We harp on due diligence a lot at PropLogix. After all, that’s our speciality. Regardless of who does the work – an investor, a title processor, a paralegal, a settlement agent, a homebuyer, or even our competitors – we want everyone to be aware of all the hidden property information that can affect a new homeowner. That’s why we’re dedicated to educating everyone involved in the transaction on best practices, the importance of title insurance, and how unrecorded debt or other municipal issues can become just as big of a problem as recorded property liens.
But what happens when the information we gather isn’t deemed good any more by the municipality that provided it? Or a city finally decides to collect on an outstanding balance that they didn’t disclose at the time of a municipal lien search or record as a lien?
Property Owner Sues City over Utility Lien
Municipal Lien Searches are one of our most popular services, particularly among Florida-based title agents and attorneys. It’s a commonly outsourced part of their title production, but much of the data we collect in our reports is dependent on third parties, especially cities, counties, townships, and other municipalities.
Unpaid utility balances, building code violations or open permits, and pending code violations are typically part of municipal lien search reports, but unlike a recorded utility or tax lien, this information isn’t readily available to the public.
In 2014, FKR Investment Corporation purchased a property in the City of Homestead, located in South Florida. They requested a municipal lien search from a competitor lien search company before closing, which reported no record of any municipal liens.
Upon requesting that the city activate the electricity, the new owners were alerted that it could not do so because of pending code violations. FKR spent $100,000 to correct the violations and again asked the city to activate services, but the city refused once more, citing that there was an outstanding utility bill from two previous owners totaling $113,906.
FKR subsequently submitted a title claim on its policy issued by First American Title Insurance on December 1st, 2014. First American rejected the claim on the grounds that the utility lien was not recorded in the public record. Four days later, on December 5th, the City of Homestead officially recorded a notice of lien.
FKR filed suit against the city and First American in early 2015. Eventually the city agreed to dismiss the lien and restore utility services to the property. When the lien was released, FKR dismissed its claim against First American.
FKR filed another suit against the city in 2017 seeking damages, which was dismissed by a U.S. District Judge.
When do Municipalities Have a Right to Enforce Unpaid Accounts?
Ideally, the municipal lien search would have revealed both the pending code violation and the unpaid utility accounts, but without unfettered access to municipal records, lien search companies are limited in what data they can gather. It’s unclear whether or not the lien search company could or should have detected this issue before closing.
The municipal right to attach liens to property
In Florida, Ch. 159 Section 17 of state statutes gives municipalities that provide water, sewer, or gas services for their residents the ability to lien any lands or premises with unpaid balances. These liens have the same priority as tax liens. When liens become delinquent for more than 30 days, municipalities are allowed to begin a foreclosure process in the same manner that mortgage foreclosures are conducted.
Foreclosing on properties for unpaid utilities is commonly practiced in other municipalities throughout the country to recoup unpaid municipal bills or taxes. In Baltimore, records indicate that one in five liens on properties for unpaid taxes or other municipal bills amount to $1,000 or less. The elderly are especially vulnerable to losing their homes for failing to pay only a few hundred or thousands of dollars to their utility provider.
However, the timing of filing the liens matters. One legal opinion from former Florida Attorney General, Robert Butterworth, reads, “While a municipality in Florida may impose a lien for unpaid utility services against the property served, it must perfect its lien by filing it with the clerk of the circuit court in order for its claim to be effective against creditors or subsequent purchasers for consideration.”
In the case of FKR, the city hadn’t perfected the lien by filing it in the public record before FKR purchased the property and First American conducted the title search.
Can a city place a lien on property for a tenant’s unpaid bill?
In Florida, a municipality would be prohibited by section 180.135, Florida Statutes, from imposing a lien against rental property where tenants contracted directly for utility services.
However, this provision isn’t applicable to landlords in all states. In Washington, Rep. Jeremie Dufault (R-Selah) has introduced a bill, HB 2069, to repeal a statute allowing cities and towns with authority to attach liens to properties for a tenant’s unpaid utility bills. If the bill passes, cities argue that it will result in more unpaid bills and drive up costs for all individuals serviced by the municipality. Cities also point out that because landlords have the ability to withhold a deposit, it’s fair to hold them ultimately accountable for payment of delinquent bills.
Changing the rules
Municipalities are within their right to set rules for liening and enforcing liens against properties as long as they don’t conflict with state laws. In some parts of Florida, municipalities don’t currently lien for unpaid balances, but that doesn’t mean that they won’t at some point in the future. This is common in the panhandle and Northeast parts of Florida.
Municipalities may also change their process for divulging this information, the timeframe of accounts eligible for collection or liens, or the cost in procuring this information at any time.
In May of 2017, Sarasota County changed its policy from disclosing the prior five years utility account balances to disclosing the prior 20 years. Homeowners who purchased their properties before this time relied on the information provided by the County, but they are now at risk of zombie utility accounts becoming a lien against their property.
Even when buyers do everything correctly, this type of abrupt rule change can have major ramifications for families. While the number of affected accounts is uncertain, is it really fair for municipalities to demand payment from new owners even when a municipal lien search and title search is conducted according to the proper standards at the time of purchase?