Delinquent real property tax sales

Every now and then, you may come across published notices of  Delinquency in Real Properties or a Notice of Public Auction of Delinquent Real Properties.

These notices are published by the Office of the City Treasurer of local city governments where the real properties advertised for sale are located. The owners of these properties failed to pay real property taxes imposed by the local government, and, as a consequence, stand to lose their property in public action (tax sale).

Most of the properties listed at these tax sales are priced at only a fraction of their market value. The low prices usually invite many speculators and bidders who dream of owning property.

In a notice of public auction for delinquent real properties posted by the City of Pasig to be held on Nov 28, 2023, among the hundreds of properties listed for auction, a residential property in Kaimito St. Valle Verde II measuring 115.40 square meters was listed for sale at P152,155.50 and another located in Pearl Drive corner Amethyst St. Ortigas Center, with an area of 139.76 square meters, listed for sale at P297,128.12. Note that the listed amounts are based on the total tax delinquency and are set as the minimum bid price.

READ: Taxability of sale of real property classified as ordinary asset

Since the sale will be done via public auction, the winning bid usually exceeds the minimum bid price, but still way below the market value of the property.

The power of local governments to levy and collect real property taxes is derived from Section 232 of Republic Act No. 7160, or the Local Government Code of 1991 (LGC).

Under the LGC, real property taxes are levied upon land, building, machinery, and other improvements, proceeds of which are to be distributed among the province, city, municipality and component barangays of the province, city or municipality where the property is located.

Owners of real properties who fail to pay their real property taxes levied on their property run the risk of having their properties levied upon and sold to pay for the real property taxes due thereon.

While the local governments concerned are given the right to levy and sell the real property whose real property taxes have not been paid, they must still comply with the mandatory legal requirements of notice and advertisement.

I have heard of winning bidders who end up disappointed after spending considerable amount of time and money for court litigation, only to end up being sued by delinquent taxpayers who sought to recover their property by attempting to annul the tax sale on grounds of some irregularity in the proceedings.

READ: Real estate tax valuation reform

There have also been winning bidders who later on discover that their winning bid does not entitle them to a clean title, as the property they bid for had been previously mortgaged. Accordingly, knowledge of the legal requirements for the validity of tax sales and other related issues is a must for anyone wanting to participate in delinquency real property tax sales.

First, potential bidders must verify from the local government concerned that there had been issued a Levy of Real Property (notice of levy) over the property to be auctioned off. The notice of levy must have either been mailed to or personally served upon the delinquent owner of the real property or person having legal interest therein.

In case they are out of the country or cannot be located, the notice of levy must be given to the administrator or occupant of the property. Lack of notice, either by registered mail or through courier, invalidates the sale. (Tan v. Bantegui, et al., GR 154027, October 24, 2005).

Moreover, the local government conducting the tax sale must also cause the advertisement of the properties that it plans to auction off by (a) posting a notice at the main entrance of the provincial, city or municipal building, and in a publicly accessible and conspicuous place in the barangay where the real property is located and (b) by causing the publication of a list of delinquent properties and their property owners once a week for two consecutive weeks in a newspaper of general circulation in the province, city or municipality where the property is located.

The levy must also be annotated on the tax declaration and certificate of title of the property. The levying officer must submit a report on the levy to the sanggunian concerned within 10 days after the receipt of the warrant by the owner of the property or person having legal interest therein. (Salva v. Magpile, GR 220440, November 8, 2017)

The Supreme Court has explained that unlike land registration proceedings which are in rem, cases involving an auction sale of land for the collection of delinquent taxes are in personam. This means that mere publication of the notice of delinquency is not sufficient and the city treasurer must still send the notice of tax delinquency directly to the taxpayer. (Salva v. Magpile, GR 220440, Nov 8, 2017)

The winning bidder must show that the actual notice was served upon the taxpayer or interested person and that the auction sale was advertised through posting and publication.

The steps provided for by the LGC are mandatory and must be strictly followed; otherwise, the sale of the real property is invalid, and does not make the purchaser the new owner.

The strict adherence to the law governing tax sales is imperative, not only for the protection of the taxpayers, but also to allay any possible suspicion of collusion between the buyer and the public officials called upon to enforce the laws. (Salva v. Magpile, GR 220440, Nov 8, 2017)

In addition to the foregoing, bidders must also verify the title of the real property with the Registry of Deeds, to find out what encumbrances, mortgages, restrictions or other entries are annotated at the back of the title.

Prior mortgages, restrictions, and other entries annotated at the back of the title are carried over even after consolidation of the title in the name of the winning bidder. (Tiongco, et al. v. Philippine Veterans Bank, et al., GR 82782, Aug 5, 1992)

Importantly, in the event that the auctioned property was previously mortgaged, the highest bidder should it wish to remove the encumbrance or mortgage, must pay the mortgagee the amount of the mortgage loan. Notably, this is a separate amount from the bid price.

It is also crucial for bidders to verify the name of the registered owner appearing on both the certificate of title and tax declaration. If the notice of levy was sent to and received by the declared owner in the tax declaration but not the registered owner as reflected in the title, the notice may be declared void and a ground to annul the sale.

After the sale, the delinquent taxpayer is given one year to redeem their property by paying the delinquent tax, including interest at a maximum of two percent, and expenses of the sale. (Sec. 261, LGC)

Should the delinquent taxpayer fail to redeem their property, the highest bidder at the sale may proceed to consolidate the property under their name.

During the one year redemption period, possession of the property remains with the delinquent taxpayer or person having legal interest therein who shall be entitled to the income and other fruits of the property. The winning bidder must pay for the capital gains, documentary stamp taxes, and local transfer taxes.

All in all, while purchasing a property via a tax sale may be a more affordable way to own real property, one must keep in mind the basic principle that the purchaser of property at a tax sale obtains only such title as was held by the delinquent taxpayer. Ergo, the principle of caveat emptor, or buyer beware, applies.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)