Beware of tax liens, those traps for the unwary
The storks have flown away, and the cars have returned to Warsaw. These are sure signs that vacation is over and it's back to business as usual. Buyers are looking for sellers; politicians are looking for votes; and lenders are looking for collateral to back the financing that borrowers are requesting. I'll leave the first two to their own devices. When it comes to financing, however, lenders usually want to have some hard and fast assets to secure the loan in case the borrower becomes short on cash. Mortgages on real estate tend to rate high on the list of desirable collateral. At least over the long term, land tends to appreciate in value. Like other countries, Poland has an adequately functioning system of recording mortgages that allows anyone to go to the title and mortgage register to see what sort of liens, if any, encumber the property. This seemingly idyllic picture is not, however, without traps for the unwary. Statutory mortgages, the most common of which are tax liens, take precedent over ordinary mortgages, even if they are not recorded in the title and mortgage register.
The state treasury and municipal or county authorities are entitled to place statutory mortgages, including tax liens, on the real property of a taxpayer that has outstanding tax obligations or owes past-due taxes.
The tax authorities may only place a lien on a taxpayer's real property with respect to current obligations if they have either:
delivered a decision stating the amount of the tax obligation to the taxpayer or
issued a decision setting forth the tax liability of the taxpayer or other withholder.
Most typically, the decisions on tax obligations concern either an employer's obligation to pay certain contributions and taxes on behalf of its employees or to withhold contributions and taxes that are payable by employees, or an obligation to withhold other types of taxes and contribute them to the tax authority at the proper time, such as VAT tax payments.
Similarly, the tax authorities may not place a lien on a taxpayer's real property with respect to pay-due taxes until they have issued a decision setting forth the amount of the tax arrears.
A tax lien may be established on almost any sort of interest in real estate, including ownership of a house, an apartment in a cooperative, or a business premises; a partial interest in a property; and a right of perpetual usufruct.
As I mentioned above, a tax lien does not need to be recorded in the title and mortgage register for it to exist, but the tax authorities must disclose the lien. The tax authority must apply to the district court that maintains the title and mortgage register for the particular property within one month of creating the tax lien. Failure to file this application within one month results in the expiration of the lien. Thus, there exists a short, but nevertheless crucial, gap of time when a lender (or anyone else reviewing real estate records) cannot be certain whether a tax lien encumbers the property.
It is important to determine whether a tax lien or other type of statutory mortgage exists as these liens have priority over ordinary mortgages. Priority means that the government gets its claims paid before those of other creditors having a security interest in the real estate. No good rule, however, is without an exception, and even here two key exceptions exist to the general rule that gives the government an earlier chance at recovery. First and, frankly of less interest to lenders, if the property is encumbered with several statutory mortgages, the statutory mortgage that is disclosed in the title and mortgage register takes priority over the other mortgages. Thus, even the tax authorities have incentive to file as soon as possible.
The second exception, however, should warm the hearts of all lenders. If property encumbered by a statutory mortgage is also encumbered by a mortgage securing a long-term bank loan for housing purposes, priority is based on the order of the filing of applications for recording in the title and mortgage register. The moral of the story here is to file as quickly as possible. This exception only relates to bank loans for housing purposes and does not cover other types of bank loans (such as loans for the construction of office buildings).
Obviously, the fact that undisclosed tax liens could take priority over ordinary mortgages impairs, to some extent, the reliability and safety of transactions secured by mortgages. The tax code provides for some regulations that attempt to mitigate the uncertainty that tax liens introduce. Of particular note, the tax authorities may issue a certificate specifying the amount of undisclosed statutory mortgages. A purchaser (but not a lender) of real estate encumbered with a mortgage may request the issuance of the certificate. A catch exists the owner of the real estate must consent to the issuance of this certificate. In the certificate, the tax authority specifies the amount of undisclosed statutory mortgages as of the day of the certificate.
In this article, I focused on tax liens only. Any discussion of government action to enforce taxes tends to conjure up colorful images, such as of Al Capone and the Untouchables. The regulations discussed in this article apply equally to a far drabber subject, payments owed to the Social Insurance Co. (ZUS), which also may be secured by a statutory mortgage on real estate.
