Foreclosures Resulting from Ad Valorem Taxation
A tax is a state or federally mandated imposition created and imposed to pay for governmental activities. One such tax is a property tax, which is assessed and imposed based on the value of the property being taxed. As such, it is called “ad valorem,” which means “according to value.” There are generally two types of property that are taxed in Texas: real property (land, improvements, mines, minerals, and timber) and personal property (everything else that isn’t real property). Tex. Tax Code § 1.04(2), (4).
This chapter generally addresses the processes of the assessment and imposition of the tax upon the nonexempt property owned by a person within the state of Texas. (See Texas Property Code chapters 41 and 42 and Texas Tax Code chapter 11 for information on exempt property and the administration of exemptions.) More importantly, it addresses the process of foreclosure by local taxing units in the event that the subject taxes (and other accrued amounts) are not timely paid by the property owner.
§ 24.2Bifurcated System of Taxation: Appraisal Districts and Administrative Process
For the practitioner in Texas, it is important to note that the process of taxation begins with the local appraisal district. The taxing units do not come into play until the administrative process undertaken by the appraisal district is substantially completed in late July of each year.
In most appraisal districts, property appraisal, recordkeeping, and maintenance of property tax maps occur year round. The process of gathering this information is ongoing. Doing so provides the local appraisal district with the information that it vitally needs to perform its function each year. As such, the chief appraiser and the staff will undertake their responsibility of appraising all taxable property according to its value on January 1 of the tax year. Tex. Tax Code § 23.01.
Between January 1 and April 1, property owners are required to file property renditions when necessary. See Tex. Tax Code §§ 22.01, 22.22–.27. Taxpayers turn in applications for exemptions and requests for special appraisal during the same general period from January 1 through May 1.
While this process is going on, the local appraisal office is also reviewing its records and other information from local city records, deed records, building construction records, business start-up records, and the like to add all new property to the tax roll and appraise the value of such property based on the determination of its value. See Tex. Tax Code §§ 25.01–.02.
Throughout this phase, the chief appraiser grants or denies exemptions and special use applications. See Tex. Tax Code § 25.25.
§ 24.2:2Notice of Appraised Value and Protests
It is also during this evaluation phase that the chief appraiser must notify taxpayers of any changes in their records and send a notice of appraised value. Tex. Tax Code § 25.19. Notices are to be sent to the property owner or the owner’s agent “according to the most recent record [of the address] in the possession of the official,” unless the owner or agent has filed a written request that notice be sent to a particular address. Tex. Tax Code § 1.07(b). Notices may be in electronic form if agreed to in advance. Tex. Tax Code §§ 1.07, 1.085.
On May 15, or as soon afterward as possible, the chief appraiser presents the appraisal records to the appraisal review board (ARB). During June and July, the ARB reviews the appraisal records and hears challenges to the records. Tex. Tax Code § 41.44. The ARB submits the challenges to the chief appraiser by written order and notifies the property owner of the determination made relative to his property. Tex. Tax Code § 41.11. If the property owner disagrees with the determination, he must file a written notice of protest. The protest must be filed:
(1)not later than May 15 or the 30th day after the date that notice to the property owner was delivered to the property owner as provided by Tax Code Section 25.19, whichever is later;
(2)in the case of a protest of a change in the appraisal records ordered as provided by Subchapter A of Tax Code Chapter 41 or by Tax Code Chapter 25, not later than the 30th day after the date notice of the change is delivered to the property owner;
(3)in the case of a determination that a change in the use of land appraised under Subchapter C, D, E, or H, Tax Code Chapter 23, has occurred, not later than the 30th day after the date the notice of the determination is delivered to the property owner; or
(4)in the case of a determination of eligibility for a refund under Tax Code Section 23.1243, not later than the 30th day after the date the notice of the determination is delivered to the property owner.
A person who acquires property after January 1 and before the deadline for filing notice of the protest may pursue a protest under section 41.44 in the same manner as a property owner who owned the property on January 1. Tex. Tax Code § 41.412(a). If during the pendency of a protest the ownership of the property subject to the protest changes, the new owner of the property on application to the ARB may proceed with the protest in the same manner as the property owner who initiated the protest. Tex. Tax Code § 41.412(b).
