Always Do a Title Search!
A property purchased at a courthouse auction has an $18,000 judgment lien encumbrance. Presumably the purchaser is responsible for it.
Before buying a property at a foreclosure auction, it is best to do a title search to be aware of the liens and obligations to which the property may be subject. The best way is to pay a title company or real estate attorney to search the property chain of title, but hands-on buyers can search the county recorder’s office file themselves.
At mortgage foreclosure sales, trustees exercise authority under deeds of trust to sell homes after homeowners default on their mortgage agreements. The homeowners secured their mortgage obligations to their lenders with deeds of trust recorded at county recorder’s offices.
Sometimes such deeds are not the only liens, which are essentially notices of debts, secured by properties. Second and third mortgages, home improvement or equity loans, and lines of credit are examples of others.
Liens operate by priority, seniority, or superiority based generally on the order of their recordation. When a first mortgage holder forecloses, purchase and sale of the property extinguishes the trust deed and, with some exceptions, all junior liens recorded after it so long as the junior lienholders have notice of the sale and therefore an opportunity to bid on the price.
Purchasers of properties at foreclosure auctions should examine the chain of title for any liens senior or superior to that to be foreclosed. A mortgage lien recorded before the one defaulted and foreclosed would not be extinguished by the auction purchase and sale, and the purchaser would become responsible for it.
Other liens can be not necessarily senior may be superior to that on the first mortgage trust deed. In many states, any overdue property taxes are liens with automatic priority over all others and become obligations of property purchasers at foreclosure sales.
Moreover, judgment liens, unpaid homeowner association or condominium assessments, liens for city or county services, and even mechanic’s liens by unpaid contractors who started on their jobs prior to the mortgage lien’s recordation all could survive the foreclosure sale and become the new purchaser’s responsibility. On the other hand, a lien from a home equity loan recorded after the foreclosed mortgage would not be an obligation for the purchaser, and that lender’s sole recourse would be against the personal assets of the previous owner.
Internal Revenue Service (IRS) tax liens are always most senior for 120 days following the foreclosure auction. Leases, subordination agreements, and easements may survive foreclosure sales by their particular terms and provisions.
With these general guidelines, application of governing Florida law indicates which property liens can survive foreclosures and remain in force against property purchasers in that state.
Mortgage and Lien Foreclosures
Foreclosures are consequences of unpaid debts secured by liens or mortgages. Either way, there must a judgment in favor of the foreclosure plaintiff for an auction by judicial sale to occur. Unpaid debts cause creditors to record claims of lien official county land records. Unpaid contractors, service providers, government agencies, homeowner and condominium associations all may place liens against properties. The most common Florida lienholders are state and county governments, homeowner associations and condominiums, and contractors.
If the debtor is a mortgagor in default, the foreclosure plaintiff files a civil action against the debtor. Banks are not the only mortgagees. Government-supported (Fannie, Freddie, HUD, VA) and private mortgage holders foreclose as well. On the 10th day following a foreclosure auction with no objection to the sale, the certificate of title or sale issues to the successful bidder. If there are no bids in excess of the foreclosure amount, the certificate of title issues to the foreclosing mortgagee or lienholder.
Purchasers at foreclosure auctions of properties encumbered by government liens are responsible for the indebtedness. With the certificate of title recorded and parties of interest notified, property purchasers are on the hook of liability. The county as lienholder may attach liens to other properties they own. Ordinarily, purchasers must settle all liens before title insurers will issue coverage for their property purchases.
Liens and judgments issued by governing entities with authority to levy against property survive foreclosure and are superior to certificates of title. If the foreclosing entity is not the lienholder, the property purchaser will be responsible. Example: Foreclosure on a county code enforcement lien extinguishes it. Foreclosure on a mortgage has no effect on a code enforcement lien; the lien survives. By foreclosing on a lien or mortgage, the lienholder or mortgagee acquires ownership of property and pays off the lien or mortgage in the same transaction.
