Acme Bank has a problem. Acme loaned $480,000 for the purchase of a beach house on Sullivan’s Island, South Carolina, securing the debt with a recorded mortgage. Six months ago, the bank received a letter from the county tax collector, which unfortunately was overlooked after being routed to the wrong department. Today, Acme was served with a lawsuit from an unknown company seeking to quiet title to the beach house and alleging that the mortgage has been extinguished. Upon investigation, the bank discovered that the letter it received from the tax collector was actually a notice that the property had been sold for unpaid property taxes and that if not immediately redeemed, title to the beach house would be transferred to the tax sale purchaser. Acme now wants to know what, if anything, can be done to save its mortgage.

This story is not uncommon for mortgage lenders in South Carolina. As in other states, South Carolina law provides for a statutory lien for the recovery of unpaid property taxes. This lien takes priority over a mortgage, even if the mortgage is recorded prior in time. If taxes are not paid, the property may be sold to the highest bidder, often for a price well below the market value of the property. A complicated set of statutory notice requirements exists to protect the homeowner and the lender, but these provisions do not require or ensure that the lender actually receive notice of the tax sale. Counties opting for minimum compliance may mail a notice to the mortgagee of record only a few weeks before the time to redeem the property expires.

Ideally, the lender will protect itself on non-escrowed loans by proactively contacting the county each year to ensure taxes have been paid. Where the tax sale has already occurred, the lender should first find out if the time to redeem the property has expired. South Carolina law allows the property to be redeemed by paying taxes, penalties, and interest for up to a year following the tax sale. The lender should contact the county tax collector’s office to find out the exact amount that must be paid to avoid transfer of title to the tax sale purchaser.

If the redemption period has already expired, the lender should strongly consider retaining legal counsel to investigate the tax sale for procedural defects and determine if a suit should be filed seeking to void the sale. The tax collector is required to send multiple notices at different times to the homeowner, mortgagee, and other persons with interests in the property. South Carolina courts have been willing to set aside a tax sale where statutory notice requirements and other procedures have not been strictly followed. But time is of the essence: all but the most serious defects are subject to a two-year statute of limitations that may begin to run as early as the date of the sale.

If there are not sufficient grounds to set aside the sale, the lender will often be able to pursue excess tax sale proceeds. South Carolina provides for the sale purchaser to be paid substantial interest on her bid if the property is redeemed. This incentivizes a degree of overbidding on the property, frequently resulting in a surplus after taxes, interest, and other charges have been paid from the sale proceeds. By statute, this surplus belongs to the homeowner, but the mortgage instrument typically provides that the proceeds are assigned to the lender. If the property cannot be redeemed and the sale cannot be set aside, the lender should bring a claim for the surplus proceeds at the earliest opportunity.

Loss of property for unpaid taxes usually results from failures at multiple levels by both the homeowner and the lender. Even after the property has been sold, however, the lender may be able to limit its losses by taking speedy action to protect its interest.