Collecting Unpaid Municipal Charges and Real Estate Taxes in Pennsylvania Through Real Estate Sales Can Be Risky

Selling mortgaged real estate to collect unpaid municipal charges and county property taxes under both the Pennsylvania Municipal Claims Act (MCA) and the Real Estate Tax Sale Law (TSL) can present traps for the unwary. The biggest risk is that the property will be sold free and clear of the first mortgage holder’s lien, resulting in loss of the collateral to satisfy the unpaid mortgage loan.

‍Municipal Claims Act

‍City, town, borough, and township collection of unpaid services or charges related to a specific parcel of real estate is governed by the MCA. These charges include, but are not limited to, those related to condemnation proceedings; demolition and clean up; sewer assessments; mandatory hookups; and services and utilities such as trash, water, electricity, and natural gas. Under the MCA, a city may file both a lien for the unpaid amounts and a writ of scire facias (a judicial writ requiring a person to appear in court) to enforce the lien. The writ is then served on the property owner, similar to the process for a complaint in a mortgage foreclosure.

Once judgment is obtained, a sheriff’s sale is scheduled, and all parties holding an interest in the real property, including mortgage holders, receive sale notices. Under statute and relevant case law, the first time a property is scheduled for a sheriff’s sale due to a municipal claim, there is no risk that the property can be sold to divest the first mortgage holder. However, if the property fails to sell, the municipality may file a petition to sell free and clear of all liens and encumbrances, including the first mortgage, at the next continued or rescheduled sale date.

‍Tax Sale Law

‍The TSL governs delinquent real estate tax collection for all counties other than Philadelphia and Allegheny. Unlike municipalities under the MCA, the county’s taxing authority doesn’t file a lawsuit to enforce its rights to collect delinquent real estate properties. Instead, a number of delinquent tax properties are advertised and sold by the county’s Tax Claim Bureau at what is known as an “upset sale.” These are usually, but not always, held in each county in September. An upset sale only functions to transfer the owner’s interest in the real property to a third party. It doesn’t divest any mortgages, liens, or encumbrances. Consequently, a property upset sale results in a new owner, but doesn’t impair a mortgagee lien or any pending foreclosure.

However, if the property doesn't sell at an upset sale, then a sale can be held free and clear of all liens at a “judicial sale” upon petition of the Tax Claim Bureau and approval by the Court. Judicial sales are generally, but not always, held in the spring or summer. Both the petition to sell the property free and clear of all liens and encumbrances, and the ultimate order scheduling the sale, must be served on all parties of interest, including mortgagees. Failure to properly serve is a ground to set aside the judicial sale.

‍Of Special Note

‍To make matters more complicated, Philadelphia and Allegheny counties use the MCA process to collect unpaid real estate taxes, just as they would for other municipal claims. Philadelphia County generally conducts its sales through the city solicitor. Both counties frequently sell tax liens to third-party investors, who then collect. Because of these inconsistencies, it is important to monitor such proceedings more closely in these counties – especially petitions filed to sell the property free and clear of all liens.

Manley Deas Kochalski, LLC does not advise mortgagees to advance payment for non-divesting actions under the MCA or TSL during a pending foreclosure. This is because it’s difficult to add such advances to the judgment amount. However, any amounts needed to stop a judicial or other divesting sale must be advanced as soon as possible to avoid potential mortgage lien loss. Mortgagees are strongly advised to consult with counsel and monitor closely any pending sales under either the MCA or TSL.