Principles of California Real Estate Lesson 4 Encumbrances

Encumbrances Encumbrance: Nonpossessory interest in real property held by someone other than owner. l

Encumbrances are either: l financial (liens), or l nonfinancial (easements, private restrictions, etc. ).

Liens Security interest Financial encumbrance (lien) is security interest in real property. Security interest: Creditor’s interest that makes property security (collateral) for debt. © 2010 Rockwell Publishing

Liens Security interest If property owner fails to repay debt, secured creditor may foreclose. l Property burdened by lien may be sold, but new owner takes title subject to lien. © 2010 Rockwell Publishing

Liens Voluntary vs. involuntary Voluntary lien: Property owner voluntarily grants lien to creditor. l Examples: mortgage, deed of trust. Involuntary (statutory) lien: Lien given to creditor by operation of law, without property owner’s consent. l Example: tax lien. © 2010 Rockwell Publishing

Liens General vs. specific General lien: Lien attaches to all of debtor’s real property. l Example: judgment lien. Specific lien: Lien attaches only to specific piece of real property, not everything debtor owns. l Example: mortgage. © 2010 Rockwell Publishing

Liens Types of liens Mortgages l Deeds of trust l Mechanic’s liens l Judgment

Types of Liens Mortgage: Specific, voluntary lien created by contract between property owner and

Types of Liens Deeds of trust Deed of trust: Serves same purpose as mortgage but has different foreclosure procedures. l Borrower = Trustor or Grantor l Lender = Beneficiary l Neutral third party = Trustee l Trustee handles foreclosure, if necessary. © 2010 Rockwell Publishing

Types of Liens Mechanic’s lien: Specific, involuntary lien attaching to real property undergoing construction work. l Can be claimed by anyone providing labor, materials, or services. l If owner fails to pay as agreed, lienholder can foreclose on property. © 2010 Rockwell Publishing

Mechanic’s Liens Preliminary notice Must give owner, general contractor, and construction lender (if any) preliminary notice of right to claim lien within 20 days of starting to provide services or materials. © 2010 Rockwell Publishing

Mechanic’s Liens Deadlines for filing liens vary depending on whether owner files: l notice of completion: must be filed within 10 days after project completed l notice of cessation: can be filed only after work has stopped for 30 continuous days (whether project finished or not) © 2010 Rockwell Publishing

Mechanic’s Liens Deadlines If owner files notice of completion or cessation, mechanic’s lien must be filed within 30 days (60 days for original contractors). If owner doesn’t file notice, mechanic’s lien must be filed within 90 days after work stops. © 2010 Rockwell Publishing

Mechanic’s Liens Foreclosure Once filed, mechanic’s lien will expire if lienholder doesn’t start foreclosure

Types of Liens Judgment lien: Involuntary, general lien that results from financial judgment against losing party in a lawsuit (the judgment debtor). l Attaches to judgment debtor’s property. l If judgment is not paid, court may order debtor’s property sold to satisfy judgment. © 2010 Rockwell Publishing

Types of Liens Judgment liens A judgment lien: l attaches to property owned by judgment debtor in any county where abstract of judgment is filed l can also attach to new property acquired by debtor © 2010 Rockwell Publishing

Types of Liens Attachment lien: Lien used to prevent defendant from selling property that could be subject to future judgment. l Court issues writ of attachment. l When writ is recorded in county where property is located, it creates involuntary, specific lien. l Valid for three years. © 2010 Rockwell Publishing

Attachment Liens Lis pendens: Legal document recorded by plaintiff, notifying anyone who purchases specified property about pending lawsuit that may affect title. l Just provides notice; doesn’t create lien. l If property is sold, new owner is bound by any resulting judgment. © 2010 Rockwell Publishing

Types of Liens Property tax lien: Involuntary, specific lien created by general real estate taxes. l Attaches only to property being taxed. l Government can foreclose and collect unpaid taxes from foreclosure sale proceeds. © 2010 Rockwell Publishing

Types of Liens Special assessment lien: Involuntary, specific lien based on levy, to pay for specific improvements such as street paving or sewer lines. l Only attaches to properties subject to special assessment (because they benefit from project). © 2010 Rockwell Publishing

Types of Liens IRS lien: Involuntary, general lien that attaches to all property belonging

Summary Basic Definitions • • Encumbrance Lien Mortgage Deed of trust • • Mechanic’s

Lien Priority Lien priority: Determines order in which lienholders will be paid, in foreclosures

