Summary:
Real estate, often referred to as a ‘hard asset’ due to its physical nature, is a tangible and physical property that is presumed immovable and an asset in the real estate industry.
You can own, occupy, identify, visit, modify, and improve only with a government-sanctioned temporary bundle of rights. . .
The government may extinguish those bundles of rights at will, rendering the rights non-absolute, but relatively temporary. No matter what you have been taught about private property rights, step into the government court system, and watch a judge routinely violate the rights that you thought you had.
You may convey a security interest in real property to a lender to encumber (i.e., place a lien on) it as collateral for a loan. The loan proceeds are what you exchange for your security interest.
Public notice of the security interest attached to the property is done through a government-controlled public records recording process. This process, managed by a county or municipal recorder’s office, involves filing and indexing various documents, such as deeds, mortgages, and liens, that comprise the community’s records. Public records searches are open to the public.
In public recordings, agreements, actions, notices, intentions, and performances attached to real property must comply with laws and regulations that modify the rights, title, and interest in one’s ownership rights.
Article:
An alien is a legal right or claim against real property, also known as a security interest. The lien is given to a creditor (lender) to hold and possess until the loan is paid off.
A lien refers to a monetary (money charge) claim that will be attached to a property by a recording instrument and becomes an encumbrance on one or more properties.
Property owners/borrowers willingly agree to grant or convey a security interest in their real property by signing a deed of trust or mortgage instrument. As an agreed-upon loan consideration, this document must be recorded in a public records office to establish a recorded lien position as a lien attached to a particular real property.
Lenders/creditors are individuals or entities that willingly invest their capital in loans secured by a security interest in the property. The creditor/lender receives a recorded charging interest and claims against the collateral property and is placed as the beneficiary on the document.
What is an Encumbrance?
An encumbrance is a legal claim or agreement that enforces rights and obligations related to a property. The claims are against the property by an independent party, such as a mutual property association, a court-ordered lien, a notification from a municipal building department for substandard conditions, or a government agency. The claims restrict the unrestricted use of the property until the deficiencies are satisfied or negotiated into an equitable agreement of future actions. An encumbrance may be lifted, reconveyed, or modified.
Understanding the distinction between a lien and an encumbrance is not just a matter of legal jargon. It’s a crucial aspect of real estate law that can significantly impact your professional success. This knowledge empowers you to make informed decisions and navigate real estate transactions confidently, making you feel more in control and knowledgeable.
Failing to recognize the distinction between a lien and an encumbrance can significantly impact real estate transactions. Dozens of actions, events, court-ordered conclusions, and regulatory requirements are memorialized in written agreements, and instruments may be recorded in public records, creating either a lien or an encumbrance on the property. Failing to recognize these can lead to legal disputes, financial losses, and even the inability to transfer property ownership, instilling a sense of caution and vigilance in the audience.
Here are a few considerations about recordation, liens, and lien priority:
Conveyance documents, such as grant deeds, quitclaim deeds, general warranty deeds, gift deeds, and other legal instruments, transfer title and ownership interests from one party to another.
An original recorded tract map by the state of jurisdiction for the entire neighborhood will be a matter of public record.
Utility and other easements, as well as government-mandated conditions, include historical property registries, long-term leases, agreed-upon encroachments, air and subsurface rights, and height and view restrictions.
Mutual association by-laws, covenants, conditions and restrictions, entity ownership and Partnership agreements, tenancy leases, various public notices such as weed abatement, and notifications of substandard conditions.
Lis pendens, property settlements by adverse parties, divorce decrees, subordination, non-disturbance, and attornment agreements (commonly abbreviated as an “SNDA”), parking easements, reciprocal parking agreements, signage easements, and memorandums of agreement or understanding.
Property taxes, federal or state tax liens, zoning laws, environmental regulations, Etc.
While the lending industry may use the terms “lien” and “encumbrance” interchangeably, there is a distinct difference between them. A lien is generally a recorded monetary charge against a property. At the same time, an encumbrance is a broader term that encompasses any claim against the property. All liens are encumbrances, but not all encumbrances are liens. Both create claims against the property that impact ownership rights, possessory interests, and transferability. Bothth liens and encumbrances restrictheed usof the property e until the claim is lifted, reconveyed, or modified.
