Understanding the Purchase Transaction for Properties Sold Under a Tax Sale

By Mirjana (Mira) Markovic

Dear Friends,

I hope you are all doing well and looking forward to a season of beaches, sunglasses, long days, and colourful clothing.

Recently, I have received inquiries from clients regarding properties being sold by the municipalities under a tax sale. Prima Facia, this option is appealing to many potential buyers given the current real estate market as they are able to purchase a property at a fraction of the market value. Let’s be honest, who isn’t intrigued by a waterfront property on sale for $75,000.00 in an area where cottages are selling for more than $200,000.00?

Many real estate investors have taken advantage of this trend and have seen great success purchasing from tax sales, as they can turn over a large profit in a short amount of time.[1] However, given the number of risks associated with purchasing from tax sales, due diligence on behalf of the buyer is of substantial importance to ensure a successful transaction.

How does a property become eligible for tax sale?

If a homeowner is in arrears for at least 3+ years, the municipality may commence a proceeding to recover delinquent property taxes by registering a tax arrears certificate (“certificate”) against such property. Once registered, a one-year redemption period is triggered during which the property owners may bring the taxes back into good standing and request the cancellation of the certificate. If the homeowner does not seize the occasion within the one-year redemption period, the municipality may advertise the property for public sale for non-payment of taxes by publishing it in the local newspapers and the Ontario Gazette.

Unlike when a bank sells a property due to a homeowner in default of mortgage payments (power of sale), a municipality is not obligated to obtain the market value for the property but is only required to obtain the amount of taxes owing including interest, penalties, and costs in conducting the sale. This is the reason that such properties can be purchased below the market value.

How a purchase through a tax sale is conducted?

In Ontario, there are two methods of conducting a tax sale. First, a public auction, and second, a public tender. However, more than 90% of tax sales in Ontario are conducted by public tender. The main difference between these two methods is that at an auction, interested parties are physically present and thus can increase their bid when someone presents a higher offer[2], while a public tender requires interested parties to submit their bids in a sealed envelope which must contain an official offer as well as a bank draft or certified cheque for at least 20% of the offer (i.e. if an interested party offers $100,000.00, $20,000.00 must be included in the envelope). The highest bid submitted will win the sale.

What interests will remain on the title after the purchase?

One of the significant drawbacks to purchasing under a tax sale is that it does not guarantee conveyance with a clear title. Any interests in favour of the “Crown” (i.e. Government of Ontario, Government of Canada, or one of their agencies or crown corporations) will remain on tiltle upon the registration of the tax deed. The obligation falls to the purchaser to satisfy the Crown’s lien and remove it from title otherwise, the Crown could potentially seize the property at any time and sell it to appease its lien.

On the other hand, any interest in favour of existing lenders (i.e. BMO, Scotia Bank, CIBC, TD, etc.) is relinquished from title by the Land Registry Office upon the registration of the tax deed unless such a lender also takes the opportunity to bring the taxes back into good standing. Typically, the municipality will deliver a notice to existing lenders with interest in the property advising of the delinquent taxes. As mentioned above, the existing lender may also seize the opportunity to bring the tax arrears back into good standing, place a lien on the property for appeasing the lien, and request that the registration of the certificate be cancelled. This way, the lender maintains their interest in the property.

Advantages and Disadvantages of purchasing from a tax sale?

Advantages:

• Purchasers are able to acquire a property at a fraction of the market value;
• Investors can realize significant returns;
• Investors have the rights to the tax-related debt associated with a property, plus interest;
• Purchasers can turn the property into their dream home as they will have more money for renovation;
• Professionals such as Real Estate Agents can provide potential purchasers with more information concerning such properties to assist with the due diligence process.

Disadvantages:

• Crown liens have a priority over all encumbrances and claims on the property;
• Crown interest remains on title even after a purchaser acquires it therefore, it can cease the property at any time and sell it to satisfy its lien;
• Purchasers are obligated to pay the outstanding Crown lien to remove it from title;
• The property is sold on an “as is basis”. There are no representation or warranties of any kind concerning the condition of the property;
• The municipality does not guarantee vacant possession therefore, purchasers will be obligated to hire a bailiff or lawyer to handle the eviction process;
• Tax or utility arrears could potentially mean, a high probability of a run-down property;
• The property may need significant repair.

This article was written by Mira Markovic. She can be contacted at mira@sorbaralaw.com for further inquiries.