Washington Real Estate Fundamentals Lesson 4: Encumbrances © 2011 Rockwell Publishing

Encumbrances Encumbrance: Nonpossessory interest in real property, held by someone other than owner.  Does not give right to exclusive possession. © 2011 Rockwell Publishing

Encumbrances Financial vs. nonfinancial Encumbrances are either: financial (liens) nonfinancial (easements, private restrictions) © 2011 Rockwell Publishing

Liens Security interest Lien: Creditor’s interest in debtor’s property. Makes property security (collateral) for debt. If property owner fails to repay debt, secured creditor may foreclose on lien. Property burdened by lien may be sold, but new owner takes title subject to lien. © 2011 Rockwell Publishing

Liens Voluntary vs. involuntary Voluntary lien: Property owner voluntarily grants lien to creditor. Example: mortgage Involuntary lien: Created by operation of law, without property owner’s consent. Also called statutory lien. Example: tax lien © 2011 Rockwell Publishing

Liens General vs. specific General lien: Attaches to all of debtor’s real property. Example: judgment lien Specific lien: Attaches only to a specific property, not to all property debtor owns. Example: mortgage © 2011 Rockwell Publishing

Liens Types of liens Mortgages Deeds of trust Construction liens Judgment liens Attachment liens Property tax liens Special assessment liens IRS liens © 2011 Rockwell Publishing

Types of Liens Mortgages Mortgage: Voluntary, specific lien created by contract between property owner and lender. Owner (Borrower) = Mortgagor Lender = Mortgagee  Borrower gives lender mortgage as security for repayment of loan. © 2011 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. © 2011 Rockwell Publishing

Types of Liens Construction liens Construction lien: Lien attaching to property on which construction work was performed. Involuntary, specific lien. Can be claimed by anyone providing labor, materials, or services. If owner fails to pay bill, lienholder can foreclose on property. Also called mechanic’s lien. © 2011 Rockwell Publishing

Construction Liens Preliminary notice Claimant who doesn’t have direct contract with owner (subcontractor) must give owner a notice of right to claim lien (Sometimes called pre-lien notice.) © 2011 Rockwell Publishing

Construction Liens Deadlines Claim of lien must be recorded within 90 days after claimant stops working on project. If deadline missed, can still sue owner for payment, but does not have lien. If foreclosure necessary, lienholder must file lawsuit within 8 months after claim recorded. © 2011 Rockwell Publishing

Types of Liens Judgment liens Judgment lien: Lien that results from financial judgment against losing party in lawsuit (judgment debtor). Involuntary, general lien against judgment debtor’s property. If judgment not paid, judgment creditor can foreclose. Court issues writ of execution. © 2011 Rockwell Publishing

Types of Liens Judgment liens Judgment lien attaches to all of judgment debtor’s property in county where lawsuit occurred. Also attaches to property in other counties if creditor files abstract of judgment in those counties. Once established, lien will also attach to any new property acquired by debtor in county. © 2011 Rockwell Publishing

Types of Liens Attachment liens Attachment lien: Plaintiff’s lien against property owned by defendant that may become subject to future judgment. Court issues writ of attachment. Writ recorded so that anyone buying property takes title subject to plaintiff’s lien. © 2011 Rockwell Publishing

Types of Liens Lis pendens Lis pendens: Document recorded by plaintiff to provide constructive notice about pending lawsuit that may affect title to specified property. Just provides notice; doesn’t create lien. If property sold, new owner bound by any resulting judgment. © 2011 Rockwell Publishing

Types of Liens Property tax liens Property tax lien: Lien created by general real estate taxes. Taxes levied annually on value of real property (ad valorem). Involuntary, specific lien attaches only to the taxed property. Government can foreclose and collect delinquent taxes from sale proceeds. © 2011 Rockwell Publishing

Types of Liens Special assessment liens Special assessment lien: Lien created by assessment levied to pay for local improvements, such as street paving or sewer lines. Involuntary, specific lien. Attaches only to properties that benefit from the improvement. © 2011 Rockwell Publishing

Types of Liens IRS liens IRS lien: Lien that attaches to all property owned by taxpayer who has failed to pay federal income taxes. Involuntary, general lien. Other taxes, such as estate and gift taxes, can also result in liens. © 2011 Rockwell Publishing

Summary Basic definitions Encumbrance Lien Voluntary or involuntary lien General or specific lien Mortgage or deed of trust Construction lien Judgment lien Attachment lien Property tax lien Special assessment lien © 2011 Rockwell Publishing

Liens Lien priority Lien priority: Determines order in which lienholders will be paid in the event of foreclosure on property with multiple liens. © 2011 Rockwell Publishing

Lien Priority Distribution of sale proceeds Foreclosure sale proceeds applied to pay off each lienholder in order of priority. If proceeds aren’t enough to pay off all liens, lienholders with lowest priority not paid. If all liens paid, any surplus goes to foreclosed property owner. © 2011 Rockwell Publishing