Tax liens have priority over all other property mortgages or liens even when later in time. For unpaid taxes, the government can have property sold to pay them from the sale proceeds. Taxpayers who fail to pay federal taxes in arrears after receiving notices from the IRS may find liens on their properties. Many creditor lienholders wait to collect until the debtors sell or refinance their properties. The IRS, however, is not fond of waiting and may force sales when arrearages are substantial.
If property owners owe child support or alimony, recipients may record liens that remain until the debtors pay the support owed, until they sell or refinance their properties, or until recipients foreclose on their liens and force sales.
Contractors who work on properties or furnish construction materials can record construction or mechanic’s liens in Florida within 90 days (See The Florida Statutes 2015 Chapter 713.08 (FS 713.08)) after completion of their services. They then must sue for enforcement of the lien within one year.
Infrequent superior liens are by the Internal Revenue Service for unpaid federal taxes and by the Environmental Protection Agency for Superfund remediation costs for contaminated sites. More frequent are liens placed by state, county, and local governments for child support collections, unpaid fines for building code violations and special assessments, and by utilities for unpaid usage charges. Government lienholders have highest priority. As to other lienholders, the general rule is that the first in time is the first in right. Property interests recorded before later recorded interests have seniority and superiority over them.
Lien priority is important because in foreclosures the lienholder with highest priority gets paid first from the foreclosure sale proceeds. Only after that lien is paid off does the lienholder with next highest priority by seniority or superiority receive anything from the proceeds, and so on down the order of priority. If there isn’t enough money from the sale to pay off every lienholder, juniors with least priority must do without. They may be able to sue for deficiency judgments under Florida law (FS 713.08) or try to collect their debts by other available legal means, but they get nothing from the foreclosure sale, where their liens on the property sold become worthless.
Any mortgage recorded after the mortgage foreclosed is inferior. Any mortgage recorded before the mortgage foreclosed is superior. In any foreclosure, the purchaser is responsible for superior liens. The county allocates any auction overage or surplus to superior liens in order of priority. Purchase of a foreclosed property on which the foreclosing entity holds the first mortgage strikes all subsequent mortgages as inferior.
A foreclosure by a lienholder differs in order of priority from a foreclosure by a mortgagee. In foreclosures by lienholders, all mortgages are superior. The most common lien foreclosures are by homeowner or condominium associations and counties for taxes and code enforcements
When there is no mortgage nor lien apart from that of the foreclosing entity, the property still may not be debt-free. There may be current year obligations unmet, taxes and association dues as examples.
Foreclosure Sale Issues
In customary real estate transactions, willing buyers and sellers negotiate agreements providing for termination of their contracts if property inspection or title search results are unsatisfactory. At foreclosure sales, the highest bids create binding contracts on the terms of the notice of sale regardless of property or title condition. The high bidder cannot repudiate the contract. If the high bidder refuses to proceed on it, the foreclosure trustee may seek recovery of all damages due to the bidder’s default. Before making a bid that might create a binding contract, a prudent bidder ponders potential pitfalls.
Foreclosure sales may raise enough money to pay off some but not all liens against properties, nor may they remedy other title defects. Property at foreclosure sales is always subject to encumbrance; else there would be no foreclosure. Foreclosure on a second deed of trust leaves title to the property subject to the first. If a property owner defaults on a mortgage, there may be defaults on other obligations with consequent judgment liens with priority over the deed of trust foreclosed. And even if the foreclosed deed of trust preceded other liens in time, they may survive the foreclosure if of superior priority.
The holder of the deed of trust foreclosed may not have done a careful title search, and the title may have a serious defect unaffected by the foreclosure. Finally, the foreclosed property is subject to unpaid taxes, so any title search should review property tax records in detail. Before bidding, therefore, a prudent prospective purchase bidder examines title to the property for liens and encumbrances that may survive the foreclosure.
Foreclosure sales must comply strictly with procedures under Florida law. If they do not, the successful bidder may run into litigation with the former property owner or with a lienholder claiming its lien was unaffected by the foreclosure because the trustee failed to comply with required notice procedures. Any title examination, therefore, should investigate compliance with complicated statutory procedures. Cautious bidders should monitor trustee conduct for strict compliance.