§ 24.2:3Rights of Lessee to Protest
A person leasing real or tangible personal property who is contractually obligated to reimburse the property owner for taxes imposed on the property is entitled to protest before the ARB a determination of the appraised value of the property if the property owner does not file a protest relating to the property. Tex. Tax Code § 41.413(a), (b). That is, the protest is limited to a single protest by either the property owner or the lessee. Tex. Tax Code § 41.413(b). The lessee is considered the owner of the property for purposes of the protest. Tex. Tax Code § 41.413(c). One of the actual owners is statutorily required to send the lessee a copy of any notice of the property’s reappraisal received by the property owner, but the failure of the owner to send a copy of the notice to the person leasing the property does not affect the time within which the person leasing the property may protest the appraised value. Tex. Tax Code § 41.413(d).
§ 24.2:4Failure to Give Notice of Protest
The notice of protest is essential to the property owner for many reasons. First, it is the initial legal opportunity for the property owner to challenge and have a hearing on the validity of the chief appraiser’s determination. Second, the notice of protest provides the property owner with an administrative forum in which he can present evidence and be heard before an independent administrative body, the ARB. See Tex. Tax Code §§ 41.04–.07. This right is absolute and provided for by law. Tex. Tax Code § 41.41. The Tax Code identifies nine specific items that the property owner can protest before the ARB. See Tex. Tax Code § 41.41(a)(1)–(9).
The failure of a taxpayer to exhaust this administrative remedy may be fatal to the taxpayer’s cause when a taxing unit subsequently files a lawsuit to collect a tax which the taxpayer believes is excessive. The Tax Code strictly outlines the administrative processes that must be undertaken by a taxpayer to protest the items listed in section 41.41(a). When these are not followed, the taxpayer loses the right to challenge a lawsuit subsequently brought by a taxing unit. See Tex. Tax Code § 42.09.
The Texas Supreme Court and the various courts of appeal have uniformly held that the administrative remedies outlined in chapter 41 of the Texas Tax Code are exclusive and that a property owner who fails to exercise such remedies cannot subsequently challenge those particular matters. See Starflight 50, L.L.C. v. Harris County Appraisal District, 287 S.W.3d 741 (Tex. App.—Houston [1st Dist] 2009, no pet.); Public, Inc. v. County of Galveston, 264 S.W.3d 338 (Tex. App.—Houston [14th Dist.] 2008, no pet.); Valero Transmission Co. v. Hays Consolidated Independent School District, 704 S.W.2d 857 (Tex. App.—Austin 1985, writ ref’d n.r.e.). Furthermore, failure to comply with the Code’s requirements deprives a district court (in either a case against the appraisal district or in a suit brought by a taxing unit) of jurisdiction to consider any of the arguments or challenges. KM Timbercreek, LLC v. Harris County Appraisal District, 312 S.W.3d 722 (Tex. App.—Houston [1st Dist.] 2009, no pet.).
In the event the taxpayer timely files a notice of protest and participates in the administrative process and still disagrees with the finding of the ARB, he has an additional right under the Tax Code. The property owner can file an appeal to a district court. See Tex. Tax Code § 42.01. The petition for review must be filed with the district court within sixty days after the party receives notice that a final order has been entered from which an appeal may be had or at any time after the hearing but before the sixty-day deadline. Tex. Tax Code § 42.21. Failure to timely file a petition bars any appeal under the applicable chapter. Tex. Tax Code § 42.21. Equally important to the filing of any appeal is the mandatory requirement that the taxpayer pay the taxes that become due before the delinquency date in an amount equal to the lesser of (1) the amount of taxes due on the portion of the taxable value of the property that is not in dispute or (2) the amount of taxes due on the property under the order from which the appeal is taken. Tex. Tax Code § 42.08(b). While not all district courts in Texas enforce this prepayment, the practitioner should be mindful that the Tax Code makes such payment mandatory and a precursor to jurisdiction.
§ 24.3Equalization and Assessment Phases
During June and July, the ARB usually reviews the appraisal records and hears taxing unit challenges to the appraisal roll. Most protests must be filed by June 1. See Tex. Tax Code § 41.44. By July 20, the ARB finishes its hearings and approves appraisal records, thus making them the official appraisal roll. However if more than 5 percent of the total appraised value remains under protest, the ARB may not approve the roll. During this period of time, additional processes are undertaken to provide the taxing units with the appraisal roll which reflects all of the properties subject to taxation.