Some liens and encumbrances may remain on the property’s title. Property ownership may be conveyed to another party by a negotiated purchase contract, “subject to" certain items remaining on the title. A new owner may or may not take steps to have some of the encumbrances removed.
Generally, lenders will not accept irrational, unlawful, or illegal restrictions. Some restrictions may cloud the title and could be avoided as a matter of law. I once witnessed a deed that stated the property could not be sold to a person of Asian (Chinese) descent. I also read a deed restricting future property owners from selling or serving alcohol. Fortunately, I did not make a loan or purchase that property.
Some encumbrances can significantly affect a property’s unrestricted use, desirability, and marketability. For instance, a property with a recorded lien for unpaid taxes may be less desirable to potential buyers. Similarly, a property subject to a restrictive covenant that prohibits specific uses may have limited marketability. This highlights the importance of understanding and addressing encumbrances when engaging in real estate transactions, instilling a sense of caution and vigilance in the audience.
Dozens of issues may create conflicts, such as disagreements in the limited Partnership's ownership rights, claims of proprietary rights, notice of substandard conditions, and many other problems. The purchasing party may be unable to convince a title insurer to provide a title policy on the conveyance. In such cases, a court process known as a declaratory relief action may be required..This process, where the court mediates and decides on the validity of the contested claim, provides a legal resolution to the conflict. Understanding this legal option can reassure you about the legal resolution of such issues, instilling confidence in the legal system’s ability to resolve disputes.
How does a lien or encumbrance become attached to a property?
The vital role of the Municipal Recorder’s Office in real estate transactions cannot be overstated. This office is responsible for recording and managing public records, including deeds, mortgages, and liens. With the advent of modern technology, the recording process has become more convenient, allowing for quicker and more efficient management of these critical documents.
Understanding the Purpose of Recording Documents in Real Estate Transactions:
The purpose is to create constructive notice to the public of records, documents, and instruments that affect the chain of titles. The objective is to access public records and provide a traceable chain of title documents attached to real property. Interested parties may trace recorded documents for many years to determine ownership, liens, encumbrances, and whether they were voluntary or involuntary. Recording statutes permit (not require) the recording of instruments that historically affect the chain of title to or possession of real property.
If a person fails to record an instrument that should have been recorded, the property is left vulnerable to other events and documents that may be recorded. This could result in another unrelated recorded document assuming a senior lien or encumbrance position. Consequently, the person may encounter difficulties in any subsequent conveyance action, making it challenging to prove ownership or the status of the possessory interest. This underscores the potential risks and the need for utmost caution in real estate transactions, ensuring you are always aware of the possible pitfalls.
https://www. boe. ca. gov/proptaxes/pdf/Ownership_DeedRecording. pdf
https://en. Wikipedia Orgg/wiki/Recording_(real_estate)
In the past, paper records were the primary source of information. Then came what was considered a substantial improvement: a microfiche records database. Microfiche was a flat piece of film that contained microphotographs. These images were photographed and reduced from the original. The materials were made of plastic (acetate) between the 1930s and the 1980s, and then of polyester after the 1960s. The film has a silver-gelatin emulsion coating on it. A single 4 x 6-inch sheet of film may have many separate frames. Copies of documents would be obtained using a scanner and a printing device. By today’s standards, this is an obsolete method in our world of instant information.
Public records may contain notices of encumbrance for both voluntary and involuntary rights and claims. Liens and encumbrances create clouds on the title that must be acknowledged and dealt with by the transaction-procuring broker, purchaser, or lender. A purchaser or lender may accept the property with questionable conditions, remove it from the title, modify it, or reject it because the risk is too significant.
Each document recorded against the property may contain agreements, considerations, prohibitions, and risks that the Borrower/lender must consider. A recorded trust deed may contain 20-40 pages of legalese that the Borrower should review, as well as the Borrower's counsel, agent, fiduciary, and prudent lender. The document identifies three parties: a lender, a Borrower, and a trustee. Documents include a comprehensive property description, an assessor’s parcel number (APN), a granting clause, a legal description, statements, and provisions that encompass all the rights, titles, and interests held by the three parties. Clauses may also include “representations and warranties.” “due-on-sale,” “due-on-further encumbrance,” and “default provisions” by the Borrower.
https://www. law. Cornell. edu/wex/deed_of_trust
Due to their tremendous complexity, various clauses in loan documents generally create restrictions and prohibitions that should be addressed separately. I encourage interested parties to seek advice from competent counsel.
