Chapter 9

Liens on Property

Chapter Outline

I.Definitions

  1. Lien: a claim against property that secures a debt incurred by the property owner. It acts as an encumbrance on property because it is an interest in property that diminishes the property’s value.
  1. General lien: a lien that is not secured by any particular parcel of real property and, therefore, may affect all nonexempt property of a debtor.
  1. Specific lien: a lien that is secured by a particular parcel of real property.

II.Judgment Liens

  1. Types and definitions
  1. Judgment: a final decree of a court resolving a dispute and determining the rights and obligations of the respective parties.
  2. Monetary judgment: an award of monies to a plaintiff if he or she wins a lawsuit. When plaintiff wins a monetary judgment, he/she becomes a judgment creditor of the defendant(debtor).
  3. Declaratory judgment: a judgment sought when the parties to a lawsuit want a judicial decree on their status and rights with regard to a particular matter.
  4. Writ of execution: a court order that directs the sheriff to levy upon real property and sell it in a sheriff’s sale.
  1. Procedure
  2. A judgment lien is a general lien.
  3. For a judgment to become a lien and attach to real property, a certified copy of the judgment must be recorded in a judgment docket, register, or official records book in the county in which the real property is located.
  4. State statutes determine what property is exempt by law from forced sale. In some states, homestead property is exempted from forced sale to satisfy a judgment.
  5. To enforce a judgment lien, the plaintiff must have the court issue a writ of execution. Proceeds of the sale are used to pay the plaintiff the monies owed to him/her and any expenses incurred. Any surplus is returned to the defendant.
  6. In most states, a judgment lien’s priority is established by date of recording. In other states, it is determined by the date the court entered the judgment, and in yet others, by the date of issuance of the writ of execution.
  7. Once recorded, it remains a lien until the debt is paid or the statute of limitations expires.
  8. To remove a judgment lien after the defendant pays the debt, a satisfaction of judgment must be recorded to evidence the satisfaction of the debt.

III.Tax Liens

  1. Federal tax liens
  2. These liens attach to all property of the debtor, including property that may be exempt from judgment liens, such as homestead property.
  3. The priority is based on the date of its recording.
  4. The lien is valid for 10 years and 30 days from the date of assessment unless the lien is re-filed during that time period.
  5. The lien indicates the name and address of the delinquent taxpayer, kind(s) of taxes owing, pertinent tax period(s), date(s) of assessment, identifying number(s), and unpaid balance of the assessment(s).
  6. A tax sale is held after a notice of tax sale is published in a newspaper of general circulation in the county in which the real property to be sold is located.
  7. The purchaser must pay, at a minimum, the amount of the delinquent tax, any accrued penalties, and court costs.
  8. The delinquent taxpayer is given the equitable right of redemption (the right to buy back the property at any time prior to a forced sale by paying the full amount of the debt owed and all additional charges).
  1. State tax liens
  2. Examples: state estate and inheritance taxes, intangible taxes, corporate franchise taxes, and business-related taxes.
  3. These liens are governed by state statute.
  4. Estate and inheritance taxes are encumbrances on a decedent’s real and personal property and normally are satisfied as part of probate proceedings.
  5. Intangible tax: a tax imposed for the right to issue, execute, sell, assign, trade in or receive income from intangible property.
  6. Corporate franchise tax: A tax imposed for the right to exist and do business as a corporation in a certain state.
  1. Real property tax liens
  2. These liens may be enforced only against the real property that is the subject of the tax.
  3. They have priority over all other liens and need not be recorded to be enforced.
  4. Owner of the property must be given notice of the proposed sale, and notice must be published in a newspaper of general circulation in the county in which the property is located.
  5. In some states, prior to giving public notice of the sale, the taxing authority must file a bill of complaint in the appropriate court in the county in which the property is located, naming itself as complainant and the property as defendant.
  6. After a tax sale, the purchaser receives a tax deed.
  7. If the real property is not sold at a tax sale because of lack of interest, the property is forfeited to the state.

IV.Mortgage Liens

  1. A mortgage instrument is a specific lien, attaching only to the particular real property that is purchased with the loan proceeds. It becomes a lien when it is recorded in the public records in the county in which the property is located.
  1. Its priority is determined by the date of recording. Because real property tax liens are superior to all other liens, including mortgage liens, many lenders require the escrow of the real property taxes.
  1. Many lenders want to maintain priority status over all other liens, and to accomplish this, they may require that other lienors execute subordination agreements (agreements by which one party agrees that his/her interest in real property should have a lower priority than the interest to which it is being subordinated).
  1. Once a mortgage loan is paid in full, a satisfaction of mortgage must be recorded to remove the lien as an encumbrance on the real property.

