On April 16, 2024, the Governor signed LD 2262, “An Act to Amend the Process for the Sale of Foreclosed Properties Due to Nonpayment of Taxes.”  In June 2023, in response to the United States Supreme Court’s decision in Tyler v. Hennepin County, Minnesota (598 U.S.  (2023)), the Legislature adopted emergency legislation to amend 36 M.R.S.A. §943-C and provide a process that municipalities could use to sell tax-acquired properties.  The recently-enacted LD 2262 includes significant changes to that process, which are summarized below.  These changes will go into effect in July.  In the meantime, municipalities will need to adjust their policies and ordinances relating to tax-acquired properties to ensure they are complying with the new requirements of LD 2262.

Municipalities must attempt to sell tax-acquired properties through a real estate broker.

Section 943-C previously required municipalities to provide former owners of tax-acquired properties with at least 90 days’ notice that the property would be put up for sale and provide the former owner with the right to request that the property be sold through a real estate broker.  If the former owner did not respond within the 90-day timeline, the municipality could sell the property immediately at auction.

LD 2262 keeps the 90-day notice requirement but requires municipalities to attempt to sell all tax-acquired properties through a real estate broker, regardless of whether the former owner responds to the 90-day notice.  Municipalities may only sell tax-acquired properties without a broker if, after the 90-day notice period, (1) they are unable (after three attempts) to hire a real estate broker to list the property or (2) the property remains unsold one year after being listed by a real estate broker.  By making brokered sales the default sales method, LD 2262 seriously restricts the ability of municipalities to quickly dispose of tax-acquired properties and requires municipalities that can find a broker to retain tax-acquired properties for at least 15 months after the date of foreclosure.

Municipalities must provide a written accounting of excess sale proceeds.

LD 2262 makes several changes to the way in which municipalities must calculate excess sale proceeds.  Under Section 943-C, when calculating costs associated with the sale of a tax-acquired property, municipalities could assess an administrative fee equal to 10% of the property taxes owed.  LD 2262 has removed the allowed administrative fee and replaced it with “documented administrative costs.”  Additionally, LD 2262 now requires municipalities to provide a written accounting showing how the amount of excess sale proceeds has been calculated.  By removing the allowed administrative fee and requiring a written accounting of costs, LD 2262 has placed a new administrative burden on municipalities and seemingly requires them to maintain records of all time and materials spent liening, maintaining, listing and selling the property from the start of the lien process through the date of sale.  These records would need to be maintained for each property for which a tax lien certificate is recorded or the municipality may be unable to recover those costs at the time of sale.  This requirement presents obvious administrative difficulties but also raises questions about how time spent by salaried or uncompensated individuals, such as economic development personnel and municipal officers, could or should be calculated.

Municipalities must provide additional notices to former owners.

LD 2262 also requires municipalities to jump through additional hoops when distributing excess sale proceeds to former owners of tax-acquired properties. After a property is sold, municipalities are required to send the former owners written notice of the intent to distribute excess sale proceeds to them at least 30 days in advance.  Unlike the 90-day notice prior to the sale, this notice must be sent by first class mail and certified mail, return receipt requested.  If a municipality can’t locate the former owner, it is required to publish that notice in a newspaper for at least three consecutive weeks.  If the excess sale proceeds are not claimed within 30 days after notice is completed by mailing or publication, those proceeds must be sent to the State’s unclaimed property fund.  If a former owner does claim the excess proceeds, then the municipality is required to record a notice in the registry of deeds within 10 days that indicates that the former owner received payment.

Former owners retain the right to challenge the sale price and calculation of excess proceeds.

LD 2262 also impacts the ability of municipalities to resolve potential title issues and litigation after the sale of tax-acquired properties.  Under Section 943-C, municipalities were able to demand that former owners execute a quitclaim deed for the property prior to distributing any excess sale proceeds.  LD 2262 removes this mechanism.  As a result, purchasers will not be able to obtain clear deeded title to their property unless they separately obtain a release or deed from the former owner, which will likely require additional payments to the former owner.  This will negatively impact the marketability of tax-acquired properties, potentially resulting in below-value sales and losses to municipalities and former owners.

Section 943-C also provided that a former owner who received excess proceeds automatically waived their right to challenge the sale of the property.  This gave purchasers and municipalities an assurance that the sale could not be undone after completion and limited purchasers’ exposure to future litigation.  However, LD 2262 has added language indicating that, despite having waived their ability to challenge the sale, former owners may still sue for damages relating to the sale price of the property and calculations of excess proceeds.  As a result, former owners likely have the ability to sue the municipality (and, potentially, the purchaser) for damages for up to six years after the sale date.  Ideally, the cost accounting also required by LD 2262 would limit the potential for litigation; however, it may also invite disputes as to whether certain costs are properly chargeable against the sale price of the property.  Overall, the risk of potential future litigation will further limit the marketability and sale value of tax-acquired properties.

Municipalities must pay excess proceeds on properties retained for municipal use.

Lastly, LD 2262 addresses a gap in Section 943-C, namely, what municipalities are required to do when they choose to retain tax-acquired properties.  LD 2262 requires municipalities to hire a licensed appraiser and obtain an appraisal of the value of the tax-acquired property.  Within 120 days of the appraisal, the municipality must calculate any excess sale proceeds and then provide the former owner with 30 days’ notice of its intent to distribute the excess proceeds, as it would in the event of a sale.  Notably, LD 2262 does not amend Section 943-C to allow municipalities to deduct appraisal costs when calculating excess sale proceeds.  As a result, it is likely that municipalities would be unable to recover such costs if they choose to retain tax-acquired property for municipal or public use.

Key Takeaways:

Overall, the changes implemented through LD 2262 were not very friendly to municipalities.  The changes provided some clarity on the consequences of retaining tax-acquired property but also subject municipalities to additional administrative responsibilities that will require further adjustment policies and procedures relating to the sale of tax-acquired properties.  It will take time and input from the courts to understand fully how these processes will function.  Preti Flaherty recommends contacting your municipal attorney with any questions and before listing any tax-acquired properties for sale or finalizing the sale of any currently-listed tax-acquired properties.