Lesson 4: Encumbrances Principles of California Real Estate

Lesson 4: Lesson 4: EncumbrancesEncumbrances

Principles of California Real Estate

Encumbrances

Encumbrance: A nonpossessory interest in real property, held by someone other than the owner.

Encumbrances

Encumbrance: A nonpossessory interest in real property, held by someone other than the owner.

Does not give ownership or right to

exclusive possession.

Encumbrances are either: financial (liens)

or

Financial vs. Non-financial Encumbrances

Encumbrances are either: financial (liens)

or non-financial (easements, private

restrictions, etc.)

Financial vs. Non-financial Encumbrances

LiensSecurity interest

Security interest: A creditor’s interest in property based on a lien, which makes the property security (collateral) for the owner’s debt.


Security interest: A creditor’s interest in property based on a lien, which makes the property security (collateral) for the owner’s debt.If property owner fails to repay debt,

secured creditor may foreclose.


Security interest: A creditor’s interest in property based on a lien, which makes the property security (collateral) for the owner’s debt.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.

LiensVoluntary vs. involuntary

Voluntary lien: Property owner voluntarily grants lien to creditor.


Voluntary lien: Property owner voluntarily grants lien to creditor.Example: mortgage



Involuntary (statutory) lien: Lien given to creditor by operation of law, without property owner’s consent.



Involuntary (statutory) lien: Lien given to creditor by operation of law, without property owner’s consent.Example: tax lien

LiensGeneral vs. specific

General lien: Lien attaches to all of the debtor’s real property.Example: judgment lien

Specific lien: Lien attaches only to a specific piece of real property, not to everything debtor owns. Example: mortgage

LiensTypes of liens

Mortgages Deeds of trust Mechanic’s liens Judgment liens Attachment liens RE Property Tax liens Special assessment liens

Types of LiensMortgages

Mortgage: A lien created by contract between a property owner and a lender.



Owner (Borrower) = Mortgagor

Lender = Mortgagee



Owner (Borrower) = Mortgagor

Lender = Mortgagee

Borrower gives lender mortgage as security for repayment of loan, with property serving as collateral.

Types of LiensDeeds of trust

Deed of trust serves same purpose as mortgage but has different foreclosure procedures.

Types of LiensDeeds 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.)

Types of LiensMechanic’s liens

Mechanic’s lien: Lien attaching to real property on which construction work was performed.


Mechanic’s lien: Lien attaching to real property on which construction work was performed.Can be claimed by anyone providing

labor, materials, or services.



labor, materials, or services. If owner fails to pay as agreed, lienholder

can foreclose on property.



labor, materials, or services. If owner fails to pay as agreed, lienholder

can foreclose on property.

Also called a construction lien or materialman’s lien.

Mechanic’s LiensPreliminary notice

Must give owner preliminary notice of right to claim lien within 20 days of starting to provide services or materials.

Mechanic’s LiensPreliminary notice

Must give owner preliminary notice of right to claim lien within 20 days of starting to provide services or materials.

Notice unnecessary if lien claimant has direct contract with owner (usually true for general contractor).

Mechanic’s LiensDeadlines

Once project is completed (or all work has stopped for 30 days), owner has 10 days to file a notice of completion.


Once project is completed (or all work has stopped for 30 days), owner has 10 days to file a notice of completion.

Once notice of completion is filed, mechanic’s lien must be filed for recording within 30 days. Exception: general contractors have 60

days.

If no notice of completion is filed, mechanic’s lien may be filed up to 90 days after work has stopped.


If no notice of completion is filed, mechanic’s lien may be filed up to 90 days after work has stopped.

If deadline is missed, lien cannot be filed. Creditor can still sue owner, but can’t

foreclose on property to collect debt.



Once filed, mechanic’s lien will expire if lienholder doesn’t start foreclosure proceedings within 90 days.

Types of LiensJudgment liens

Judgment lien: A lien that results from a financial judgment against the losing party in a lawsuit (the judgment debtor).



Attaches to judgment debtor’s property.



Attaches to judgment debtor’s property.

If judgment is not paid, court may order debtor’s property sold, to satisfy judgment.

A judgment lien: attaches automatically to all the debtor’s

property in county where lawsuit took place




can attach to new property acquired by the debtor




can attach to new property acquired by the debtor

can attach to property in other counties if the creditor files an abstract of judgment in those counties


Types of LiensAttachment liens

Attachment lien: A lien used to prevent a defendant from selling property that could be subject to a future judgment.