Lien Priority Determining priority General rule: Priority of lien determined by recording date (date entered in public record). Exceptions: Property tax and assessment liens: always have highest priority. Construction liens: priority based on date claimant began work. © 2011 Rockwell Publishing

Liens Homestead law Homestead law: State law that gives homeowners limited protection against judgment lien foreclosure. Does not apply to: voluntary liens (mortgages, deeds of trust) construction liens child support or spousal maintenance liens liens of condo or homeowners association © 2011 Rockwell Publishing

Homestead Law Protects owner-occupied home Homestead: Owner-occupied dwelling, plus land and appurtenant buildings. Homestead protection automatic once owner occupies property. Declaration of homestead can be recorded to claim protection in advance. © 2011 Rockwell Publishing

Homestead Law Exemption amount Homestead protection exempts $125,000 of homeowner’s equity from foreclosure. Judgment creditor can’t foreclose unless property’s net value (market value minus higher-priority liens) exceeds exemption amount. In foreclosure, exemption amount set aside for homeowner before judgment creditors paid. © 2011 Rockwell Publishing

Homestead Law Sale of home Homestead law also protects sale proceeds from creditors’ claims, up to exemption amount. One-year grace period for using exempt funds to buy new home. © 2011 Rockwell Publishing

Homestead Law Termination of homestead Homestead terminates when: homestead property sold, or owner files declaration of homestead on different property. © 2011 Rockwell Publishing

Summary Lien Priority and Homestead Law Surplus Homestead property Homestead exemption © 2011 Rockwell Publishing

Encumbrances Nonfinancial encumbrances Nonfinancial encumbrances include: easements profits private restrictions In contrast to liens, nonfinancial encumbrances affect not only title but also use of property. © 2011 Rockwell Publishing

Nonfinancial Encumbrances Easements Easement: Right to use someone else’s land for particular purpose. Easement holder: has right to use property in specific, limited way does not have right to take possession © 2011 Rockwell Publishing

Easements Types of easements Two basic types of easements: easements appurtenant easements in gross © 2011 Rockwell Publishing

Types of Easements Easements appurtenant Easement appurtenant: Burdens one piece of land for benefit of another piece of land. Burdened land = servient tenement Owner = servient tenant Benefited land = dominant tenement Owner = dominant tenant Example: easement for ingress and egress © 2011 Rockwell Publishing

Easements Appurtenant Running with the land Easement appurtenant runs with the land. Appurtenant to dominant tenement. Continues to exist even if: dominant tenement sold servient tenement sold Benefit or burden automatically passed on to all subsequent owners. © 2011 Rockwell Publishing

Types of Easements Easements in gross Easement in gross: Benefits particular person or entity rather than parcel of land. No dominant tenement, only servient tenement. Generally ends with death of dominant tenant (easement holder). © 2011 Rockwell Publishing

Easements in Gross Assignment General rule: Benefit of easement in gross is personal right, can’t be assigned to someone else. Exception to rule: Commercial easement in gross can be assigned from one entity to another. Example: easement to install and maintain utility lines © 2011 Rockwell Publishing

Summary Easements Nonfinancial encumbrance Easement Easement appurtenant Dominant tenement and tenant Servient tenement and tenant Running with the land Easement in gross Commercial easement in gross © 2011 Rockwell Publishing

Easements Creating easements Easements may be created by: express grant express reservation implication prescription dedication condemnation © 2011 Rockwell Publishing

Creating Easements Express grant Easement by express grant: Property owner may expressly grant someone an easement on her land. Grant must be in writing and signed. Document should be recorded. Easement often created by express grant in deed when part of larger property sold. © 2011 Rockwell Publishing

Creating Easements Express reservation Easement by express reservation: Owner selling part of her property may expressly reserve easement against parcel she’s selling, to benefit parcel she’s keeping. Must be in writing and signed. Should be recorded. Reservation ordinarily made in deed. © 2011 Rockwell Publishing

Creating Easements Implication Easement by implication: If part of larger parcel sold, but grantor neglected to create easement in deed, court may hold easement exists if: reasonably necessary for enjoyment of dominant tenement apparent prior use of easement Also called implied easement or easement by necessity. © 2011 Rockwell Publishing

Creating Easements Prescription Easement by prescription: Created by using someone else’s property without permission. Use must be: open and notorious, and hostile reasonably continuous for 10 years For easement (as opposed to title), use need not be exclusive. Also called prescriptive easement. © 2011 Rockwell Publishing

Creating Easements Dedication Easement by dedication: Public acquires easement rights in private property without compensating owner. Dedication may be express or implied. © 2011 Rockwell Publishing

