Encumbrances Physical & Financial

Which of the following is the best definition of

encumbrance?

Which of the following is the best definition of

encumbrance?

A. The degree, quantity, and extent of interest a person has in

real property.

B. Anything that affects or limits the fee simple title to or

value of property.

C. The use of property as security for a debt.

D. Any action regarding property, other than acquiring or

transferring title.

• Non-possessory interest in real property held by

someone who is not the owner.

• Anything that burdens or affects:

• Title

• Use of the property

• Property is encumbered when burdened with

• legal obligations against the title.

• Most buyers purchase encumbered property

A landowner owns fifty acres with a five-acre lake

centrally located on the land. When the owner sells off

twenty acres which border the lake, it is stated that the

owner retains a permanent right to access the lake for

recreational purposes. This would best be accomplished

through a (an):

A landowner owns fifty acres with a five-acre lake

centrally located on the land. When the owner sells off

twenty acres which border the lake, it is stated that the

owner retains a permanent right to access the lake for

recreational purposes. This would best be accomplished

through a (an):

A. easement appurtenant

B. five-year lease, renewable at the seller’s option

C. license

D. lien against the property

Non-Financial Encumbrances

Affect the physical use of property

• easements

• building restrictions

• zoning requirements

• Encroachments

• HOA – CCR’s (covenants, conditions, restrictions)

Easement

The right to enter or use someone else’s land for a specified purpose.

• not ownership

• holder of an easement can use it only for the purpose specified. Such as:

• ingress (enter)

• egress (exit)

Appurtenant

“Run with the land”

•Anything that transfer with ownership

•New owner is required to honor existing limitation or requirement.

• Limitations established by previous owners

•HOA - CCRs

Appurtenant Easement

Transfers with the property sale automatically

• dominant tenement (parcel)

The person’s land receiving the benefit

• servient tenement (parcel)

• The landowner whose land being used

Servient Tenement only

Ex:

• Utilities: Water, Electricity

• Public Right of Way: Road

easement by prescription

legal right to use another person’s land, acquired through continuous, open, notorious, and hostile use without the owner's permission for a legally defined statutory period

Termination of an Easement

MERGER

• Servient buys Dominant (or vice versa)

• And

• Merge into a single legal land description

QUIT CLAIM DEED

• Dominant parcel ONLY

QUIET TITLE ACTION

• Lawsuit to Quiet the Title by Servient parcel

• Dominant no longer needs or uses easement

The form of encumbrance that makes specific

property the security for the payment of a debt or

discharge of an obligation is called a:

The form of encumbrance that makes specific

property the security for the payment of a debt or

discharge of an obligation is called a:

A. reservation

B. liability

C. lien

D. quitclaim

Liens

financial encumbrances, which affect the title to property

• Interest in real property owned by someone

• secures the payment of a debt or financial obligation.

• Uses real property as security for the payment of a debt - Collateral.

Specific lien -

placed against a certain property

• mechanic’s lien, deed of trust, and property tax lien.

• General lien

all real & personal property of the owner

• judgment lien, federal or state income tax lien

Liens – Voluntary

Owner chooses to borrow money

• pledging property as security for the loan

• Security instrument is a legal document

• given by the borrower to pledge property to the lender

• as security for the loan.

Hypothecation (Pledge)

• is a legal arrangement that allows borrower to remain in possession of a property secured by a loan.

Collateral

• is something of value given as security for a debts

Liens – Involuntary

• Used to collect money from debtors

• who have real property among their assets.

• Include judgment liens, tax liens, and mechanic’s liens.

• If owner fails to pay these items

• lien may be placed against his or her property without permission.

Lien Priority

• Paid in the order recorded

• First in time, first in right to be paid in event of foreclose sale

• Exceptions:

• Unpaid property tax and special assessments

• Mechanics Liens

Which of the following would constitute both a lien

and an encumbrance against a property?

Which of the following would constitute both a lien

and an encumbrance against a property?

A. A restrictive covenant

B. A lease providing the mineral rights to another

C. Property taxes

D. An easement

• While all liens are encumbrances, all encumbrances are not always liens

• Real property taxes are the highest, best lien if they become a lien (Always paid first)

• A lease is not a lien ( It’s an estate )

A contractor is building a patio. A lumber company delivers

bricks on July 1st and work begins that same day. Work is

completed on August 15th. The contractor is paid for labor and

materials on September 1st. Ten days later the contractor goes

bankrupt without paying the lumber company. The lumber

company records a mechanic's lien on the property as of

September 4th. The mechanic's lien is effective as of:

A contractor is building a patio. A lumber company delivers

bricks on July 1st and work begins that same day. Work is

completed on August 15th. The contractor is paid for labor and

materials on September 1st. Ten days later the contractor goes

bankrupt without paying the lumber company. The lumber

company records a mechanic's lien on the property as of

September 4th. The mechanic's lien is effective as of:

A. July 1st

B. August 15th

C. September 1st

D. September 4th

Mechanic’s Liens

• Specific Lien placed on property where work was performed or material delivered

• Related back to the date the work began

• Mechanic’s lien must be recorded.

• Statutory procedure must be followed exactly if the mechanic’s lien is to be valid.

• Secures payment for labor or materials

• supplied in improving, repairing, or maintaining real property.

• Includes contractors, subcontractors, laborers, material suppliers, architects, and other parties who improve real property

To make sure that the mortgage loan has a higher

priority than a potential mechanic’s lien:

To make sure that the mortgage loan has a higher

priority than a potential mechanic’s lien:

A. The lender should record the mortgage prior to

the mechanic’s lien being recorded

B. The lender should record the mortgage prior to

the beginning of work on the property

C. The loan must be for $750,000 or less

D. There must be a clause in the mortgage stating

the mortgage has priority over mechanic’s lien

Judgment liens differ from mechanics’ liens in that:

Judgment liens differ from mechanics’ liens in that:

A. mechanics’ liens are created by statute

B. judgment liens are voluntary liens

C. judgment liens are not enforceable until recorded

D. mechanics’ liens could take priority earlier than the date they are recorded

Judgment Liens – Involuntary

• Acquired by a judgment creditor

• usually, the plaintiff in court against the judgment debtor.

Judgment creditor

• Person prevailing in lawsuit awarded money damages.

Judgment debtor

• Person in lawsuit against whom damages awarded

Abstract of judgment

Abstract of judgment

• one-page document that contains information about the court judgment.

• Recorded with each county recorder where the judgment debtor owns real property.

• Once recorded, creates a general lien

• applies to all parcels of real property owned by the judgment debtor in that county

Judgment Liens – Involuntary (DURATION)

Good for 10 years.

• Can be renewed twice.

• Could be enforceable for 30 years.

• If renewed 90 days prior to expiration

• If not expired

• automatically attaches to any after-acquired real property (willed property)

Notice of satisfaction of judgment

• Judgment is paid in full

Foreclosure Process - Judgment or Mechanics Lien

Writ of execution

• Judgment creditor obtains this document from the court

• Pays the county sheriff a fee to start the foreclosure process.

• Sheriff records a notice of levy with the county recorder

• provides various notices to the judgment debtor regarding real property sale.