A property owner (the “Owner”) holds title to a parcel of real property (the “Property”). Every year ad valorem taxes (the “Taxes”) are due to the state, county and city (if applicable) based on the value of the Property. If the Owner fails to pay those Taxes, then the Property could be sold to a potential purchaser (the “Tax Purchaser”). What happens then? When can the Owner “redeem” his Property from the Tax Purchaser? The answers can be confusing.
However, in 2016, Judge Sawyer of the United States Bankruptcy Court for the Middle District of Alabama undertook a detailed examination of the tax sale procedure and redemption rights. See In re Washington, 551 B.R. 644 (Bankr. M.D. Ala. 2016). Judge Sawyer’s excellent description is summarized a bit further here to give you a better idea of what rights the Owner and Tax Purchaser may have and when they can exercise those rights. Any citations to authority supporting the statements may be found by reviewing In re Washington.
1. Certificate of Purchase and Right to Possession
If the Owner fails to pay the Taxes, the probate court of the county in which the Property is located may order the sale of the Property. The probate court must sell the Property at the tax sale for at least the amount of the tax lien (i.e., the amount of Taxes owed plus late fees and any other fees due). If there is no bidder, the State of Alabama buys the land at the amount of the tax lien.
If a private party purchases the Property at the tax sale (a “Tax Purchaser”), the Tax Purchaser is entitled to a certificate of purchase containing a description of the Property and the Taxes owed. The Tax Purchaser is immediately entitled to possession of the Property and may demand possession from the Owner. If the Owner has not surrendered possession of the Property to the Tax Purchaser within six months after the Tax Purchaser demands possession, the Tax Purchaser may sue the Owner for “ejectment.” An “ejectment” action is a lawsuit brought by one party to remove another from property.
An ejectment action normally requires a showing by the plaintiff that he has either legal title to, or possession of, the property, and that the defendant has either unlawfully entered upon or detained the property. The Alabama Code regarding tax sales provides the Tax Purchaser a statutory exception to the requirement of legal title when pursuing an ejectment action against the Owner.
2. Administrative Redemption
If a Tax Purchaser (not the State) bought the Property at the tax sale, the Owner may redeem the Property from the Tax Purchaser “at any time within three years from the date of the sale.” This is known as “administrative redemption.” The Owner may administratively redeem the Property by paying to the probate court in the county in which the Property is located the purchase price plus (1) 12% interest per year from the date of the sale, (2) any insurance premiums paid by the Tax Purchaser, and (3) the value of all “preservation improvements” made by the Tax Purchaser (also with 12% interest from the date of such premium payments or improvements).
If the State purchased the Property at the tax sale, the Owner may redeem the Property at any time before title passes out of the State. If Property sold to the State has not been redeemed after three years, the State is authorized to sell it to any purchaser for all taxes due plus 12% interest, or to the municipality or county in which the land is located at the best price offered, irrespective of the amount of taxes and interest due. If the Property has not been redeemed after five years, the State may sell the Property to any purchaser for cash at the best price obtainable, irrespective of the amount of taxes due.
3. Tax Deed
If Property purchased at a tax sale by a Tax Purchaser has not been redeemed within three years from the purchase, the Tax Purchaser may demand a tax deed from the probate court. The tax deed will “vest in the [Tax Purchaser] all the right, title, interest and estate of the person whose duty it was to pay the taxes on such real estate [i.e., the Owner] and the lien and claim of the state and county thereto.”
If the State purchased the Property at the tax sale and later sells the Property to a private party (also a “Tax Purchaser”), the Tax Purchaser is entitled to a tax deed granting him “all the right, title, and interest of the state in and to such lands” and providing him “all the rights, liens, powers, and remedies, whether as a plaintiff or defendant, respecting said lands as an individual purchaser at the tax collector’s sale would have in similar circumstances.” Delivery of a tax deed to the Tax Purchaser extinguishes the Owner’s “legal title” in the Property.
