1. © 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

2. © 2010 Rockwell Publishing Encumbrances Encumbrance: Nonpossessory interest in real property held by someone other than owner. Does not give ownership or right to exclusive possession.

3. © 2010 Rockwell Publishing Encumbrances are either: financial (liens), or nonfinancial (easements, private restrictions, etc.). Encumbrances

4. © 2010 Rockwell Publishing Liens Security interest Financial encumbrance (lien) is security interest in real property. Security interest: Creditor’s interest that makes property security (collateral) for debt.

5. © 2010 Rockwell Publishing Liens Security interest If property owner fails to repay debt, secured creditor may foreclose. Property burdened by lien may be sold, but new owner takes title subject to lien.

6. © 2010 Rockwell Publishing Liens Voluntary vs. involuntary Voluntary lien: Property owner voluntarily grants lien to creditor. Examples: mortgage, deed of trust. Involuntary (statutory) lien: Lien given to creditor by operation of law, without property owner’s consent. Example: tax lien.

7. © 2010 Rockwell Publishing Liens General vs. specific General lien: Lien attaches to all of debtor’s real property. Example: judgment lien. Specific lien: Lien attaches only to specific piece of real property, not everything debtor owns. Example: mortgage.

8. © 2010 Rockwell Publishing Liens Types of liens Mortgages Deeds of trust Mechanic’s liens Judgment liens Attachment liens Tax liens Special assessment liens

9. © 2010 Rockwell Publishing Types of Liens Mortgages Mortgage: Specific, voluntary lien created by contract between property owner and lender. Owner (Borrower) = Mortgagor Lender = Mortgagee

10. © 2010 Rockwell Publishing Types of Liens Deeds of trust Deed of trust: Serves same purpose as mortgage but has different foreclosure procedures. Borrower = Trustor or Grantor Lender = Beneficiary Neutral third party = Trustee Trustee handles foreclosure, if necessary.

11. © 2010 Rockwell Publishing Types of Liens Mechanic’s liens Mechanic’s lien: Specific, involuntary lien attaching to real property undergoing construction work. Can be claimed by anyone providing labor, materials, or services. If owner fails to pay as agreed, lienholder can foreclose on property.

12. © 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.

13. © 2010 Rockwell Publishing Mechanic’s Liens Deadlines Deadlines for filing liens vary depending on whether owner files: notice of completion: must be filed within 10 days after project completed notice of cessation: can be filed only after work has stopped for 30 continuous days (whether project finished or not)

14. © 2010 Rockwell Publishing 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. Mechanic’s Liens Deadlines

15. © 2010 Rockwell Publishing Mechanic’s Liens Foreclosure Once filed, mechanic’s lien will expire if lienholder doesn’t start foreclosure proceedings within 90 days.

16. © 2010 Rockwell Publishing Types of Liens Judgment liens Judgment lien: Involuntary, general lien that results from financial judgment against losing party in a lawsuit (the judgment debtor). Attaches to judgment debtor’s property. If judgment is not paid, court may order debtor’s property sold to satisfy judgment.

17. © 2010 Rockwell Publishing A judgment lien: attaches to property owned by judgment debtor in any county where abstract of judgment is filed can also attach to new property acquired by debtor Types of Liens Judgment liens

18. © 2010 Rockwell Publishing Types of Liens Attachment liens Attachment lien: Lien used to prevent defendant from selling property that could be subject to future judgment. Court issues writ of attachment. When writ is recorded in county where property is located, it creates involuntary, specific lien. Valid for three years.

19. © 2010 Rockwell Publishing Lis pendens: Legal document recorded by plaintiff, notifying anyone who purchases specified property about pending lawsuit that may affect title. Just provides notice; doesn’t create lien. If property is sold, new owner is bound by any resulting judgment. Attachment Liens Lis pendens

20. © 2010 Rockwell Publishing Types of Liens Property tax liens Property tax lien: Involuntary, specific lien created by general real estate taxes. Attaches only to property being taxed. Government can foreclose and collect unpaid taxes from foreclosure sale proceeds.

21. © 2010 Rockwell Publishing Types of Liens Special assessment liens Special assessment lien: Involuntary, specific lien based on levy, to pay for specific improvements such as street paving or sewer lines. Only attaches to properties subject to special assessment (because they benefit from project).

22. © 2010 Rockwell Publishing Types of Liens IRS liens IRS lien: Involuntary, general lien that attaches to all property belonging to taxpayer who has failed to pay federal income taxes.