§ 24.4Taxing Units: Tax Bills and Delinquency Dates
§ 24.4:1Certification of Tax Roll
By July 25, the chief appraiser prepares and certifies to the assessor for each taxing unit its respective certified tax roll. The certified tax roll is then presented to the governing body for each taxing unit within the appraisal district’s jurisdiction. Tex. Tax Code § 26.01. The information contained in the tax roll assists the taxing unit in setting its budget and adopting its tax rate based on its determination of anticipated values and revenue generated therefrom. The assessor for the taxing unit then calculates the effective tax rate and roll back tax rate as soon as he receives the tax roll. Thereafter, the taxing unit publishes those rates along with other financial information required by the Tax Code. Tax rates must be adopted by September 30 or sixty days after receipt of the certified tax roll. Tex. Tax Code § 26.05. Otherwise, the rate is based on the lower of the effective tax rate or the rate from the previous year.
Soon after the governing body adopts its budget based on the latest appraisal information, the governing body adopts a tax rate to generate enough revenue to fund that budget. The assessor then calculates the tax liabilities for each property by multiplying the taxable value times the adopted tax rate. This generates a tax levy and the tax assessor then mails notices to taxpayers in October of the adopting year. See Tex. Tax Code § 31.01.
§ 24.4:3Tax Payment and Delinquency Dates
Taxes are due upon receipt of the tax bill and become delinquent if not paid before February 1 of the following year. Tex. Tax Code § 31.02(a). To be deductible for federal income tax purposes, the taxes should be paid on or before December 31, even though they are not delinquent pursuant to state law until February 1.
Once the taxes become delinquent on February 1, penalties and interest begin to accrue as outlined in chapter 33 of the Tax Code. Tex. Tax Code § 33.01. A delinquent tax incurs a penalty of 6 percent of the amount of the tax for the first calendar month it is delinquent plus one percent for each additional month or portion of the month it remains unpaid before July 1 of the year in which it becomes delinquent. For the practitioner and taxpayer, July 1 is an important date for two specific reasons: First, on July 1 an additional penalty “to defray costs of collection” is added to the delinquent account if the taxing unit has contracted with an attorney for collection. Tex. Tax Code § 33.07(a). A tax lien attaches to the property to secure the payment of this penalty. Tex. Tax Code § 33.07(b). Second, if the collection penalty is added, the attorney may not recover any additional attorney’s fee. Tex. Tax Code § 33.07(c).
§ 24.4:4Limited Ability to Waive Statutory Penalties and Interest
The ability to challenge, dispute, or negotiate the accrual of any of the statutory penalties or interest is extremely limited. As a general proposition, the Texas Constitution article III, section 55, forbids the legislature from releasing or extinguishing all or part of any person’s indebtedness, liability, or obligation to the state, a county, political subdivision, or municipal corporation. Article III, section 55, has been construed to forbid any county, political subdivision, or municipal corporation from likewise releasing or extinguishing an indebtedness or liability without constitutional authority. Corpus Christi People’s Baptist Church, Inc. v. Nueces County Appraisal District, 904 S.W.2d 621 (Tex. 1995); Tex. Att’y Gen. Op. No. GA-0134 (2004); Tex. Att’y Gen. LO-96-099 (1996). For these reasons, both the practitioner and the taxing unit will be limited in their efforts to negotiate or compromise the amounts due and owing as reflected in the records of the respective taxing unit.
There is a limited exception for the waiver of penalties and interest outlined in section 33.011 of the Tax Code. If an act or omission caused by the taxing unit prevented the taxpayer from timely paying the tax before the delinquency date, a basis for the request may exist. See Tex. Tax Code § 33.011. However, the request must be made within the time constraints outlined, and the taxes must be paid within twenty-one days after the date the taxpayer knows or should have known about the delinquency. Tex. Tax Code § 33.011(a)(1). For most taxpayers who have a legitimate error on which they could rely, they most often lose that right by not tendering payment timely. If such a payment is tendered, it should be made with a notation of “made under protest with reservation of rights” so that it is not legally construed as a voluntary payment.
§ 24.5Lawsuit Process to Collect Delinquent Ad Valorem Taxes
At any time after its tax on property becomes delinquent, a taxing unit may file suit to foreclose the lien securing the payment of the tax, to enforce personal liability for the tax, or both. The suit must be filed in a court of competent jurisdiction for the county in which the tax is imposed. Tex. Tax Code § 33.41(a). The tax lawsuit takes precedence over all other suits pending in appellate courts. Tex. Tax Code § 33.41(b). Other liens owed by the taxpayer in favor of the taxing unit may be added to the lawsuit, such as weed and paving liens. See Tex. Tax Code § 33.41(c). Under limited circumstances, injunctive relief is available to the taxing units. See Tex. Tax Code § 33.41(d).
