Liens & Lis Pendens - Part 1 - Chapters 29-31 Flashcards
Understand construction loans as a source of financing available to owners who pay for labor and materials to improve property
When contractors and subcontractors are not paid for labor and materials, they have a constitutionally-protected right to file a mechanic’s lien against the property they improved. A mechanic’s lien enables the contractor or subcontractor to foreclose on the property to recover the amount due and unpaid under the contract.
Discuss a contractor or subcontractor’s right to record a mechanic’s lien on title to the owners job site
Before a subcontractor may record a mechanic’s lien against property, they need to serve a 20-day preliminary notice on the owner, the general contractor and the construction lender of their right. A general contractors right to a mechanic’s lien is perfected automatically.
A preliminary notice is served within 20 days after the general contractor or subcontractor first furnishes labor or materials to the job site.
The general contractor or subcontractor may only make a claim under a mechanic’s lien for non-payment of labor and materials furnished beginning 20 days prior to service of the preliminary notice.
A subcontractor does not have a duty to re-check the public records to establish a construction lenders identity. A subcontractor only needs to check the public records once, whether on the first day of work or at any other time during the 20-day preliminary notice period.
The subcontractor is not required to send the lenders a 20-day preliminary notice before exercising their mechanics lien rights if they do not have constructive notice of the lender’s identity.
Identify the notices required for a contractor to perfect and foreclose on a mechanics lien
An owner may prevent the attachment of a mechanic’s lien for improvements contracted for by a tenant by recording and posting a Notice of Non-Responsibility.
The waiver of a general contractor or subcontractor’s mechanic’s lien rights is unenforceable unless the waiver is a waiver and release signed by the general contractor (or subcontractor) making the claim in exchange for partial or full payment of the amount due under the mechanic’s lien.
The owner of a property, or a general contractor affected by a recorded mechanic’s lien, who contest the validity of the mechanics lien may obtain a release of the property from the mechanics lien by recording a Lien Release Bond.
mechanic’s lien
A mechanic’s lien is a lien entitling a contractor or subcontractor to foreclose on a job site property to recover the amount due and unpaid for labor and materials they provided. Before a subcontractor, employed by a contractor, may record a mechanic’s lien against real estate and enforce it by foreclosure, they PERFECT their lien rights by serving a 20-day preliminary notice on:
- the owner
- the general contractor
- the construction lender.
A mechanic’s lien becomes void if a foreclosure action is not filed within _____90 days_____ after the mechanic’s lien is recorded.
20-day preliminary notice
A 20-DAY PRELIMINARY NOTICE is a notification of a subcontractors right to record and foreclose a mechanic’s lien against property when they are not paid. The 20-day preliminary notice is not a notice of nonpayment or for payment. Rather, it is a notice which informs the relevant parties that the subcontractor has been or is supplying labor and materials to the property. Note – in contrast to subcontractors, an owners general contractor’s right to a mechanic’s lien is perfected automatically. The lien is perfected when the contractor and property owner enter into an agreement calling for the general contractor to deliver labor or furnish materials to the job site, directly or through subcontractors. However, for the contractor to be able to enforce collection from mortgage funds held by the construction lender, they need to provide a 20-day preliminary notice to the construction lender, when one exists.
construction lender
A CONSTRUCTION LENDER is a lender that originates a mortgage which funds the construction or development of Real Estate. A general contractor or subcontractor checks the public record to identify any construction lenders to be served with a 20-day preliminary notice needed to perfect any claim they make on construction funds.
notice of nonresponsibility
A NOTICE OF NON-RESPONSIBILITY is a notice used by a landlord to declare that they are not responsible for any claim arising out of improvements the tenant is constructing on their property. The owner may prevent the attachment of a lien to their property by recording and posting a notice of non responsibility within 10 DAYS after they become aware of the tenant contracted improvements. The notice of non responsibility is POSTED AT A CONSPICUOUS PLACE on the property AND RECORDED with the recorders office in the county where the property is located.
10 DAYS to record
Negotiate the release of a lien from title to a seller-in-foreclosure’s residence
The agent of an equity purchaser (EP) investor negotiates the release of a recorded lien to create equity. Good bargaining tactics for obtaining a release of a lien from a seller’s residence include:
- a reminder to the Creditor that the lien is on the verge of being wiped out by foreclosure of the First Trust deed without the likelihood of an overbid to provide funds for the creditor
- a review of the homeowners $100,000 homestead exemption rights as having a claim on equity senior to the creditors lien, leaving no ability for the creditor to collect by forcing a judicial sale.
- an offer to pay a lesser amount in full satisfaction of the debt owed to the lien holder
- a partial (or full) satisfaction and the execution of a partial (or full) release, allowing the abstract of judgment to remain of record (unless fully released) while releasing the residence from its lien so escrow may close.
A judgment creditor creates a valid lien on real estate owned by the debtor by recording an abstract of judgment issued by a state court. Similarly, a money judgement from a court of the United States becomes a valid lien on real estate on the recording of an abstract of judgment or a certified copy of the money judgment.