23. © 2010 Rockwell Publishing Summary Basic Definitions Encumbrance Lien Mortgage Deed of trust Mechanic’s lien Judgment lien Attachment lien Tax lien

24. © 2010 Rockwell Publishing Lien priority: Determines order in which lienholders will be paid, in foreclosures with multiple lienholders. Lien Priority

25. © 2010 Rockwell Publishing Foreclosure sale proceeds are paid to each lienholder in order of priority. Any surplus goes to foreclosed property owner. If proceeds aren’t enough to pay off all liens, lienholders with lowest priority are not paid. Lien Priority

26. © 2010 Rockwell Publishing Lien Priority Recording date Recording date: Date lien was filed in county’s public records office. Generally determines lien priority except for: tax and assessment liens (always have highest priority) mechanic’s liens (priority based on date work began)

27. © 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: voluntary liens (mortgages, deeds of trust) mechanic’s liens liens for child support or spousal maintenance

28. © 2010 Rockwell Publishing Homestead: Owner-occupied dwelling, plus land and attached buildings. Homestead protection may be claimed by filing declaration of homestead in county office. Or: owner (or authorized person) may claim homestead protection after foreclosure started Liens Homestead Law

29. © 2010 Rockwell Publishing Person can only claim one homestead at a time. Homestead protection terminates when: owner files declaration of homestead on different property original property is sold declaration of abandonment is filed Liens Homestead Law

30. © 2010 Rockwell Publishing If homestead owner dies, protection continues for family members still living on property. Liens Homestead Law

31. © 2010 Rockwell Publishing Homestead Law Exemption Homestead exemption: Homestead property is exempt from judgment liens up to exemption amount. Judgment creditor can’t foreclose unless property’s net value exceeds exemption amount. Net value = Market value minus amount of higher-priority liens

32. © 2010 Rockwell Publishing Current exemption amounts: $75,000 standard exemption $100,000 if debtor is part of family unit $175,000 if debtor is: over 65 over 55 and low income, or unable to work because of disability Homestead Law Exemption

33. © 2010 Rockwell Publishing Summary Lien Priority and Foreclosure Lien priority Foreclosure Homestead laws Exemptions

34. © 2010 Rockwell Publishing 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: easements private restrictions

35. © 2010 Rockwell Publishing Easement: Right to use someone else’s land for particular purpose. Easement holder may use property in some specific, limited way, but may not take possession of property. Nonfinancial Encumbrances Easements

36. © 2010 Rockwell Publishing Easements Types of easements Two basic types of easements: easements appurtenant easements in gross

37. © 2010 Rockwell Publishing Types of Easements Easements appurtenant Easement appurtenant: Burdens one piece of land (servient tenement) for benefit of another piece of land (dominant tenement). Owner of dominant tenement is dominant tenant. Owner of servient tenement is servient tenant.

38. © 2010 Rockwell Publishing Easement appurtenant runs with the land. Continues to exist even if dominant or servient tenement is sold. The benefit and burden are automatically passed on to all subsequent owners. Types of Easements Easements appurtenant

39. © 2010 Rockwell Publishing 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. Types of Easements Ingress and egress

40. © 2010 Rockwell Publishing Types of Easements Easements in gross Easement in gross: Benefits particular person rather than parcel of land. No dominant tenement, only servient tenement (parcel burdened by easement). Burden of easement in gross runs with the land.

41. © 2010 Rockwell Publishing Types of Easements Easements in gross Easements in gross can be personal or commercial (such as access rights for utility company). In California, both kinds of easements in gross are transferable, through assignment or inheritance. Many other states do not allow transfer of personal easements in gross.

42. © 2010 Rockwell Publishing Summary Easements Easement Easement appurtenant Running with the land Easement in gross

43. © 2010 Rockwell Publishing Main ways to create easement are: express grant express reservation implication prescription Easements Creating easements

44. © 2010 Rockwell Publishing Express grant: Property owner clearly grants someone easement on her property. May be purchased by person needing an easement. May be created when part of larger property is sold. Creating Easements Express grant

45. © 2010 Rockwell Publishing Express grant must be in writing and signed by grantor (statute of frauds). Exact location of easement need not be specified in grant. Document creating easement should be recorded (to give notice). Creating Easements Express grant

46. © 2010 Rockwell Publishing Express reservation: Owner selling part of property may reserve easement against parcel being sold and to benefit parcel she’s keeping. Easement by express reservation must be in writing, and document should be recorded. Creating Easements Express reservation

47. © 2010 Rockwell Publishing Easement by implication: Can be implied grant or implied reservation; also known as easement by necessity. 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. Creating Easements Implication

48. © 2010 Rockwell Publishing Requirements for easement by implication: must be reasonably necessary for enjoyment of dominant tenement prior use of the easement should have been apparent to parties Creating Easements Implication

