Chapter 4: Encumbrances


 

Chapter 4
Encumbrances:
Liens (Financial Encumbrances) and
Non-Financial Encumbrances

Encumbrances
Encumbrance defined:
A nonpossessory interest in real property
held by someone other than the fee owner
that affects title or use of the property


Marketable Title and Clouds on Title
Marketable title is title that a prudent buyer would accept
Some encumbrances do not affect marketable title (for example, a utility easement)
A “cloud on the title” is some defect in the title that prevents an owner from conveying marketable title
Example: real estate loan repaid, but deed of trust has not been reconveyed
Example: a mechanic’s lien remains on title after lien claimant has been paid

Encumbrances: Types
Non-financial
Affect physical condition or use of property
Examples:
Easements
Private restrictions
Public restrictions (Chapter 5)
Encroachments
Financial (liens)
Secure repayment of debt or performance of an obligation
Examples:
Mechanic’s liens
Judgment liens
Attachments
Deeds of trust (Chapter 9)
Real property taxes (Chapter 5)

Monetary Encumbrances: Liens
A lien is a financial interest in real property which secures performance of a specific act
Usually, the payment of money
The lien holder has the right to force the sale of the property if the act is not performed

Classifying Liens: Voluntary vs. Involuntary
Voluntary liens
Created by agreement of the owner (contract)
Examples: deeds of trust, mortgages (Chapter 9)
Involuntary liens
Created by operation of law (imposed by law)
Sometimes called “statutory liens”
Examples:
Mechanic’s liens
Judgment liens
Attachment liens
Property tax liens
Income tax liens

Classifying Liens: Specific vs. General
Specific liens attach to a particular, identified parcel or parcels of real property
Examples: Deeds of trust, mortgages, property taxes, mechanics’ liens
General liens apply to all property of the owner
Examples: judgment liens, income and estate tax liens
Types of Liens
List a lien that is both:
Voluntary and specific
Involuntary and specific
Involuntary and general
Mechanic’s liens
Persons who provide labor, materials, or equipment to improve real property have a right to place a lien against the property for the value of the labor, materials or equipment if they are not paid
If lien is not paid, claimant can force the sale of the property to satisfy the debt
Mechanic’s liens can be claimed by contractors, subcontractors, laborers, material suppliers, equipment suppliers, surveyors, and architects
Claiming and Enforcing Mechanic’s Liens
Right to claim lien and right to enforce lien are both subject to compliance with statutory filing deadlines
Three deadlines:
Giving preliminary notice
(for some claimants)
Recording mechanic’s lien claim
Recording lawsuit to enforce claim
Mechanic’s lien: First Deadline
Notice must be given to owner within 20 days after labor, materials, or equipment are first provided by the claimant
Example: XYZ Lumberyard delivers lumber to a jobsite on September 15
XYZ must deliver a preliminary notice to the owner no later than what date?
October 5 – September 15 + 20 days
The main purposes of the preliminary notice are to:
let the owner (and any construction lender) know who might be able to file a mechanic’s lien if they are not paid; and
preserve the right to claim a lien if not paid
Claimants Required to Give Preliminary Notice
Requirement does not apply to:
contractors (someone with a contract directly with the owner), or
laborers
Requirement applies to all others
subcontractors, material suppliers, equipment providers
Sample Preliminary Notice Form
Mechanic’s liens: Second Deadline
All claimants must record a mechanic’s lien within a certain time after the improvement is complete
The time period for recording depends on whether the owner records a Notice of Completion and who is making the claim
If owner records a Notice of Completion
Contractors (those with direct contract with owner) must record their lien within 60 days after Notice of Completion is recorded
All others must record their lien within 30 days after NOC recorded
If owner does not record Notice of Completion, all claimants have 90 days from completion to record their liens
Mechanic's liens: Third Deadline
Once a claim is recorded, the claim must be enforced (collected) by filing a court action for foreclosure
Mechanic's lien claimant must file the court action to foreclose within 90 days after the date that the mechanic’s lien was recorded
Foreclosure action is to force the sale of the property and use the proceeds of the sale to pay the claim
Mechanic’s Liens: Doctrine of Relation Back
Most claims of an interest in real property have a priority date based upon the date that the claim was recorded in the county recorder’s office
All mechanic’s who record a lien on a timely basis have priority date back to the date work first started on the project

