The Effect of Tax Foreclosure Sales on Servitudes: Olympia v. Palzer

• Publication year: 1987
• Citation: Vol. 11 No. 01

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 11, No. 1FALL 1987

The Effect of Tax Foreclosure Sales on Servitudes: Olympia v. Palzer

Daniel W. Galvin

I. Introduction

The purpose of this note is to examine whether a tax foreclosure sale should act to extinguish pre-existing servitudes such as easements and real covenants.(fn1) A majority of jurisdictions have held that easements and restrictive covenants(fn2) are not extinguished by a tax foreclosure sale.(fn3) In addition, a number of states have gone so far as to enact statutes to deal specifically with this issue.(fn4) However, there are a minority of jurisdictions that have taken the opposite approach and have considered a tax title to be a new and perfect title that extinguished all pre-existing liens and encumbrances of any kind, including easements and real covenants.(fn5)

Prior to the decision in Olympia v. Palzer,(fn6) Washington's approach was divided between the majority and minority positions. Washington's pre-1959 decisions followed the minority position and allowed complete extinguishment of both easements and restrictive covenants upon a tax foreclosure sale.(fn7) In 1959, the approach toward easements changed when the Washington legislature enacted a statute establishing that tax deeds are taken subject to any prior existing appurtenant easement.(fn8) This statute aligned Washington with the majority of jurisdictions as to easements, but the statute failed to specifically address the situation regarding real covenants.(fn9) Palzer is the first case since 1938 to address both tax sales and real covenants.(fn10)

This Note analyzes the historical position taken by Washington courts regarding servitudes and tax sales prior to and subsequent to the 1959 statute dealing with easements.(fn11) The Note next examines the Palzer holding,(fn12) the degree to which it aligns Washington's position with that of the majority,(fn13) and its limited support for future litigation involving other forms of servitudes.(fn14)

II. Historical Perspective

A. Pre-1959 Statutory Approach

Prior to 1959, the Washington Supreme Court had taken a rigid position regarding the effect of tax foreclosure sales on easements and real covenants.(fn15) The court's position was based on a very strict reading of the taxation statutes and a desire to promote the priority of tax liens.(fn16) No consideration was given to possible benefits derived from such servitudes or the burden that would be placed on the parties owning the beneficial interest in the servitudes.(fn17)

The first example of the court's doctrine was the 1911 decision of Hanson v. Carr.(fn18) In Hanson, the court held that an easement to use a strip of land as a private road was extinguished by a subsequent tax foreclosure sale.(fn19) The court interpreted the tax statutes to provide that all taxes imposed on real estate shall create a lien that has priority over any mortgage, judgment, debt, obligation or responsibility to or with which the real estate may become charged.(fn20) This priority rationale became the foundation for the subsequent cases addressing the issue of tax foreclosure sales and servitudes regardless of whether the servitude was an easement or a covenant.(fn21)

The court reasoned that when a tax lien is foreclosed, the fee passes to the purchaser and all grants made by the owner of the fee must be extinguished.(fn22) The new tax title stems from a source independent of the original owner, which consequently would destroy all prior property interests.(fn23) The source of the new tax title was considered to be a new grant from the sovereign state.(fn24) The only way to protect a servitude from possible extinction would be to segregate(fn25) the servitude for tax purposes from the servient estate and then pay the tax on the servitude separately.(fn26) The court reasoned that a substantial burden would be placed on the taxing authority if the authority were required to examine each tract of land for possible easements.(fn27)

The tax lien priority rationale was a harsh doctrine and resulted in a per se rule of tax deed superiority. The problem with the tax lien priority approach was that the general policy supporting the analysis only addressed one side of the issue: the collection of taxes.(fn28) Very little consideration was given to the value of the interests being extinguished.(fn29)

Today's modern land use planning techniques make extensive use of easements and real covenants as planning devices.(fn30) If easements or real covenants are extinguished by a tax foreclosure sale, entire housing developments and general building plans could be rendered useless.(fn31) Persons purchasing housing tracts in planned residential developments could not be assured that commercial business or industrial development might not infiltrate the area simply because some party in the development failed to pay their property taxes.(fn32) The practical effect of the Hanson doctrine is to require any party living in a development making use of easements or real covenants to check on each neighbor to make sure property taxes are being paid.(fn33) The doctrine over-emphasizes administrative expediency (efficiency of tax collection) to the detriment of the parties' expectations.(fn34)

In addition, the method of protecting servitudes suggested by the court in Hanson is impractical to apply. In Hanson, the court suggested that anyone wishing to protect an interest in an easement could have that interest segregated and taxed separately.(fn35) The segregation of interests may have been appropriate under facts such as Hanson, where only two parties were involved.(fn36) However, when applied to a large housing development, which may include hundreds or thousands of people, the segregation of interests between parties is not practical.(fn37) The Washington court's historical approach to priority of tax deeds and tax foreclosure sales is not practical when overall societal costs are taken into consideration.

On the other hand, the majority doctrine that was developing at the same time as Washington's priority approach produced a more favorable result.(fn38) The majority position is based on a tax assessment theory.(fn39) The tax assessment theory focuses on a different portion of the typical taxation statute than Washington's priority approach.(fn40) The assessment theory focuses on the actual assessed value of property on which the tax lien is based.(fn41) The only interests transferred by a tax title are those interests assessed in the value of the property.(fn42) Any interest not assessed would not be transferred by the tax deed and would remain in effect.(fn43)

Applying this assessment approach to servitudes,(fn44) the courts reasoned that the burden of a servitude would tend to lower the assessed value of the servient estate,(fn45) resulting in a lower tax liability.(fn46) In effect, the servitude was carved out of the land being taxed and would not be extinguished by a tax foreclosure sale.(fn47) On the other hand, the benefit of the servitude would enhance the value of the dominant estate(fn48) and result in an increased tax liability.(fn49) The interest in the servitude would, accordingly, be passed on through a tax deed of the dominant estate.(fn50) The state would receive the appropriate amount of tax since the lower assessed value of the servient estate was offset by the increased assessed value of the dominant estate; thus the servitude would remain intact.(fn51)

Although the majority approach protects the expectations of the parties as to the use of servitudes for land use control,(fn52) the practical application of the majority rule is not wholly satisfactory. The administrative burden on the taxing authority would substantially increase if assessors were required to consider all servitudes when valuing property.(fn53) Determining the existence of an easement or covenant can be quite time-consuming. The tax assessor may have physical evidence of an easement burdening the servient estate, but in most cases the assessor would have to examine the records to determine the existence of covenants or locate dominant estates.(fn54) If done properly, the extra effort required to acquire and maintain the appropriate information and records could be staggering. Accordingly, there is doubt whether the tax assessing process actually takes such interests into consideration.(fn55)

The tax assessment theory is based on rationale opposite to that used in support of Washington's tax lien priority position. Under the tax assessment theory, the courts do not consider the rule burdensome to the tax collection system because in order to comply with the tax valuation statutes, the servitudes need to be identified by the taxing authority anyway. Interests that affect the fair cash value of property must be examined in order to obtain a valid appraisal and any other approach would violate the property tax laws.(fn56) The only burden that the courts considered meaningful was the burden on the landowners if they were forced to keep track of other parcels of land to make sure tax payments were kept up to date.(fn57)

On the other hand, Washington's priority theory considers only the burden on the taxing authority.(fn58) Whichever approach is taken, the final outcome seems to result from underlying policy considerations.(fn59) The majority's result would seem favorable to the...