A lien is a monetary charge or claim against property that is made to enforce the payment of money. Whenever someone borrows money, the lender generally requires some form of security. Security (also referred to as collateral) is something of value that the borrower promises to give the lender if the borrower fails to repay the debt. When the lender’s security is in the form of real estate, the security is called a lien.
A lien represents only an interest in property; it does not constitute actual ownership of the property. It is an encumbrance on the owner’s title. An encumbrance is any charge or claim that attaches to real property and lessens its value or impairs its use. An encumbrance does not necessarily prevent the transfer or conveyance of the property, but because it is “attached” to the property, it transfers along with it. Liens differ from other encumbrances, however, because they are financial or monetary in nature and attach to the property because of a debt.
Types of Liens
There are many different types of liens. One way liens are classified is by how they are created.
- A voluntary lien is created intentionally by the property owner’s action, such as when someone takes out a mortgage loan.
- An involuntary lien, on the other hand, is not a matter of choice; it is created by law. It may be either statutory or equitable.
- A statutory lien is created by statute. A real estate tax lien, then, is an involuntary, statutory lien. It is created by statute without the property owner taking it on voluntarily.
- An equitable lien is created by a court to ensure the payment of a judgment as well as by agreement.
Liens also may be classified according to the type of property involved.
- General liens affect all the property, both real and personal, of a debtor. This includes judgments, estate and inheritance taxes, decedent’s debts, corporate franchise taxes, and Internal Revenue Service taxes.
- Specific liens are secured by specific property and affect only that particular property.
Specific liens on real estate include :
- mechanics’ liens,
- mortgage liens,
- real estate tax liens,
- liens for special assessments and utilities.
- personal property, as when a lien is placed on a car to secure payment of a car loan,
Effects of Liens on Title
The existence of a lien does not necessarily prevent a property owner from conveying title to someone else. The lien might reduce the value of the real estate, however, because few buyers will take on the risk of a property that has a lien on it.
Because the lien attaches to the property, not the property owner, a new owner could lose the property if the creditors take court action to enforce payment. Once properly established, a lien runs with the land and will bind all successive owners until the lien is paid in full.
Priority of liens
Priority of liens refers to the order in which claims against the property will be satisfied. In general, the rule for priority of liens is “first to record, first in right.”
Liens take priority from the date they are recorded in the public records of the county in which the property is located.
There are some notable exceptions to this rule,
- Real estate taxes and special assessments generally take priority over all other liens, regardless of the order in which the liens are recorded. This means that outstanding real estate taxes and special assessments are paid from the proceeds of a court-ordered sale first. The remainder of the proceeds is used to pay other outstanding liens in the order of their priority.
- Mechanics’ liens take priority as provided by state law but never over tax and special assessment liens.
Subordination Agreements
These are written agreements between lienholders to change the priority of mortgage, judgment, and other liens. Under a subordination agreement, the holder of a superior or prior lien agrees to permit a junior lienholder’s interest to move ahead of her lien.