4. Judicial Redemption
The Owner loses his right of administrative redemption to the Property once the tax deed is delivered to the Tax Purchaser (whether the Tax Purchaser originally purchased the Property at the tax sale or purchased the tax deed from the State). But the Owner retains a right of “judicial redemption.” Judicial redemption requires the filing of a lawsuit against the Tax Purchaser (or the filing of a counterclaim in an ejectment action brought by that Tax Purchaser) and the payment of specified sums into the court in which that action or counterclaim is pending. When the Owner has paid the required redemption amount to the court, “the court shall enter judgment for the [Owner] for the land, and all title and interest in the land shall by such judgment be divested out of the [Tax Purchaser].”
The Owner has three years “from the date when the [Tax P]urchaser became entitled to demand a deed therefor.” However, this three-year period does not begin to run until the Tax Purchaser is “in adverse possession” of the Property and is entitled to demand a deed to the Property. In essence, “adverse possession” requires the Tax Purchaser to control the Property openly, exclusively, and continuously from all other persons for a specified period of time. If the Tax Purchaser has a tax deed and is in adverse possession of the Property, then the Owner has only three years to file an action for judicial redemption. After the three-year period has run, the Tax Purchaser may quiet title to the property by suing all persons claiming an interest in the Property.
To obtain “quiet title” relief, the Tax Purchaser must prove either (1) that he has “actual, peaceable possession of the lands,” or (2) that no other person has actual possession of the land and either (2a) that he has held color of title to and paid taxes on the land for 10 or more consecutive years, or (2b) that he has paid taxes on the land for 10 consecutive years and no other person has paid taxes on the land during that time. A person is in “peaceable possession” as opposed to “scrambling possession” when at the time of the lawsuit no other party is denying that the person is in possession of the Property. If some other party does something (other than mere isolated acts) which indicates that the other party claims to be in possession of the Property, the possession ceases to be peaceable and becomes “disputed” or “scrambling.” Scrambling possession requires that the party disputing the right of possession “do something indicating that he claims to be in possession himself” of the Property. Where there is no real occupancy of the Property (for instance on unimproved land or an empty lot), constructive possession stays with the Owner and can only be cut off by the adverse possession of the Property by the Tax Purchaser.
Because the three-year period for the Owner to judicially redeem the Property does not begin to run against the Owner unless the Tax Purchaser adversely possesses the land, the right of judicial redemption remains in the Owner “without a time limit, if the owner of the land seeking to redeem has retained possession.” So, for example, if the Owner remains in his home though it was purchased for taxes and the Tax Purchaser obtained a tax deed, the Owner retains his right to judicial redemption for so long as he remains in the home. While the Tax Purchaser must have “peaceable possession,” the Owner’s possession of the Property “may be constructive or scrambling.”
The three-year limitations period for judicial redemption can also cut the other way. If the Tax Purchaser holds a tax deed and the Owner remains in possession of the Property, the three-year limitation period will bar the Tax Purchaser’s ejectment action against the Owner and will also “re-vest” legal title to the Property in the Owner. Any Tax Purchaser must be certain to either obtain peaceable possession of the Property or file an action for ejectment within three years of the time the Tax Purchaser was entitled to demand a tax deed for the Property.
When Property is sold under Alabama law due to non-payment of Taxes, the Owner has three years (or more) to redeem his interest in the Property without losing legal title to the Property — known as administrative redemption. If the Owner fails to redeem his interest in the Property within three years after the tax foreclosure/sale, the Tax Purchaser may demand a tax deed (or the State may sell one) that extinguishes the Owner’s legal interest in the Property.
The Tax Purchaser is entitled to possession of the Property when he purchases the Property at the tax sale (or from the State). If the Tax Purchaser obtains a tax deed and maintains adverse possession of the Property, the Owner has three years to redeem the Property by filing suit — known as judicial redemption. If the Owner has at least constructive or scrambling possession of the Property (i.e., the Tax Purchaser does not adversely possess the Property), then notwithstanding the tax deed the Owner has a right to redeem the Property for as long as the Owner retains possession of the Property. Finally, if the Tax Purchaser obtains a tax deed but the Owner remains in adverse possession of the Property, title to the Property will revert back to the Owner unless the Tax Purchaser files an ejectment action within three years from the date the Tax Purchaser was entitled to demand a tax deed.