Lien Priority Foreclosure sale proceeds are paid to each lienholder in order of priority. l Any surplus goes to foreclosed property owner. l If proceeds aren’t enough to pay off all liens, lienholders with lowest priority are not paid. © 2010 Rockwell Publishing

Lien Priority Recording date: Date lien was filed in county’s public records office. Generally determines lien priority except for: l tax and assessment liens (always have highest priority) l mechanic’s liens (priority based on date work began) © 2010 Rockwell Publishing

Liens Homestead Law Homestead law: State law that gives homeowners limited protection against foreclosure for judgment and attachment liens. Does not apply to: l voluntary liens (mortgages, deeds of trust) l mechanic’s liens l liens for child support or spousal maintenance © 2010 Rockwell Publishing

Liens Homestead Law Homestead: Owner-occupied dwelling, plus land attached buildings. Homestead protection may be claimed by filing declaration of homestead in county office. Or: l owner (or authorized person) may claim homestead protection after foreclosure started © 2010 Rockwell Publishing

Liens Homestead Law Person can only claim one homestead at a time. Homestead protection terminates when: l owner files declaration of homestead on different property l original property is sold l declaration of abandonment is filed © 2010 Rockwell Publishing

Liens Homestead Law If homestead owner dies, protection continues for family members still living

Homestead Law Exemption Homestead exemption: Homestead property is exempt from judgment liens up to exemption amount. l Judgment creditor can’t foreclose unless property’s net value exceeds exemption amount. l Net value = Market value minus amount of higher-priority liens © 2010 Rockwell Publishing

Homestead Law Exemption Current exemption amounts: l $75, 000 standard exemption l $100, 000 if debtor is part of family unit l $175, 000 if debtor is: l over 65 l over 55 and low income, or l unable to work because of disability © 2010 Rockwell Publishing

Summary Lien Priority and Foreclosure • • Lien priority Foreclosure Homestead laws Exemptions ©

Encumbrances Nonfinancial encumbrances While liens usually affect owner’s title only (not use of property), nonfinancial encumbrances often affect both title and use. Nonfinancial encumbrances include: l easements l private restrictions © 2010 Rockwell Publishing

Nonfinancial Encumbrances Easement: Right to use someone else’s land for particular purpose. l Easement holder may use property in some specific, limited way, but may not take possession of property. © 2010 Rockwell Publishing

Easements Types of easements Two basic types of easements: l easements appurtenant l easements

Types of Easements appurtenant Easement appurtenant: Burdens one piece of land (servient tenement) for benefit of another piece of land (dominant tenement). l Owner of dominant tenement is dominant tenant. l Owner of servient tenement is servient tenant. © 2010 Rockwell Publishing

Types of Easements appurtenant Easement appurtenant runs with the land. l Continues to exist even if dominant or servient tenement is sold. l The benefit and burden are automatically passed on to all subsequent owners. © 2010 Rockwell Publishing

Types of Easements Ingress and egress Ingress/Egress: Easement in which dominant tenant has right to drive over part of servient tenant’s land in order to reach or leave her property. © 2010 Rockwell Publishing

Types of Easements in gross Easement in gross: Benefits particular person rather than parcel of land. l No dominant tenement, only servient tenement (parcel burdened by easement). l Burden of easement in gross runs with the land. © 2010 Rockwell Publishing

Types of Easements in gross can be personal or commercial (such as access rights for utility company). l In California, both kinds of easements in gross are transferable, through assignment or inheritance. l Many other states do not allow transfer of personal easements in gross. © 2010 Rockwell Publishing

Summary Easements • • Easement appurtenant Running with the land Easement in gross ©

Easements Creating easements Main ways to create easement are: l express grant l express

Creating Easements Express grant: Property owner clearly grants someone easement on her property. l May be purchased by person needing an easement. l May be created when part of larger property is sold. © 2010 Rockwell Publishing

Creating Easements Express grant must be in writing and signed by grantor (statute of frauds). l Exact location of easement need not be specified in grant. l Document creating easement should be recorded (to give notice). © 2010 Rockwell Publishing

Creating Easements Express reservation: Owner selling part of property may reserve easement against parcel being sold and to benefit parcel she’s keeping. l Easement by express reservation must be in writing, and document should be recorded. © 2010 Rockwell Publishing

Creating Easements Implication Easement by implication: Can be implied grant or implied reservation; also known as easement by necessity. l Example: Part of larger parcel is sold, but grantor fails to create easement in deed, leaving one of the lots without access. This creates an easement by implication. © 2010 Rockwell Publishing