A real estate or lending broker/agent has a fiduciary responsibility to assist the buyer or Borrower in understanding all documents relating to a purchase or loan transaction.
Below is a good summary of fiduciary duties.
https://dre. ca.gov/files/pdf/The_Real_Estate_Brokerage_as_Fiduciary.pdf. pdf
Sometimes, a property owner may record notices of change of ownership in public records that amend the method of ownership status. An example would be changing or conveying the title of a property from “husband and wife as joint tenants ” to an “evocable family trust.” Another example may be recording a divorce decree or a quitclaim, which relinquishes one’s ownership interest in the property to another party as part of a negotiated settlement.
As a matter of law, only the trustees of a revocable family trust can hold legal title to real property, not the family trust itself. A revocable family trust is not a legal entity in its own right; it requires a trustee to act on behalf of the trust. The trust document is an agreement between the key parties of the trust.
What are the first, second, and third lien priority positions?
Lien priority is established by the precise date and time stamp when the document is recorded in the recorder’s office, as well as the date and location at which it becomes a public record. When a document is recorded, it is date and time-stamped and affixed with a sequential recording reference number.
Example: If a Borrower or their title company recorded three liens simultaneously on a single property, that would create a first, second, and third lien, regardless of the dollar amount of each lien. The first lien, or the earliest recorded, is considered a senior lien; the second and third liens are junior liens, with the second lien senior to the third. After the documents are recorded and scanned into the public records, the person who recorded them will receive the originals back in their possession. A title company, lender, or Borrower who records the documents gets the original, date- and time-stamped documents with reference numbers to confirm validity and ensure safekeeping.
What ensures the order of the recording is considered first, second, or third? How do you know the recorder did not make a mistake and record the documents out of order? You may request and pay for a title insurance policy from an insurance carrier. The title insurance policy guarantees your lien priority position, without which the airline may be required to pay an incorrect claim to the insured.
If you were to visit the recorder’s office, stand in line, and have your documents recorded, you would then check the recording sequence yourself. But generally, a title company carrier records documents as part of a sale or loan transaction.
Assume that a property is encumbered with a first lien of $500,000, a second lien of $100,000, and a third lien of $50,000! Assume all were recorded on the subject property properly. If the first lien is paid in full and the trustee records a reconveyance, that procedure will remove the first lien from public records. The second lien would then become the first lien, and the third would become the second lien.
A reconveyance is a written form signed by the trustee that is recorded when the lien is paid in full and fully satisfied. It is publicly shown that the lien has been released and removed from the public record. At the point of recording, the security interest is extinguished. A title company handling the title work for sale or refinance transactions usually records the reconveyance.
Some states use a satisfaction of the mortgage document rather than a reconveyance, but they are essentially the same.
If you were to refinance the same property and replace all three liens with one new single loan, all three liens would be reconveyed by the trustees and removed from public records. A new recording of the single loan with a fresh date stamp and recording number would reflect the new first lien position. The system works well if, for a fee, a title insurer provides an insurance policy that guarantees the lien positions.
Voluntary vs. Involuntary liens:
A voluntary lien is a claim that a person or lender has against the property of another as security for payment of a voluntary debt, as agreed to by the Borrower. The lien is attached to the property rather than the person. A trust deed or mortgage lien is a voluntary lien. The lien involves legal claims on assets such as real property. An owner may not sell the property or convey title to a third party without acknowledging, dealing with, or extinguishing the lien.
The recorded notice that a lien exists is with the county or municipal recorder’s office. Recording any lien or encumbrance against the private property will cloud the title.
A party may cloud the title to private property for involuntary claims by recording a lien against it. The owner did not agree to the lien. However, encumbering the property is a method to enforce claims for involuntary debts. These claims include obligations such as local, state, and federal tax liens, a notice of substandard conditions, contractor claims for mechanics’ liens, homeowner’s association dues, child support payments, and judgments from civil suits.
Liens may be consensual, such as a real estate loan, statutory, such as property taxes or infrastructure bond assessments, or based on a court order. A judgment lien is the most dangerous because a judge can order the recording of a lien on one’s property, whether for rightful reasons or subject to objection.
