituary searches
- Searching social media
- Running public records searches
- Searching the registry of deeds for recorded death certificates of the property owner and related information
- Conducting probate record searches
A prudent municipality will contract with legal counsel or a title examiner to complete one or more of the above tasks. Note that the municipality can recover such legal expenses pursuant to RSA 80:88, RSA 80:89, and RSA 80:90, I(d)-(e).
Myth 5: Municipalities are not required to try to achieve market value when selling tax deeded properties themselves.
Many municipalities in New Hampshire continue to sell tax deeded real estate “in-house.” Due to the Polonsky and Tyler decisions described above, however, municipalities now have an obligation to the former owner(s) and lienholder(s) to attempt to achieve market value when selling tax deeded properties. Unless a municipality’s sale method and marketing strategies are sound, it could expose itself to claims from the former owner(s) and lienholder(s) that the municipality failed to generate adequate proceeds.
When selling tax deeded properties, the municipality’s first consideration should be its sale method. Although the municipality may sell properties several different ways pursuant to RSA 80:80, the two most common (and the only two that do not require a special justification by the governing body) are (1) advertised sealed bids and (2) public auctions.
In an advertised sealed bid sale, also known as a “blind auction,” interested purchasers submit confidential bids directly to the municipality. Typically, the municipality will accept the highest bid received. Unlike a public auction, the bidders submitting sealed bids have no knowledge of the other bidders’ identities or their bid amounts. This process may result in higher sale values than a public auction if one bidder overvalues the property or wants to ensure no one else purchases it.
If, however, two or more bidders have roughly equal valuations of a property, a public auction usually will result in higher sale values than an advertised sealed bid sale. In an auction setting, interested purchasers know who is bidding and the bid amounts. This transparency can lead to more robust values because, among other reasons, bidders have a better understanding of the true market for a property. In addition, the collegial yet exciting atmosphere of a public auction, and the competitive nature of open bidding, often leads to higher overall bids.
Regardless of whether a municipality chooses to sell its tax deeded properties by advertised sealed bid or public auction, the municipality must be diligent in marketing the sale. When a municipality fails to advertise widely, fewer bidders likely will participate, and the bids likely will be less competitive. This could expose the municipality to claims from the former owner(s) and lienholder(s) that the amount of excess proceeds generated was unreasonably low.
Therefore, when marketing a sale of tax deeded properties, municipalities should consider doing one of the following: 1. Hiring a third-party auction company or marketing firm that will comprehensively advertise the sealed bid sale or public auction on behalf of the municipality, or 2. Advertising the sale extensively by posting announcements on the municipality’s website and in municipal buildings as well as (a) sending notices to property abutters, (b) erecting signage on the properties, (c) purchasing ads in newspapers with local and statewide circulation, (d) uploading listings on real estate websites, (e) posting on social media, and (f) performing other marketing that will alert members of the community, prospective home buyers, and real estate investors. Note that, although these tasks probably will require substantial municipal staff time, advertising costs incurred are generally recoverable from the sale proceeds
pursuant to RSA 80:88 and RSA 80:90, I(e).
Summary
Disposing of tax deeded properties and surplus municipal real estate can be complex and time-consuming. Nevertheless, given the Polonsky and Tyler decisions, municipalities now have an obligation to sell or convert tax deeded properties and distribute any excess proceeds to the former owner(s) and
lienholder(s). Municipalities should also explore selling surplus non-tax-deeded municipal real estate to increase tax revenue and make available properties that could be developed for affordable housing and other beneficial purposes.
When undertaking any sale or conversion of municipal real estate, however, a municipality ought to engage legal counsel at the outset to confirm that it is adhering to the relevant laws and regulations. This will not only help safeguard the municipality from potential future litigation, but also will help ensure that any properties sold will close without issue.
Weston R. Sager and Richard D. 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. Weston may be reached at weston@sagersmith.com or weston@nhtaxdeedauctions.com, and Rick may be reached at rick@sagersmith.com or rick@nhtaxdeedauctions.com.
The information contained in this article is not intended as legal advice or as a legal opinion.