A personal income tax lien on a residence recorded by the Franchise Tax Board (FTB) is enforced under the same procedure as any creditor judgement lien.
Understand the process a judgement creditor uses to create a valid lien on real estate owned by a debtor.
Under the California taxpayer Bill of Rights, the FTB is obligated to release its lien from the residence when the proceeds from the sale do not result in a reasonable reduction of the seller in foreclosures debt to the FTB.
When property is sold at a trustee’s sale and timely recorded, and a junior federal tax lien exists, the Internal Revenue Service (IRS) may later purchase the property from the successful bidder at the trustee’s sale. The IRS pays the successful bidder the amount of the bid within 120 days, plus interest and foreclosure costs.
Advise a homeowner how to preserve their equity on a sale under the CA homestead exemptions.
Through bankruptcy proceedings, the homeowner is able to clear their title of judgment and state tax liens impairing the value of their $100,000 Homestead equity in the property under California homestead exemption laws. However, the automatic homestead exemption is not enforceable against an IRS tax lien in bankruptcy.
judgement lien
A judgement lien is a money judgment against a person recorded as an abstract and attaching to the title of real estate they own. Note a personal income tax lien on a residence recorded by the California Franchise Tax Board is enforced under the same procedure as any creditors judgment lien. The Franchise Tax Board issues and records the warrant for the amount claimed due by the state. The warrant has the same force and effect as an abstract of judgment issued by a court. The Franchise Tax Board lien created by recording the warrant attaches to real estate owned by the taxpayer in the same priority as a judgment lien. No statutory or regulatory authority exists for the FTB to negotiate a partial payment of the tax bill in exchange for releasing the residence from the tax lien. However, California’s taxpayer Bill of Rights provide some relief. Under it, the FTB is obligated to release its lien from the residence when the proceeds from the sale do not result in a reasonable reduction of the seller in foreclosures debt to the FTB. Again, negotiations are an all-or-nothing analysis for release of the FTB lien on a short sale of the property.
Often a judgement lienholder agrees to release a residence from their lien. To document the release, a signed and notarized RELEASE OF RECORDED INSTRUMENT is obtained from the lienholder and recorded. The release contains all the information necessary to clear the Judgment lien from the record title to the property. When the release is notarized and recorded, the Judgment lien attached to the residence is removed from record and a policy of title insurance is issued covering title free from the lien.
declaration of homestead
A DECLARATION OF HOMESTEAD is a document signed by a homeowner and filed with the county recorder’s office to shield the owner-occupant’s homestead equity from being seized by creditors.
abstract of judgement
An ABSTRACT OF JUDGEMENT is a condensed written summary of the essential holdings of a court judgment. A judgment creditor creates a valid lien on real estate owned by the debtor by recording an abstract of judgment issued by a state court. A judgement lien CONTINUES IN EFFECT FOR 10 YEARS from the date it is recorded, unless the money judgment is either satisfied or released. Further, the recording of a certified copy of a judgment awarded by a federal court attaches without the need to obtain and record an abstract of judgment. A money judgment from a court of the United States becomes a valid lien on real estate on the recording of either:
- An abstract of judgment or
- A certified copy of the money judgment.
federal tax lien
A FEDERAL TAX LIEN is a lien recorded attaching to the title of real estate owned by a taxpayer who owes the IRS unpaid taxes.
On a regular sale of property, the IRS has the authority to negotiate with the seller or taxpayer, they’re authorized agent or the equity purchaser investor to accept partial or no payment in exchange for a certificate of discharge from the income tax lien.
Unlike rules controlling the Franchise Tax Board, the discharge by the IRS is authorized when the IRS’s recovery under its lien and redemption and resell rights are economically unfeasible beyond the amount available to the IRS from a sale of the property at current value.
The equity purchaser Investor’s agent May negotiate the discharge of the IRS tax lien from title on behalf of the taxpayer. The agent uses the same persuasive facts used to negotiate a release of a judgment lien with a creditor, or a short payoff with a lender using a hardship letter.
FEDERAL IRS can negotiate - California FTB may not
homestead
A HOMESTEAD is the dollar amount of equity in a homeowner’s principal dwelling the homeowner qualifies to shield as exempt from creditors seizure. Homeowners qualify for one of three dollar amounts of net Equity Homestead protection:
- a $75,000 equity for an individual homeowner with no dependents
- a $100,000 equity for a head of household or
- a $175,000 equity for homeowners who are:
- age 65 years or older
- disabled or
- a 55 years or older with an annual income of less than 15000 or a combined gross annual income of no more than 20,000 if married.
Two types of Homestead procedures are available to California homeowners:
- the Declaration of Homestead, which is recorded and
- the Automatic Homestead, also called a statutory homestead exemption, which is not recorded, although this automatic homestead exemption only applies to the execution sales ordered by a court to satisfy money judgments against the homeowner and any sale of the home in a bankruptcy proceeding.