The petition that is generally filed by taxing units throughout the state is fairly generic and straightforward. See form 24-1 in this manual. The Tax Code mandates only general terms and allegations to be contained in the petition. The property that is the subject of the tax and the amount due and owing as of the date of filing is usually identified by attaching a copy of the tax bill or similar document. See Tex. Tax Code § 33.43(a)(1)–(11). Occasionally the taxpayer’s attorney will seek to object to the petition or seek more specifics, which are generally never granted because the Tax Code does not require it. For example, in one case the court held that a general property description of “FURN FIXT EQPT” (abbreviation for furniture, fixtures, and equipment) read in conjunction with a very broad all inclusive description in the petition was in substantial conformity of the requirements of the Code. Castillo v. State, 733 S.W.2d 560, 562 (Tex. App.—San Antonio 1987, no writ).
All persons having an ownership interest, lien interest, or any equitable interest should be added as a necessary party. While most practitioners understand the inclusion of a lienholder who filed a mechanic’s lien against the property, most cannot fathom why a distant heir who has no interest in the property is often added. However, if during its due diligence the taxing unit or its attorney identifies a person or party through a public filing, such as a probate record or affidavit of heirship, that person will often be added as a party.
The taxing unit that filed the suit must also join other taxing units that have claims for delinquent taxes against all or part of the same property. Tex. Tax Code § 33.44(a). While this is statutorily required, it does not always occur. As such, special attention should be noted when advising a prospective client about whether payment of the amounts due to the taxing unit filing the suit constitutes full payment of all taxes due and owing. In many instances, the remaining taxing units may not have been added as of the time a payment to satisfy the lawsuit is proffered.
Practice Tip: If a practitioner has a client who has not owned the property (i.e., not in the direct deed conveyances) and the client has no interest in the property at all, it is recommended that he offer a disclaimer of interest to the taxing unit’s lawyer and request a dismissal of his respective client. See form 24-2 in this manual.
“A party to the suit must take notice of and plead and answer to all claims and pleadings filed by other parties that have been joined or have intervened, and each citation must so state.” Tex. Tax Code § 33.45.
A recent addition to the ad valorem tax landscape is a growing industry of lenders commonly known as tax lien transferees. These lenders make loans to taxpayers so that their respective tax lien to the taxing unit is satisfied and, in turn, take a transfer of the tax lien (with the owner’s authorization) unto itself. As such, the tax lien itself is not extinguished and simply transferred. Under the applicable provisions of the Tax Code, the tax lien transferee retains a lien of equal standing with all future tax liens that may accrue and become due.
If the taxing unit files the suit, it must add the tax lien transferee as a party to the lawsuit. Tex. Tax Code § 33.445(a). The tax lender can then join the foreclosure suit and have a lien of equal standing that seeks recovery of the amounts due and owing under its legal documents as permitted by law. Alternatively, the lender may pay all the taxes, penalties, interest, court costs, and attorney’s fees owing to the taxing unit that filed the foreclosure suit and each other taxing unit joined, and take control of the litigation in the manner it deems most appropriate to protect its respective interest. See Tex. Tax Code § 33.445(a).
Practice Tip: The practitioner should closely scrutinize the loan documents, tax lien transfers, payment history, and all related documents to ascertain that the charges, fees, and assessments made by the tax lender are both (1) permitted by the Texas Tax Code and the Texas Finance Code and (2) permitted by the underlying legal documents, themselves. Often the charges, fees, and assessments are considered standard but differ under the terms of the documents.
The tax lending industry has come under recent attack for some of its practices from both business and private interests. In 2013, the Texas legislature passed legislation to curb certain deceptive practices and place significant restrictions on tax lenders. See Acts 2013, 83d Leg., R.S. ch. 206, § 1 (S.B. 247), eff. Sept. 1, 2013.
§ 24.6Judgment by Taxing Units and Orders of Sale
The typical tax lawsuit goes to trial in an uncontested manner. The taxing units generally appear and present their case in chief based upon certified tax records as permitted by the Tax Code. See Tex. Tax Code § 33.47(a). These records, once introduced and admitted, constitute prima facie evidence that each person charged with a duty relating to the imposition of the tax has complied with all requirements of law and that the amount of tax alleged to be delinquent against the property and the amount of penalties and interest due on the tax as listed are the correct amounts. Tex. Tax Code § 33.47(a).
If the records of the tax office are insufficient to describe the property, the records of the appraisal office are admissible to identify the property. Tex. Tax Code § 33.47(b).