Beyond title status and apparent property condition, prudent bidders consider and investigate for the presence of environmental concerns. The law generally spares innocent owners from remedial liability for hazardous waste so long as they make all appropriate inquiries as to possible contamination prior to purchase. Review of public records and an on-site examination by a qualified environmental inspector are required. Without these precautionary measures, property foreclosure sale purchasers may find themselves liable for hazardous waste contamination remediation costs.
Tax Certificates and Deeds
County tax collectors hold tax deed auctions to raise money to pay off liens for overdue property taxes. Such auctions sell tax certificates (FS 197.432) to successful bidders. A tax certificate is a property lien which, if not paid off within two years, entitles its purchaser or holder to apply for a tax deed sale at a public auction of the property. A certificate holder applying for a tax deed must pay the tax collector all amounts necessary to redeem or purchase all other outstanding tax certificates and all outstanding, unpaid taxes (FS 197.502).
Tax deed sale proceeds pay off the tax lien certificate holder. Remaining lienholders or the former property owner may apply for any excess funds.
All lienholders and mortgagees must have notice of tax deed sales. The circuit court must notify them by certified mail if listed in the statement of the tax collector reporting to the court the application for a tax deed (FS 197.502(4)). Failure to comply with this notification mandate may violate due process and expose tax deed sales to challenges from those not notified. The Supreme Court of the United States has ruled that “when mailed notice of a tax sale is returned unclaimed, the State must take additional reasonable steps to attempt to provide notice to the property owner before selling his property, if it is practicable to do so (Jones v Flowers, 547 US 220, 225 (2006)).”
Tax deed sales extinguish all liens except those that run with the land or those held by municipalities or counties (FS 197.552). In Florida a current controversy continues over whether unpaid condominium and homeowner association assessments survive tax deed sales when no lien is yet on file. Associations argue that current and former property owners should be jointly and severally liable for all assessments; however, the statute governing tax deed sales states that only governmental liens survive tax deed sales, so current case law is that they cannot and that tax deed sale purchasers are not liable to homeowner or condominium associations for assessments. There is an important distinction, however, between property purchases at tax deed sales and at foreclosure sales on mortgages and other types of liens, where purchasers may be liable for such unpaid and overdue assessments.
Quiet Title Actions
Purchasers at tax deed sales commonly file actions to quiet title to eliminate all claims that might impede purchase of title insurance. Quiet title actions can resolve ownership disputes where who owns the property is unclear because of errors in recording or executing deeds.
Quiet-title actions clarify real property title issues. All parties with actual or potential interests in the real property have an opportunity assert them. If there be any such assertions, the court must examine conflicting claims, determine the rights of the parties, and enter a judgment accordingly. Title is not sufficiently clear until all liens are satisfied, the quiet title action is complete, and an underwriter is satisfied that all interested parties had an notice and an opportunity to be heard in the quiet title action.
Homeowner/Condominium Association Liens
Purchasers of properties on which homeowner associations later place liens are responsible for them. Any homeowner association lien recorded prior to the purchase becomes stricken by issuance of the certificate of title, but any later liens following the purchase are enforceable. Tax liens are always enforceable.
When homeowners fail to pay homeowner association assessments, do the associations have liens superior to the homeowner mortgages? For mortgages recorded since July 2008, the lien relates back to the filing date of the association governing declaration (FS 720.3085(1)), but “for a claim of lien recorded pursuant to a declaration of covenants to have priority over an intervening recorded mortgage, the declaration must contain specific language indicating that the lien relates back to the date of the filing of the declaration or that it otherwise takes priority over intervening mortgages (Holly Lake Association, Inc v Federal National Mortgage Association, 660 So2d 266, 269 (FL 1995)).”
Lenders should name homeowner associations as defendants in mortgage foreclosure actions to obtain the limitation on first mortgagee liability (FS 720.3085(2)(c)). This measure limits association ability to pursue assessments accruing prior to foreclosure. The association may recover from the mortgagee only the lesser of (1) assessments for the 12 months immediately preceding the mortgagee’s acquisition of title or (2) one percent of the original mortgage debt (FS 720.3085(2)(c)).