Creating Easements Implication Requirements for easement by implication: l must be reasonably necessary for enjoyment of dominant tenement l prior use of the easement should have been apparent to parties © 2010 Rockwell Publishing

Creating Easements Prescription Easement by prescription: Easement established by using another’s property without permission, similar to adverse possession. l Also called prescriptive easement. © 2010 Rockwell Publishing

Creating Easements Prescription Requirements: l open and notorious use l hostile use l claim of right l continuous use for at least 5 years l if property taxes assessed separately on easement, claimant must pay them during five-year period. © 2010 Rockwell Publishing

Summary Creating Easements • • Express grant Express reservation Implication Prescription © 2010 Rockwell

Terminating Easements can be terminated by: l release l merger l failure of purpose

Terminating Easements Release: Someone with interest in property gives it up to someone else. l Easement is terminated if dominant tenant releases servient tenant, in writing. l Usually done through quitclaim deed. © 2010 Rockwell Publishing

Terminating Easements Merger: When two adjacent properties come under the same ownership. l If same party becomes owner of both dominant and servient property, easement terminates by merger. (No need for easement on your own property. ) © 2010 Rockwell Publishing

Terminating Easements Failure of purpose Since easement is a right to use another’s property for a particular purpose, if that purpose ceases to exist the easement terminates. © 2010 Rockwell Publishing

Terminating Easements Abandonment: Easement holder (dominant tenant) does something that shows intent to stop using easement. l Non-use (alone) generally not sufficient. l Exception: Prescriptive easement terminates automatically after 5 years of non-use. © 2010 Rockwell Publishing

Terminating Easements Prescription Easement is terminated by prescription if servient tenant prevents dominant tenant from using easement for 5 years. l Example: building brick wall around property. © 2010 Rockwell Publishing

Summary Terminating Easements • • • Release Merger Failure of purpose Abandonment Prescription ©

Nonfinancial Encumbrances Related concepts Licenses l Encroachments l Nuisances l l Not classified as

Related Concepts License: Right to enter and use land belonging to another person. l Need not be in writing. l Temporary. l Revocable. l Doesn’t create a property interest. l Not assignable. l Doesn’t run with the land. © 2010 Rockwell Publishing

Related Concepts Encroachment: Occurs when physical object from one property intrudes onto neighboring property. l Most encroachments unintentional. l Considered trespass rather than encumbrance. © 2010 Rockwell Publishing

Related Concepts Encroachments Landowner who believes her property is being encroached upon can sue for an ejectment. l Remedy may be removal and/or damages. l Statute of limitations: 3 years (for owner to bring legal action). © 2010 Rockwell Publishing

Related Concepts Nuisance: Activity or condition on a neighboring property that interferes with enjoyment of one’s own property. A private nuisance affects at most a few properties. A public nuisance affects a larger community. © 2010 Rockwell Publishing

Summary Related Concepts • License • Encroachment • Nuisance © 2010 Rockwell Publishing

Nonfinancial Encumbrances Private restrictions limit how owner may use his own property; also known

Nonfinancial Encumbrances Private restrictions If put into writing and recorded, private restrictions run with

Private Restrictions Illegal or unconstitutional Private restrictions that violate law, public policy, or constitutional provisions are not enforceable. l Unenforceable restriction in deed does not make deed void—only restriction is void. © 2010 Rockwell Publishing

Private Restrictions CC&Rs (covenants, conditions, and restrictions) are usually imposed by developer of residential subdivision. l Recorded, and reference included in first deed for each lot in subdivision. l Provides constructive notice to subsequent lot owners. © 2010 Rockwell Publishing

Private Restrictions CC&Rs allow homeowners to restrict neighbor actions that will negatively affect property values. l If one owner violates CC&Rs, other owners can seek enforcement through courts. © 2010 Rockwell Publishing

Private Restrictions Covenants vs. conditions Covenant: Legally enforceable promise to do or not do something. l Violation can result in injunction or damages. Condition: Ownership of property depends on compliance with restriction. l Violator may actually forfeit title to property. (Courts tend to avoid this harsh result. ) © 2010 Rockwell Publishing

Private Restrictions Termination of restrictions Restriction may not be enforceable if: l owners in subdivision fail to enforce it against other violators l character of neighborhood has changed so much it’s difficult to comply © 2010 Rockwell Publishing

Private Restrictions In conflict with zoning Private restrictions may be stricter than public land use controls, such as zoning laws. l If two restrictions (one public and one private) both address same issue, more restrictive one usually applies. © 2010 Rockwell Publishing