Mechanic’s Lien: Doctrine of Relation Back
Doctrine of Relation Back Can Affect Other Property Interests
Terminating Mechanic’s Liens
Mechanic’s lien terminated if:
Claim is paid
Claimant must file release of lien
Claimant fails to foreclose within 90 days after filing lien
Foreclosure of lien
Purchaser at foreclosure sale takes property free of the interest of the lien and any interests that have a priority after the mechanic’s lien priority date
Lawsuits and Judgments
General lawsuit process
Plaintiff files a complaint with court to begin lawsuit against defendant
Defendant files an answer with court
Both parties conduct pre-trial discovery
Court holds trial on lawsuit
Court or jury renders decision in lawsuit
If Plaintiff wins, Plaintiff gets a judgment awarding money damages
If Defendant does not pay judgment, Plaintiff can take steps to collect judgment
Judgment Liens
To collect judgment, Plaintiff can place a lien against real property owned by the Defendant
Plaintiff (judgment creditor) creates a lien by recording an abstract of judgment with county recorder
judgment lien priority date is date abstract of judgment is recorded
Abstract of judgment creates general lien on all real property owned by defendant (judgment debtor) in that county
Term of lien is 10 years
Lien automatically attaches if judgment debtor acquires title to property after abstract of judgment is recorded
Enforcing a Judgment Lien
To enforce (collect) on the judgment , the judgment creditor can request court to issue a writ of execution to force the sale of the property
If court issues writ of execution, court orders sheriff’s sale (execution sale) to sell the property
Purchaser at sheriff’s sale takes title free of the interest of the judgment debtor and free of any interests with a priority after the lien priority date
Amount paid at execution sale is used to pay the judgment

Attachment Liens
Attachment: pre-judgment remedy
Remedy sought after case is filed, but before the case is completed
Plaintiff requests that court seize property of the defendant to assure that the defendant does not get rid of assets before the case is completed
Plaintiff must prove:
there is reason to believe that the defendant will try to sell or conceal assets before the end of the case
it is more likely than not that the plaintiff will win
Anyone who acquires property after attachment lien is recorded takes “subject to” the rights of the Plaintiff if the Plaintiff wins
Homestead Exemptions
Homestead exemptions can protect all or a portion of equity in a judgment debtor’s personal residence in a forced sale
Equity = Property value minus total of prior liens
Example: Buyer purchased home for $400,000 using a $20,000 down payment and a first priority loan of $380,000
Equity: $400,000 - $380,000 = $20,000
Example 2: Property value 3 years later is $430,000 and loan amount is $375,000
Equity: $430,000 - $375,000 = $55,000
Liens Affected by Homestead Exemptions
Homestead exemptions only protect against forced sales by persons who have a judgment lien on the property
Homestead exemptions do not protect equity in forced sales by persons with claims from:
Deeds of trust (voluntary liens)
Mechanic’s liens, or
Tax liens
Amount of homestead exemption
How Homestead Exemptions Work
Judgment creditor applies to court for sale
Court determines if property is a homestead and, if so, the FMV of the property
Court determines if sale of property will provide any funds to pay creditor
If so, court orders sale – issues a writ of execution
Application of Sale Proceeds
High bidder at foreclosure sale takes “subject to” prior liens and encumbrances
For example, lien of lender’s deed of trust that was recorded prior to the recording of the abstract of judgment
Proceeds of the sheriff’s sale applied in the following order:
To Judgment debtor in the amount of the homestead exemption
To pay the costs of sale
To the judgment creditor, up to the amount of the judgment
To junior liens, in order of priority
Any remaining amount to the judgment debtor
Homestead Exemption Example
Judgment = $100,000
FMV = $350,000
Prior Lien = $200,000
Homestead Exemption = $75,000
High bid at sale =$140,000, subject to prior lien
Costs of Sale = $10,000
Homestead Exemptions
Two types:
Automatic homestead
Recorded declaration of homestead
Advantages for declared homesteads:
Protect proceeds of voluntary sale by judgment debtor for 6 months
(or longer if proceeds are reinvested in new homestead)
Example:
Debtor has $50,000 equity in homesteaded property, sells property, and gets a check from escrow for $40,000 after closing costs
Homestead Declaration Form
Available online from the Los Angeles County Recorder’s office