Homeowner and condominium associations should record liens against member homeowners to put third parties on notice of them. Associations also might amend their governing declarations to provide for collection of assessments that accrue before first mortgagees acquire titles to units.
Association liens do not survive but are extinguished by mortgage foreclosures, assuming procedures properly followed by foreclosing lenders. However, FS 720.3085 provides for joint and several homeowner liability for all unpaid assessments due before transfer of title to the property. Although the association no longer has a lien on the property, the new homeowner becomes liable with the previous owner for any assessments unpaid. The association may place a new lien against the property to collect them.
As to whether mortgages survive foreclosures on association liens, foreclosures typically extinguish liens junior to that enforced, but mortgage liens are superior to association liens and thus would survive the sale. Purchasers would not be liable personally for the debts secured by the mortgages, but the lenders still could enforce their liens.
Are purchasers from foreclosing associations liable for unpaid assessments of a prior owner? Yes, but the extent of purchaser liability differs between homeowner and condominium associations. As to the former, purchaser liability is limited to unpaid assessments accruing before the association acquires title to the delinquent property. Purchasers from condominium associations are jointly and severally liable with previous unit owners for all overdue assessments, even those that accrue while the association owns the unit.
Is a purchaser at a Tax Deed sale liable for past due assessments overdue to an association? No, “liens for unpaid homeowners assessments do not survive the issuance of a tax deed and are extinguished. [FS] 720.3085(2)(b) does not save such liens from extinguishment when parcel owners acquire title by tax deed. Instead, parcel owners who acquire title by transfer, rather than by tax deed, remain liable for unpaid assessments (Cricket Properties, LLC v Nassau Pointe at Heritage Isles Homeowners Association, Inc, 124 So3d 302, 307 (FL DCA2 2013)).”
However, covenants and restrictions in the association governing declaration do survive. This area of the law may change as banking and community association lobbies propose changes to the statutes governing homeowner and condominium associations.
Code Enforcement Liens
Another lien common in Florida foreclosures is for code enforcement. Code violations often occur with lender foreclosures by abandonment of the property or by tenant neglect while the property is in foreclosure.
When confronted with a code enforcement lien, look first for the recordation date of the lien notice in the foreclosure suit. This notice protects the lender’s property interest from impairment by intervening liens. The notice also bars enforcement of liens against the property (FS 48.23) pending disposition of the foreclosure action.
Code enforcement liens are statutory (FS 162). On a code violation finding, the code enforcement board or the special magistrate allows the respondent time to correct the violation. If the respondent does not, the board or special magistrate may enter an order of violation and daily fines until the respondent does. Such fines become liens against the real property on which the violations occurred.
Another Florida controversy over lien priorities has been whether municipal ordinances may confer superior status to code enforcement liens over prior recorded mortgages. Some local governments persisted in claiming authority to enact ordinances granting super priority status to code enforcement liens until the Florida Supreme Court ruled that municipalities have no “authority to enact an ordinance providing code enforcement liens superior priority over prior recorded mortgages . . . the ordinance irreconcilably conflicts with the mechanical recording statute provided in [FS] 162.09, [and] that the Florida Legislature has expressed a scheme so pervasive as to evidence an intent to preempt the particular area (City of Palm Bay v Wells Fargo Bank, NA, 114 So3d 924, 929 (2013)).”
As the court pointed out, no law expressly authorizes municipalities to establish priority for such liens. For this reason, code enforcement liens cannot be granted priority over recorded mortgages. By elevating code liens to the rank of state and local government taxes superior to all other liens, the ordinance went beyond municipal home rule powers, but county and municipal government laws may not conflict with state law.
The Indispensable Title Search
The admonition that “Before buying a property at a foreclosure auction, it is best to do a title search to be aware of the liens and obligations to which the property may be subject” bears repetition. Title searches do the groundwork for title insurance, which protects property purchasers from even the most obscure, unanticipated, unimaginable claims against ownership.