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Lender fears over property tax amendment

Change makes mortgage lenders ‘unequivocally’ responsible for commercial property tax arrears
Guardian Business Editor

Published: Oct 09, 2013

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Mortgage lenders have been taken aback by the passage of an amendment to the Real Property Tax Act which makes them immediately liable to pay property tax on commercial properties which are mortgaged with them, Guardian Business understands.

Whereas prior practice was that a bank would not be in a position to execute the satisfaction of a mortgage until it received confirmation that outstanding property taxes were paid or that the owner had approved a payment plan with the government, lenders have expressed concern that the Real Property Tax (Amendment) Bill 2013 inserts a new section into the law that appears to increase the responsibilities facing the bank to pay the taxes in arrears.

The amendment is also made applicable retroactively, meaning that banks would be liable for any taxes which were in arrears from before the execution of the amendment, as well as afterwards.

It applies to tax on undeveloped, as well as developed, commercial property.

Guardian Business understands that the Clearing Banks Association is anxious about the Bill’s implications and is seeking discussions with the government on the matter.

In its “objects and reasons”, the amendment to the act that its intention is to make it “unequivocally clear that the penalty for non-payment of the said tax is the sole responsibility of the mortgagee (lender) in the case of commercial property.”

Yesterday, a senior source in the financial services industry, who spoke on condition of anonymity, said that the new amendment will induce moral hazard by removing the incentive for borrowers to pay their real property tax and could ultimately reduce the lending appetite of banks.

Calling the change “outrageous”, he questioned the retroactive nature of the amendment, adding that “under common law, that’s not done.”

The liability on the bank is based in the fact that in The Bahamas, banks as lenders become “owners” of the property they have mortgaged, whereas in “most countries” this does not occur anymore.

“When we mortgage a property we legally transfer property from borrower to lender. They’ve used that construct to say to people that since you are the real owner we will hold you liable for real property taxes.

“It’s saying that if there are any real property taxes owing longer than 90 days the lender had to immediately pay that property tax going back, and forward. The treasury can come and start knocking on our doors today seeking that money,” he said.

The law change is believed to have passed in August without the awareness of many in the banking community.

However, the attorney also added that the legislative amendment has “no teeth” in terms of stipulated enforcement measures should lenders refuse to pay the taxes.

The amendment inserts section 19A, “Liability of a mortgagee to pay tax on commercial property.”

It reads: “In the case where a tax or surcharge remain unpaid for a period in excess of ninety days in respect of commercial property mortgaged under a deed of mortgage executed either before or after the coming into operation of this section, the mortgagee of the commercial property shall pay the amount of tax or surcharge due and payable under the provisions of this Act in respect of such commercial property.”

CBA President Marie Rodland-Allen did not return messages seeking comment up to press time yesterday.

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