V.Construction Liens

  1. In general
  2. Also known as mechanic’s lien or materialman’s lien.
  3. Definition: a statutory lien placed on real property by persons or entities providing labor or materials for the improvement of real property.
  4. They are specific liens.
  5. They are based on the principle of unjust enrichment, preventing a party from being unjustly enriched by receiving the services, labor, or materials of another without full reimbursement.
  6. Construction liens are statutory in nature and generally have no requirement that the lien claimant be in privity of contract with the property owner.
  7. Persons/entities entitled to a construction lien are specified by state statute and typically include general contractors, subcontractors, laborers, and suppliers of materials.
  8. Many states include lessors of equipment, architects, interior designers and decorators, professional engineers, and land surveyors.
  9. In a number of states, to be entitled to file a construction lien, a claimant must supply services, labor, or material that results in a fixture of “permanent benefit” to the real property.
  10. If the materials furnished are customized, the supplier generally has a right to file a construction lien, even if the materials ultimately are not used on the site.
  11. In states that require an express or implied contract with the owner or the owner’s authorized representative, the owner may avoid responsibility for unauthorized work done or unauthorized materials furnished by completing a notice of nonresponsibility, which then is posted on the construction site and recorded in the public records.
  12. A lien claimant is entitled to his/her claim only after the work is done or materials are furnished to the real property.
  13. To establish a claim of lien, a lien claimant must record a claim of lien within a statutorily specified time period with the recording clerk in the county in which the real property is located.
  14. In some states, the lien claimant, upon first beginning work or furnishing materials, must send a notice to the owner of the property indicating that the claimant is providing goods or services to improve the property.
  15. The amount of monies to which a lien claimant is entitled is determined by state statute.
  16. To ensure that the monies paid to the general contractor are being paid, in turn, to parties hired by the general contractor, the owner may insist that the general contractor supply the owner with lien waivers (documents indicating that a subcontract has been paid and will not be subjecting real property to liens).
  17. Construction liens generally attach to property retroactively; their priority is established not by the date upon which the lien was recorded but, rather, by the date the work is first performed or supplies are furnished by the lien claimant.
  18. In some states, priority of the lien dates back to the date upon which the claimant completed work on the premises.
  19. In other states, it dates back to the first date the lien claimant entered the property.
  20. In still other states, the lien, once recorded, dates back to the first date that work began on the property.
  21. Construction liens are enforced through foreclosure suits. Although state statutes vary in setting a statute of limitations for bringing a foreclosure action on a construction lien, the statute of limitations typically is of short duration.
  22. If full payment is made, either after the recording of a claim of lien or the filing of a foreclosure action, a release of lien must be recorded to remove the lien.
  1. Notice of commencement
  2. Definition: a document recorded by a property owner indicating the date that construction began on the property.
  3. In states that make a notice of commencement a statutory requirement, the recording of such a notice serves as notification to third parties that the owner of the real property has authorized certain improvements to be undertaken on the property.
  4. In some states, construction liens date back to the recording of the notice of commencement.
  5. Lending institutions providing construction loans typically require that the notice of commencement be recorded after their mortgage deed is recorded, to preserve their lien priority.
  6. State statute may mandate that a notice of commencement automatically expires after a specified time period unless the notice specifies otherwise.
  7. In addition to providing notice that improvements to real property are to commence, it also contains information helpful to potential lien claimants, including the name and address of the owner and the general contractor’s name and address.
  8. In addition to recording, some states require that a certified copy of the notice be posted in a conspicuous place on the real property.
  1. Notice to owner
  2. Definition: a document that puts a property owner on notice of those parties expecting payment for work or materials incorporated into the owner’s real property.
  3. State statutes may specify the time period within which a notice to owner must be served on the owner and any other indicated parties.
  4. In most states, a notice to owner is considered properly served when it is hand-delivered or mailed to the owner’s address provided on the notice of commencement. It is advisable to send the notice by certified mail, return receipt requested. If service cannot be made either by mail or by hand delivery, it may be permissible to post it at the project site.
  1. Claim of lien
  2. The lien will remain an encumbrance on the property until full payment is made, settlement is reached, or the time period for bringing suit has expired.
  3. State statute specifies the time period within which a claim of lien must be recorded.

VI.Other Liens

  1. Vendor’s lien
  2. Vendor: seller of real property. If purchase price, or a portion of it, is seller-financed by a purchase money mortgage, the buyer executes a mortgage instrument that, when recorded, acts as a specific lien on the real property.
  3. The priority of this lien is determined by date of recording.
  1. Condominium and homeowners’ association lien
  2. The right to impose liens on condominium units or homes of individuals failing to make their required payments is found in the declaration of condominium or the declaration of covenants and restrictions for the subdivision.
  3. The priority of these liens is determined by the date of recording.
  1. UCC lien
  2. UCC liens cover personal property used as collateral to secure a loan.
  3. The filing of a UCC-1 financing statement with the Secretary of State acts as notice to the public of the creditor’s interest in the personal property set forth in the financing statement.

VII.Lien Priority

  1. The priority of most liens typically is established by the date of recording.
  1. Exceptions are real property tax liens (which have priority over all other liens) and construction liens (which typically work retroactively).

VIII. Attachment

A. Writ of attachment: a court order that prevents a party to a lawsuit

from conveying title to property, real or personal, while the suit is

pending.

B. The property need not be the subject matter of the suit.

  1. In most instances, a court will require that a plaintiff post a surety bond or deposit with the court a sum of money to cover any possible loss in value of the attached property the defendant may sustain pending the outcome of the suit.

IX. Lis Pendens

  1. Definition: a notice recorded when a lawsuit affects title to a particular parcel of real property.
  1. Notice is recorded in the public records in the county in which the property is located. It is not a lien. Its purpose is to put third parties on notice that the property is the subject matter of litigation. It cuts off the rights of any party whose interest in the real property arises after the notice is filed.
  1. State statutes dictate the expiration of the notice. The court may require that a bond be posted to maintain the lis pendens or to renew it.

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