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Encumbrances & Liens: Understanding Key Concepts in Real Estate

If you are entering the world of real estate in the United States, it is crucial that you understand the concepts of “encumbrances” and “liens.” These terms may affect the usability, ownership, value and transfer of a property. In this article, we will break down these concepts and their various ramifications.

Encumbrances: Limitations on Property

The "encumbrances” refer to non-possessory interests that limit the rights of the legal owner of a property. Importantly, “encumbrances” do not include ownership of the property, but can have a significant impact on its use and value.

  • non-possessory interests limiting legal owner's rights
  • do not include possession

There are two main types of “encumbrances”:

  1. Encumbrances affecting use (that affect use): These types of “encumbrances” include elements such as easements, encroachments, licenses and deed restrictions. These limitations can influence how a property is used and the actions owners can take on it.                                  Encumbrances affecting use: easements, encroachments, licenses, deed restrictions
  2. Encumbrances that affect ownership, value, transfer: This group involves liens and deed conditions, which can directly impact the property, its value, and the ability to transfer it to a new owner.Encumbrances affecting ownership, value, transfer: lies, deed conditions

Easements: Use Rights

A "easement” refers to the rights to use certain parts of another person's property for a specific purpose.

Characteristics

  • rights to use portions of another's property
  • affirmative easement: allows a use
  • negative easement: prohibitions to use

There are two types of “easements”:

  • Appurtenant Easement: This type of “easement” is tied to a specific property and is transferred when ownership changes hands. It may be necessary when a property is locked and you need access through the neighboring property.ZSAppurtenant
    • attaches to the estate
    • dominant tenement's right to use or restrict adjacent servant tenement
    • by necessity, to landlocked owners
    • party wall easement in a shared structure: to not damage or destroy
  • Easement in Gross: This “easement” NOT tied to a specific property and it can be personal or commercial. “easements in gross” are transferable if they are related to a business.

         In Gross

  • does not attach to the estate
  • staff— not transferrable, ends upon death of easement holder
  • commercial— transferrable, granted to a business

Furthermore, there is the concept of “Easement by prescription“, which is created when someone uses a property without permission for a specific period of time, regardless of the owner's consent.

By prescription

  • property used without permission; can come to exist regardless of owner's consent
  • obtainable through continuous, open, adverse use over a period of time which varies by state

Licenses: Personal Rights

A license is a personal right to use a property and does not attach to the property itself. It is revocable and generally cannot be transferred or inherited. A license expires when the original owner dies.

License

  • staff right to use a property
  • does not attach
  • non-transferable
  • revocable
  • ceases upon death of owner

Encroachments: Unauthorized Intrusions

“Encroachments” occur when a part of a property invades the space of another property without authorization. Often, a survey is required to detect encroachments. If not corrected over time, encroachments can become prescriptive easements.

Encroachments

  • unauthorized intrusions of one owner's real property onto another's
  • may require survey to detect
  • may become prescriptive easements if not remedied over prescription period

Deed Restrictions: Writing Restrictions

Writing restrictions (deed restrictions) are conditions or covenants imposed on a property through the property deed or subdivision. These restrictions are intended to control the quality and standards of a subdivision and can affect land use, the type of structures allowed, minimum distances between structures, and much more.

Deed restrictions

  • conditions, covenants imposed on property by deed or subdivision plat
  • goes with the property upon transfer
  • established to control quality, standards of a subdivision
  • apply to land use, type of structure, setbacks, minimum house size, etc.

Deed Conditions: Deed Conditions

Deed conditions are restrictions or conditions imposed on a property at the time of its transfer. These conditions are set forth in the property deed and may vary based on specific agreements between the seller and buyer. It is important to understand that if these conditions are violated, the property may revert to its previous owner, i.e. the original seller.

These conditions can address a wide variety of aspects, such as land use, maintenance of certain features of the property, or even restrictions on future subdivisions or development. For example, a “deed condition” could specify that the property can only be used for residential purposes and not for commercial activities. If the new owner violates this condition by establishing a business on the property, the original seller may have the right to repossess the property.

It is important to highlight that the “deed conditions” are legally binding and must be strictly followed. If violated, they may lead to legal action to enforce the condition or recover ownership from the original seller.