Priorities
When property is subject to several interests and encumbrances, the priority of the competing interests and encumbrances is generally determined by the order in which they are recorded
Exceptions:
Property taxes and special assessments – priority over other claims
Mechanic’s liens – priority date is date the work first started on the improvement project
Priorities: Foreclosure Sale Example
Borrower purchases property in 2005 for $500,000
Purchase price paid with:
$450,000 loan secured by deed of trust 1 (recorded first)
$30,000 loan secured by deed of trust 2 (recorded after deed of trust 1)
$20,000 cash down payment
Property value drops to $470,000
Borrower defaults on both loans
Foreclosure Example Continued
If 1st DOT forecloses
High bid $450,000
Foreclose costs $5,000
High bidder takes property free of liens of both 1st and 2nd DOT
Proceeds of sale paid:
$5,000 costs of sale
$445,000 1st DOT
Lender with 2nd DOT loses property as collateral

If 2nd DOT forecloses
Lien of 1st DOT is not affected (remains on property after foreclosure)
Bidders must adjust bids accordingly
High Bid: $10,000
High bidder takes property free of lien of 2nd DOT, but subject to lien of 1st DOT
Proceeds paid $5,000 for costs, balance to pay down 2nd DOT
Non-monitory Encumbrances
Types of non-monetary encumbrances:
Easements
Restrictions
Private
Public
Related concepts:
Encroachments (rela
Easements
Defined:
An interest in the land of another that gives the easement owner the right to use the other person's property for a particular purpose
or prevent the owner from using the owner's property for a particular purpose (negative easement)
Examples:
Right of way for access
Right to light or air (solar easement)
Easement Definitions
Servient Tenement
The property burdened by the easement
All easements have a servient tenement
Dominant Tenement
The property that benefits from the easement
Not all easements have a dominant tenement
Those that do are called appurtenant easements
Those that do not are called easements in gross
Easement Appurtenant; Easement in Gross
Creation of Easements
Easements can be created by:
Express agreement (express easements)
Implication (implied easements)
Necessity (easements by necessity)
Prescription (prescriptive easement)
Express Easements: Created by a Written Document
Most easements are created as express easements, by agreement
To be valid, must meet same requirements as for deeds
Identify parties, words of conveyance, competent grantor, adequate description, signed by grantor, in writing (Statute of Frauds), delivered and accepted
Same recording requirements as for deeds
Express Easement Created by Grant
Express Easement Created by Reservation
Easements by Implication
No written document creating easement
Three Requirements:
Both parcels were under common ownership
Obvious and permanent use of one property for the benefit of another (or actual knowledge) when owned by same person
Easement is reasonably necessary or convenient for use of benefited property
Easement by Implication
Easement by Necessity
Requirements:
Common ownership of land
Land becomes landlocked when transferred from common owner - easement is absolutely necessary
Easement by Necessity
Prescriptive Easement
Similar to adverse possession, but used to acquire a right to use, not title (ownership)
Four requirements:
open and notorious possession
hostile (adverse and without consent)
continuous for 5 years
claim of right or color of title
Not required: payment of taxes
Terminating Easements
Merger of title
Agreement
Abandonment
Must show intent to abandon
Nonuse for five years will terminate a prescriptive easement, but not other easements
20 years of nonuse + no separate tax assessment + no document recorded
Adverse possession
Easement no longer absolutely necessary
easement by necessity only
Restrictions
Private Restrictions
Typically imposed by deed or in CC&Rs
CC&Rs: Covenants, Conditions & Restrictions
Restrictions based on race, color, religion, national origin, etc. are void
Covered in Chapter 15
Condition vs. Covenant
Covenant:
promise to do, or not do, something
Condition:
limitation on ownership
Difference = Remedies for violation
Remedy for violation of covenant: injunction or money damages
Remedy for violation of condition: take back property
If unclear whether a clause is a condition or covenant, courts will interpret as a covenant
Private Controls
Deed Restrictions
Example: restricting use to residential use
Deed Clause Incorporating CC&Rs
Terminating Private Restrictions
Expiration of stated term
Voluntary termination
Merger of ownership
Government action
Changed conditions
Restrictions
Public Restrictions
Public restrictions are based on the police power
right to impose use restrictions for the benefit of public health, safety, or welfare
Examples:
Zoning
Building codes
Health codes
Discussed in Chapter 5
Encroachments
Wrongful construction or improvement on the land of another
Examples:
Building constructed over lot line