Failure to Timely Pay Texas Ad Valorem Taxes: Reminders for Taxpayers and Secured Lenders

The extended downturn in the oilfield economy is showing up in some taxpayers’ inability to pay their Texas real property and personal property ad valorem taxes when those taxes become due.  This note reminds taxpayers what happens when the ad valorem taxes are not timely paid.  It also reminds lenders with security interests in real and personal property to monitor their borrowers’ financial situations and any related developments in tax liens and tax sales in order to maximize the value of collateral.

The Texas Tax Code provides that a tax lien attaches to all taxable real property and personal property located in Texas on January 1 of each tax year for that tax year’s ad valorem taxes due the taxing jurisdiction.  The lien attaches automatically – the taxing jurisdiction need do nothing further to perfect the tax lien.  And here is the catch – the tax lien takes priority over the lien of a secured lender who perfected its lien when the loan was made, even though the loan was made and the security interest in the collateral was perfected well before the ad valorem taxes subject to the tax lien become due.

If the taxpayer who owns the taxable property fails to pay the ad valorem tax due within the period prescribed by Texas law, the tax due becomes delinquent.  Delinquent taxes incur penalties and interest, so the amount due the taxing jurisdiction quickly can increase.  If the delinquent taxes, penalties and interest are not paid, the taxing jurisdiction can institute a suit to collect the amounts due and foreclose upon the tax lien.  Under certain circumstances, taxing jurisdictions can have real property and personal property of the taxpayer seized under a tax warrant for the failure to timely pay the ad valorem taxes due.  Once a tax foreclosure or a seizure occurs, the taxing jurisdiction then can move to have that property sold at a tax sale for payment of the ad valorem taxes, penalties and interest due.

The Texas Tax Code sets out the procedures to be followed by the taxing jurisdiction in moving forward with the tax sale.  The Texas Tax Code also sets out how the proceeds of the tax sale are distributed, but because the tax lien takes priority over the lender’s security interest, the taxing jurisdiction is entitled to be paid the amount due out of the proceeds before a secured lender is paid anything.  And, in fact, if a purchaser knows the property to be sold at the tax sale has a lender’s lien on it, the purchaser will be inclined to limit the amount of its bid to the taxes, penalties and interest due.

Purchasers of property acquired at a tax sale in Texas take title subject to a right of redemption of the taxpayer whose property was sold.  The limited period during which the right of redemption must be exercised varies depending on the type and use of the property in question.  But the right of redemption belongs to the taxpayer whose property was sold – the lender with a security interest in the property sold at the tax sale does not have a right of redemption and cannot exercise the right on behalf of its borrower.  The lender’s security interest is not extinguished in the tax sale, but the lender may or may not have any business relationship with the purchaser of the property sold at the tax sale and thus may have limited control over the use to which the purchased property is put and how that property is maintained.

Taxpayers need to remember that they have a limited period of time in which to exercise their right of redemption for property sold at a tax sale, assuming that they can raise the amounts necessary to redeem.  Lenders with secured interests in property need to monitor closely the financial condition of each of their borrowers, including ensuring that their ad valorem tax payments are timely made.  Most importantly, lenders need to understand that if a borrower’s ad valorem tax payments are not timely made, the tax jurisdiction may move to effect a tax sale of their borrower’s collateral.  Depending on the nature of the collateral, lenders may consider whether they can stop the tax sale by assisting their borrower in making the payment of ad valorem tax amounts due.  Lenders also may consider whether they should bid at the tax sale in order to acquire the collateral and preserve its value through the lender’s subsequent foreclosure sale to a credible purchaser.  Alternatively, lenders may consider working with the borrower to have the borrower exercise its right of redemption, and then foreclose on the collateral.  Following either of these approaches may aid the lender in maximizing the value of the collateral and enhancing the lender’s chances on full repayment of the loan.