Deed conditions

  • created upon property transfer
  • if violated, ownership may revert to previous owner

Deed Covenants: Writing Covenants

The "deed covenants” are mutual agreements between the seller and the buyer of a property. Unlike the “deed conditions“, which are imposed at the time of transfer, the “deed covenants” are voluntary agreements that both parties have agreed to.

These covenants are designed to set certain expectations and restrictions on the property and can address everything from land use to maintenance responsibilities. For example, a “deed covenant” might stipulate that the buyer must keep the property's lawn and landscaping in good condition.

The important thing about “deed covenants” is that they are legally enforceable through a court order. If one party fails to comply with the agreed upon covenants, the other party may seek legal remedy through a court order to enforce the agreement. This may include actions such as issuing a court order for proper maintenance of the property if the buyer fails to meet their responsibilities.

Deed covenants

  • created by mutual agreement
  • enforceable by injunction

In summary, both the “deed conditions" Like the "deed covenants” are important elements in the transfer of property and help establish clear expectations and legal restrictions on the property. Both are fundamental aspects of the real estate transaction that buyers and sellers must understand and comply with to avoid legal complications in the future.

Liens: Claims as Guarantee

The "lies” are claims attached to property (both real estate and personal property) as collateral for a debt. The "lies” are recorded on the title of the property and effectively reduce the equity by the amount of the “lien“. Although they do not grant ownership, they can significantly affect the ability to transfer ownership.

Liens

  • claims attaching to real and personal property as security for debt
  • recorded on title effectively reducing equity in the amount of the lien
  • does not convey ownership unless a mortgage in a title theory state
  • lien attaches to the property
  • property can be encumbered by multiple liens
  • lien terminates upon payment, recording satisfaction

There are several types of “lies” with various characteristics:

  • Liens Voluntary / involuntary: “Voluntary liens” are created by the owner's choice, like a mortgage, while “involuntary liens” are imposed without the owner's choice, like a tax lien. Voluntary / involuntary: mortgage lien / tax lien
  • Liens General / specific (General / Specific): “General liens” apply to all of a person's assets, while “specific liens” apply only to a particular asset, such as a car or house.General / specific: against any & all assets / against car or house
    • Liens Senior/junior (Upper/Lower): “Upper liens” are paid before “lower liens” based on your registration date and class. Senior/junior: paid before juniors / paid after superiors by date of recording

Liens Priority: Who Gets Paid First

The priority of liens determines the order in which claims against a property are satisfied. Higher liens are paid before lower liens, based on their class and registration date. The highest priority liens are paid first with foreclosure proceeds, before any other liens.

It is important to understand how lien priority is established to understand who is paid first in the event of a foreclosure or property sale.

Lien Priority

  • order in which liens against a property are satisfied
  • determined by superior v junior class and by date of remembrance
  • the highest priority lien is paid by foreclosure proceeds before any other lien

Superior Liens by rank (not by date of recording; paid before junior liens) Junior Liens (by date of recording)

• real estate tax liens • federal income tax liens

• special assessment lies • judgment lies

• federal estate tax liens • mortgage liens

• state inheritance tax liens • vendors' liens

                                                                                                                                                 • mechanics' liens (priority by date work performed)

Differences between States of Lien Theory and Title Theory

Lien theory and title theory are two different approaches to mortgages in the United States:

  • Lien's theory: In lien theory states, the borrower retains legal title to the property and the lender has a security interest. If the borrower defaults on the loan, the lender must file for foreclosure to take legal possession.
  • Title Theory: In title theory states, the lender retains legal title to the property until the loan is paid in full. The borrower has equitable title. If the borrower defaults on the loan, the lender can take direct possession of the property without the need for foreclosure.

Lien vs. Title Theory State

  • lien theory state — lender of mortgaged property holds equitable title rather than legal title; borrower holds legal title.
  • title theory state – lender holds legal title to the mortgaged property until the mortgagor satisfies the terms and obligations of the loan.

Foreclosure (Foreclosure)

 

Foreclosure is a legal process by which a property is liquidated or transferred due to the borrower's inability to meet the terms of a mortgage loan.