49. © 2010 Rockwell Publishing Easement by prescription: Easement established by using another’s property without permission, similar to adverse possession. Also called prescriptive easement. Creating Easements Prescription

50. © 2010 Rockwell Publishing Requirements: open and notorious use hostile use claim of right continuous use for at least 5 years if property taxes assessed separately on easement, claimant must pay them during five-year period. Creating Easements Prescription

51. © 2010 Rockwell Publishing Summary Creating Easements Express grant Express reservation Implication Prescription

52. © 2010 Rockwell Publishing Terminating Easements Easements can be terminated by: release merger failure of purpose abandonment prescription

53. © 2010 Rockwell Publishing Release: Someone with interest in property gives it up to someone else. Easement is terminated if dominant tenant releases servient tenant, in writing. Usually done through quitclaim deed. Terminating Easements Release

54. © 2010 Rockwell Publishing Merger: When two adjacent properties come under the same ownership. If same party becomes owner of both dominant and servient property, easement terminates by merger. (No need for easement on your own property.) Terminating Easements Merger

55. © 2010 Rockwell Publishing Since easement is a right to use another’s property for a particular purpose, if that purpose ceases to exist the easement terminates. Terminating Easements Failure of purpose

56. © 2010 Rockwell Publishing Abandonment: Easement holder (dominant tenant) does something that shows intent to stop using easement. Non-use (alone) generally not sufficient. Exception: Prescriptive easement terminates automatically after 5 years of non-use. Terminating Easements Abandonment

57. © 2010 Rockwell Publishing Easement is terminated by prescription if servient tenant prevents dominant tenant from using easement for 5 years. Example: building brick wall around property. Terminating Easements Prescription

58. © 2010 Rockwell Publishing Summary Terminating Easements Release Merger Failure of purpose Abandonment Prescription

59. © 2010 Rockwell Publishing Nonfinancial Encumbrances Related concepts Licenses Encroachments Nuisances Not classified as encumbrances. Not considered interests in real property.

60. © 2010 Rockwell Publishing Related Concepts Licenses License: Right to enter and use land belonging to another person. Need not be in writing. Temporary. Revocable. Doesn’t create a property interest. Not assignable. Doesn’t run with the land.

61. © 2010 Rockwell Publishing Related Concepts Encroachments Encroachment: Occurs when physical object from one property intrudes onto neighboring property. Most encroachments unintentional. Considered trespass rather than encumbrance.

62. © 2010 Rockwell Publishing Landowner who believes her property is being encroached upon can sue for an ejectment. Remedy may be removal and/or damages. Statute of limitations: 3 years (for owner to bring legal action). Related Concepts Encroachments

63. © 2010 Rockwell Publishing 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. Related Concepts Nuisances

64. © 2010 Rockwell Publishing License Encroachment Nuisance Summary Related Concepts

65. © 2010 Rockwell Publishing Private restrictions limit how owner may use his own property; also known as deed restrictions or restrictive covenants. Nonfinancial Encumbrances Private restrictions

66. © 2010 Rockwell Publishing If put into writing and recorded, private restrictions run with land, just like easements. Nonfinancial Encumbrances Private restrictions

67. © 2010 Rockwell Publishing Private restrictions that violate law, public policy, or constitutional provisions are not enforceable. Unenforceable restriction in deed does not make deed void—only restriction is void. Private Restrictions Illegal or unconstitutional

68. © 2010 Rockwell Publishing Private Restrictions CC&Rs CC&Rs (covenants, conditions, and restrictions) are usually imposed by developer of residential subdivision. Recorded, and reference included in first deed for each lot in subdivision. Provides constructive notice to subsequent lot owners.

69. © 2010 Rockwell Publishing CC&Rs allow homeowners to restrict neighbor actions that will negatively affect property values. If one owner violates CC&Rs, other owners can seek enforcement through courts. Private Restrictions CC&Rs

70. © 2010 Rockwell Publishing Private Restrictions Covenants vs. conditions Covenant: Legally enforceable promise to do or not do something. Violation can result in injunction or damages. Condition: Ownership of property depends on compliance with restriction. Violator may actually forfeit title to property. (Courts tend to avoid this harsh result. )

71. © 2010 Rockwell Publishing Restriction may not be enforceable if: owners in subdivision fail to enforce it against other violators character of neighborhood has changed so much it’s difficult to comply Private Restrictions Termination of restrictions

72. © 2010 Rockwell Publishing Private restrictions may be stricter than public land use controls, such as zoning laws. If two restrictions (one public and one private) both address same issue, more restrictive one usually applies. Private Restrictions In conflict with zoning

73. © 2010 Rockwell Publishing Summary Private Restrictions Private restrictions CC&Rs Covenants Conditions