In addition to recovering the outstanding taxes, penalties, interest, and fees that are due and owing, the taxing unit is entitled to plead for and recover an array of costs and expenses incurred in prosecuting the lawsuit. See Tex. Tax Code § 33.48(a). Note, however, that section 33.48(a)(5) (recovery of attorney’s fees in the amount of 15 percent) applies only to taxes that have become delinquent in the most current tax year (after February 1) but not yet reached July 1 (the date the automatic penalty applies). Stated simply, if July 1 has not occurred for the current delinquent year and the automatic penalty permitted under section 33.07 has not attached, the taxing unit can recover 15 percent in attorney’s fees for that year; if July 1 has passed and the section 3.07 penalty has attached, then the 15 percent cannot be recovered.
After all the evidence is presented to the court by both the taxing unit and the taxpayer, the court should enter a judgment that forecloses the tax lien, permits the foreclosure of the property, and imposes personal liability against each person or entity that owned the property on January 1 of the year for which the tax was imposed. As to any party who was added as a party but was not an owner of the property, the judgment should be taken in rem as to that party. See form 24-3 in this manual.
Practice Tip: The practitioner should weigh the benefits of having his client named as an in rem party. Many attorneys will request a dismissal of their client rather than have them named in a judgment, even if the judgment is for nominal purposes. Over the years, many title companies have asked for written clarification of the scope of the judgment relative to an in rem party. This could be avoided, and probably should be considered, by simply filing a disclaimer of interest and seeking a dismissal. Remember that unless a party owned the property on January 1 of a given year, he has no personal liability for the payment of taxes and costs.
If the practitioner represents a creditor or lienholder who has an unpaid obligation that was filed against the property, that obligation may or may not be paid from excess proceeds that may exist following the sale of the subject property. Although the Tax Code does not require a person to be a party in order to file a petition for excess proceeds (see Tex. Tax Code § 34.04), being a party will ensure receipt of notices of the date of sale, deposit of proceeds, and notices by the district clerk.
After the judgment becomes final, the taxing unit will request an order of sale from the clerk of the court. See Tex. Tax Code § 33.53(b). The order is directed to an officer authorized to conduct the sale, usually the sheriff or constable of the county. If more than one parcel of property is included in the judgment, the taxing unit may specify which parcels it seeks to sell. Tex. Tax Code § 33.53(b). The order has to be executed within 181 days or must be returned “unexecuted.” Tex. Tax Code § 33.53(c)(1).
The legal requirements for executing the sale are set forth in chapter 34 of the Tax Code. Most counties in Texas have a standard time, place, and location where their respective tax sales take place each month. Further, the law firms who represent the taxing units will likewise generally advertise the particular properties which are being sold. This information, however, is not conclusive and is provided to prospective purchasers. The taxpayer should pay special attention to the Notice of Sheriff’s Sale that has been sent to him and direct all communications to the sheriff or executing officer from that point forward.
Practice Tip: Once the property has been placed in the hands of the executing officer or sheriff, all communications regarding payment, payoff, notices, or bankruptcy filing should be directed to the executing officer or sheriff. All monies need to be delivered to the executing officer or sheriff. For example, if on the day before the tax sale the taxpayer pays his respective taxes online or at the local tax office, that action will not stop the sale of the property because the executing officer or sheriff has a mandate to sell the property for all the amounts due and owing, which includes the costs the sheriff or executing officer has incurred. Those costs are not available at the time of the online payment and are not known to the local tax office. Also, if the taxpayer files for bankruptcy, it is essential that the executing officer or sheriff is apprised of such action so that sale will be stayed pursuant to federal law.
If the property sold was the taxpayer’s residence homestead, he can redeem the property within two years following the sale by paying the purchaser the amount the purchaser bid for the property; the amount of the deed recording fee; and the amount paid by the purchaser as taxes, penalties, interest, and costs on the property, plus a redemption premium of 25 percent of the aggregate total if the property is redeemed during the first year of the redemption period or 50 percent of the aggregate total if the property is redeemed during the second year of the redemption period. Tex. Tax Code § 34.21(a). If the property is not residential homestead, the time period is 180 days to redeem with a 25 percent redemption premium. Tex. Tax Code § 34.21(e).
Texas Tax Code section 33.54 allows either a one- or two-year limitation to challenge the validity of the tax sale. The applicable period depends on the nature of the property itself. Tex. Tax Code § 33.54(a). Further, in order to commence suit, the taxpayer must first deposit into the registry an amount equal to the amount of delinquent taxes, penalties, and interest specified in the judgment of foreclosure, plus all costs of the tax sale. Tex. Tax Code § 34.08(a).