Statutory skipping power in front of other liens:
California law regards lien priority as “first-in-time, first-in-right.” First-in-time refers to recording with a precise date and time-stamped number. California laws also allow exceptions for certain liens, which are given“skipping power” to the front of the line, regardless of the recording time. Being at the front of the line means being given priority lien position preference over other recorded liens and encumbrances.
Government regulations permit certain liens to be advanced, making them the senior priority over other liens. Mechanic’s liens, meant to ensure that tradesmen and contractors are paid promptly, exemplify a priority lien with “skipping power.” The California Constitution protects this right and is further enumerated in the California Civil Code (Section 3110 et seq).
However, there are limits to the “skipping power” of mechanics liens. These relate to technical requirements, such as when the construction began and the claimant’s process for enforcing that lien. Even when the mechanic’s lien appears to have been “wiped out or extinguished” by a senior lienholder at a foreclosure sale, the lien is not automatically expunged. For more specific requirements regarding mechanics’ liens, the lender should consult counsel knowledgeable about construction and mechanics’ lien law.
Other exceptions relating to “skipping power “ may include property taxes, special tax assessment districts, and, in some states, homeowners’ or mutual property associations.
A written lease agreement has a “first-in-time, first-in-right” priority. Lessees (tenants) who have written lease agreements recorded at the county recorder’s office, which are date- and time-stamped before the recording of the new trust deed, will have the right to enforce the terms of the lease agreement and the right of continued occupancy. The lessee’s rights will run with the property until the lease terms (rights) expire or are modified in writing by mutual agreement. Below is an instructive example.
https://law. justia com/cases/california/court-of-appeal/4th/65/1469. html
Lien priority may be modified through written agreements:
There are many reasons to create written agreements that modify the lien priority by mutual understanding. One method is called a subordination agreement. This agreement makes the subject lien junior to another lien, even though it was recorded earlier with an earlier date stamp.
A real estate lender may condition the approval of a loan upon a written modification of the statutory priority. A written agreement between the Borrower, the tenant, and the lender may be required for approval and loan closing. A straight subordination agreement or a subordination, non-disturbance, and attornment agreement (SNDA )may be advised. Both agreements, when recorded, are encumbrances on the property.
Sometimes, it is in the lender’s best interest to terminate the tenancy in case of Borrower default and completion of a foreclosure procedure. In this case, a straight subordination signed by the tenant would be appropriate. Any act that causes a change in the chain of title may result in the lessee’s priority being lost. If the lessee’s priority is lost, they could be notified to vacate and be removed from the property.
In some commercial transactions, the lender may wish to preserve the tenancy of credit tenants to preserve the property’s cash flow, stabilized occupancy, and capitalized value. A subordination, non-disturbance, and attornment agreement, “SN DA, “may be the appropriate document to record SNDAs, which are agreements between a lessee (tenant), the lessor (landlord), and the lender. The SNDA outlines the specific rights and responsibilities of the parties. The SNDA will protect the lessee or tenant from eviction if the owner (landlord) stops making loan payments to the lender(s), resulting in a completed foreclosure. Other parties may be affected, such as the property’s purchaser.
https://www. jdsupra. com/legalnews/snda-what-is-it-and-why-is-it-important-97709/
Modifying the rights and responsibilities of senior and junior lien parties:
An inter-creditor agreement may be advised. This agreement does not modify the lien positions between junior and senior lender creditors.
An inter-creditor agreement is a written agreement between two creditors intended to memorialize how their competing security interests will be handled when each possesses liens (a claim or money charging interest) in a jointly owned and secured property. This agreement is used between two (or more) senior/junior lenders to establish rights and responsibilities between each lender. The agreement typically provides that one lender’s lien is senior to the other’s, regardless of when and in what order the liens were recorded.
Sometimes, the actual agreement is referred to as a “subordination and inter-creditor agreement.” This document allows two different lenders to “split up” the collateral, securing it in an equal first or junior lien position, subject to the terms and conditions of the agreement.
The inter-creditor agreements, when recorded, are an encumbrance against the property.
The subject of liens, encumbrances, property rights, title insurance, conveyances, and ensuring property documents typically requires an attorney specializing in real property or a highly knowledgeable lender. Do not attempt to understand the depth of this subject without the representation of an expert.