Creating Easements Condemnation Easement by condemnation: Government uses power of eminent domain to obtain easement. Same requirements as for transfer of title by condemnation: public purpose just compensation paid to owner © 2011 Rockwell Publishing

Summary Creating Easements Express grant Express reservation Implication Prescription Dedication Condemnation © 2011 Rockwell Publishing

Easements Terminating easements Easements can be terminated by: release merger failure of purpose abandonment prescription © 2011 Rockwell Publishing

Terminating Easements Release Release: When someone who has an interest in property gives it up. Easement terminated if dominant tenant gives servient tenant written release. Usually accomplished with quitclaim deed. © 2011 Rockwell Publishing

Terminating Easements Merger Merger: When two adjacent properties come under same ownership. If same party becomes owner of both dominant tenement and servient tenement, easement terminated by merger. © 2011 Rockwell Publishing

Terminating Easements Failure of purpose Easement terminated by failure of purpose if original purpose of easement no longer exists or can no longer be served. © 2011 Rockwell Publishing

Terminating Easements Abandonment Easement considered terminated by abandonment if easement holder indicates intent to stop using easement forever. Nonuse alone generally not sufficient to indicate abandonment. © 2011 Rockwell Publishing

Terminating Easements Prescription Easement terminated by prescription if servient tenant takes action to prevent dominant tenant from using easement and prevents use for 10 years. © 2011 Rockwell Publishing

Summary Terminating Easements Release Merger Failure of purpose Abandonment Prescription © 2011 Rockwell Publishing

Nonfinancial Encumbrances Profits Profit: Right to remove something from someone else’s land. Must be created in writing or by prescription. © 2011 Rockwell Publishing

Nonfinancial Encumbrances Related concepts Licenses, encroachments, and nuisances: relate to use of someone else’s property but are not encumbrances – don’t create property interest © 2011 Rockwell Publishing

Related Concepts Licenses License: Permission to enter and use land owned by another person. Need not be in writing. Revocable. Not assignable. Does not run with land. © 2011 Rockwell Publishing

Related Concepts Encroachments Encroachment: When physical object intrudes from one property onto neighboring property. Most encroachments unintentional. Could be trespass if neighbor’s right of possession affected. © 2011 Rockwell Publishing

Related Concepts Encroachments Landowner who believes her property is being encroached upon can sue for ejectment. Court may order defendant to remove encroachment or pay damages. If landowner ignores encroachment, may ripen into easement by prescription. © 2011 Rockwell Publishing

Related Concepts Nuisances Nuisance: Activity on or condition of property that interferes with neighboring owner’s use or enjoyment of her property. Private nuisance: Affects a few people. Example: smell of neighbor’s garbage Public nuisance: Affects neighborhood. Example: pollution from factory © 2011 Rockwell Publishing

Related Concepts Nuisances Property owner affected by private or public nuisance can sue for: injunction to stop nuisance compensatory damages © 2011 Rockwell Publishing

Related Concepts Nuisances Attractive nuisance doctrine: Applies when property has feature that is dangerous and attractive to children. Owner liable for harm resulting from failure to keep out trespassing children. Example: unfenced swimming pool © 2011 Rockwell Publishing

Summary Concepts Related to Easements Profit License Encroachment Private nuisance Public nuisance Attractive nuisance © 2011 Rockwell Publishing

Nonfinancial Encumbrances Private restrictions Private restrictions: Limit how owner may use her own property. Also known as deed restrictions or restrictive covenants. Imposed in deed or by written agreement. Run with land if recorded. © 2011 Rockwell Publishing

Private Restrictions Illegal restrictions Private restriction that violates law or constitutional provision is unenforceable. Example: deed restriction prohibiting sale of property to nonwhites Deed isn’t void, only restriction is void. © 2011 Rockwell Publishing

Private Restrictions CC&Rs Developers impose a set of restrictions on all lots in new subdivision. These are recorded. Called covenants, conditions, and restrictions (CC&Rs). Also called declaration of restrictions. © 2011 Rockwell Publishing

Private Restrictions CC&Rs CC&Rs enable homeowners in subdivision to prevent neighbors from doing things that could have negative effect on property values. If one owner violates CC&Rs, other owners can seek a court order (injunction) to stop violation. © 2011 Rockwell Publishing

Private Restrictions Covenant vs. condition Covenant: Legally enforceable promise. Violation can result in injunction or damages. Condition: Makes ownership of property depend on compliance. Violation can result in title forfeiture. Courts interpret restriction as covenant when possible, to avoid harsh result of forfeiture. © 2011 Rockwell Publishing

Private Restrictions Termination Restriction may no longer be enforceable if: owners in subdivision failed to enforce it against other violators character of neighborhood has changed dramatically © 2011 Rockwell Publishing

Summary Private Restrictions CC&Rs Covenant Condition © 2011 Rockwell Publishing