  • Liquidation or transfer of collateral property by judicial, non-judicial, or strict foreclosure

This process can be carried out in various ways, and some of the main ones are explained here:

Mortgage Lien Foreclosure (Foreclosure of a Mortgage Lien)

In this case, the property held as collateral for a mortgage loan is liquidated due to the borrower's nonpayment. This can be carried out through judicial or non-judicial processes, or even strict foreclosure.

  • liquidation of collateral property by judicial, non- judicial, or strict foreclosure

Judicial Foreclosure (Judicial Foreclosure)

In a judicial foreclosure, the lender files a lawsuit against the borrower who has defaulted on mortgage payments. If the court finds that the default is valid, a public sale of the property is ordered to pay the debt.

This form of foreclosure may include elements such as deficiency judgment and redemption rights.

  • Deficiency Judgment: If the sale of the property at foreclosure does not fully cover the outstanding debt, the court may enter a deficiency judgment. This means that the borrower must pay the difference between the amount owed and the sales price of the property. In some states, legislation may limit or prohibit deficiency suits. (J.udgment by court on borrower to forfeit other property to pay off any shortfalls from foreclosure)
  • Redemption Rights: Some states allow the borrower to exercise his or her redemption rights after a judicial foreclosure. This means that the borrower has the opportunity to purchase the property again, usually paying the sales price plus associated costs within a set period after the sale. (Borrower's right to reclaim property before or after foreclosure sale)
  • lawsuit by creditor followed by court-ordered public sale to enforce lien; may entail deficiency judgments, redemption rights

Non-judicial Foreclosure (Non-Judicial Foreclosure)

In contrast to judicial foreclosure, nonjudicial foreclosure is carried out without the need for a trial. Here, the lender can exercise the “power of sale” granted by the mortgage deed. There is usually no deficiency judgment, and in some states, there are no redemption rights.

  • “power of sale” granted to lender; no suit; No deficiency deficiency

Strict Foreclosure (Strict Foreclosure)

In rare cases, a court may order a strict foreclosure. This means that the property is transferred directly to the lender without a public sale. This form of foreclosure is used in specific situations and varies depending on state laws.

  • court orders legal transfer of title directly to lender without public sale

Deed in Lieu of Foreclosure (Deed in Lieu of Foreclosure)

Sometimes, instead of foreclosing, the borrower and lender can agree to a “deed in lieu of foreclosure.” In this case, the borrower legally transfers the property to the lender to settle the outstanding debt. This avoids a full foreclosure process and often does not involve a deficiency judgment or redemption rights.

  • “power of sale” granted to lender; no suit; No deficiency deficiency judgement; no redemption period after sale

Foreclosure is a complex legal process that varies by state and individual situation. Those facing foreclosure or involved in one as a lender should seek legal counsel to fully understand their rights and responsibilities in this process.

Conclusion

Understanding “encumbrances” and “liens” is essential for anyone involved in the United States real estate market. These concepts can affect the ownership, value and transfer of a property, and understanding them is crucial to making informed real estate decisions. By understanding the rights and restrictions associated with a property, buyers, sellers, and real estate agents can better navigate the complex world of real estate in the United States.

Note: This article provides general information and does not constitute legal or financial advice. Always consult a qualified professional for advice specific to your situation.

Legal and Tax Disclaimer

Please be advised that the content presented in this blog is for informational purposes only and should not be construed as legal or tax advice. The articles and information provided here are written from the perspective of a real estate agent affiliated with Keller Williams, and do not represent legal or tax counsel.

As the author, I am a licensed real estate professional under Keller Williams, holding Brokerage DRE License Number: #02197031. However, it is important to note that my expertise is in the field of real estate, and not in legal or tax matters. The insights and opinions shared on this blog are based on my experiences and knowledge in the real estate industry and should be treated as general guidance rather than definitive legal or tax advice.

For specific legal or tax concerns relating to any real estate transactions or investments, readers are strongly encouraged to consult with a qualified attorney or tax advisor who can provide tailored advice based on your individual circumstances and the latest legal and regulatory requirements.

The information on this blog is provided "as is" without warranty of any kind, and I, along with Keller Williams and its affiliates, disclaim all liability for any loss, damage, or misunderstanding arising from reliance on the information contained herein.

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