Court issues writ of attachment.



Court issues writ of attachment.

Writ is recorded so that anyone buying the property takes title subject to plaintiff’s lien.

Lis pendens: Legal document filed by plaintiff in lawsuit, notifying anyone who purchases specified property about a pending lawsuit that may affect title.



Just provides notice; doesn’t create lien.



Just provides notice; doesn’t create lien.

If property is sold, new owner is bound by any resulting judgment.


Types of LiensProperty tax liens

Property tax lien: The lien created by general real estate taxes.



Attaches only to the property being taxed.



Attaches only to the property being taxed.

Allows government to foreclose and collect delinquent taxes from the proceeds of the foreclosure sale.

Types of LiensSpecial assessment liens

Special assessment lien: A lien based ona special assessment levied to pay for specific improvements such as street paving or sewer lines.

Types of LiensSpecial assessment liens

Special assessment lien: A lien based ona special assessment levied to pay for specific improvements such as street paving or sewer lines.Attaches only to properties that are

subject to the special assessment (because they will benefit from the project).

Types of LiensIRS liens

IRS lien: A general lien that attaches to all property belonging to a taxpayer who has failed to pay federal income taxes.

SummaryBasic definitions

Encumbrance Lien Mortgage Deed of trust

Mechanic’s lien Judgment lien Attachment lien Tax lien

Lien priority: Determines the order in which lienholders will be paid if one lienholder forecloses on a property with multiple liens.

Lien Priority

Foreclosure sale proceeds are paid to each lienholder in order of priority.

Lien Priority


Any surplus goes to foreclosed property owner.

Lien 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

Lien PriorityRecording date

Recording date: The date a lien was filed for recording in county’s public record.



Determines lien priority except for:



Determines lien priority except for:property tax and assessment liens

(always have higher priority)



Determines lien priority except for:property tax and special assessment

liens (always have higher priority)mechanic’s liens (priority based on date

work began)

LiensHomestead Law

Homeowners have limited protection against judgment lien foreclosure.

LiensHomestead Law


Homestead law does not apply to:

LiensHomestead Law


Homestead law does not apply to:voluntary liens (mortgages, deeds of trust)

LiensHomestead Law


Homestead law does not apply to:voluntary liens (mortgages, deeds of trust) mechanic’s liens

LiensHomestead Law


Homestead law does not apply to:voluntary liens (mortgages, deeds of trust) mechanic’s liensliens resulting from failure to pay child

support or spousal maintenance

Homestead: Dwelling occupied by the owner, plus land and any attached buildings.

LiensHomestead Law

Homestead: Dwelling occupied by the owner, plus land and any attached buildings.

Owner may claim homestead protection after foreclosure proceedings have started, or by filing a declaration with the county recorder.

LiensHomestead Law

A person can have only one homestead at a time.

LiensHomestead Law

A person can have only one homestead at a time. Homestead protection terminates when:

owner files declaration of homestead on different property

LiensHomestead Law



original property is sold

LiensHomestead Law



original property is solddeclaration of abandonment is filed

LiensHomestead Law



original property is solddeclaration of abandonment is filed

If the homestead owner dies, protection continues for family members still living on the property.

LiensHomestead Law

Homestead LawExemption

Homestead makes part of homeowner’s equity exempt from claims.



Judgment creditor can’t foreclose unless property’s net value exceeds the exemption.



Judgment creditor can’t foreclose unless property’s net value exceeds the exemption.

Net value = Market value minus amount of higher-priority liens

Exemption amounts: $50,000 standard exemption


Exemption amounts: $50,000 standard exemption $75,000 if debtor is part of a family unit


Exemption amounts: $50,000 standard exemption $75,000 if debtor is part of a family unit $150,000 if debtor is:

1) over 65,

2) over 55 and low income,

3) married and low income, or

4) unable to work because of a disability


Homestead LawSale of home

Homestead protection also covers sale proceeds.

Homestead LawSale of home

Homestead protection also covers sale proceeds. Homestead owner has a six-month grace

period to use the money to buy a new home.

SummaryLien Priority and Foreclosure

Lien priority Voluntary liens Tax liens Construction liens Surplus Homestead exemption

EncumbrancesNon-financial encumbrances

While liens usually affect only owner’s title (not use of property), non-financial encumbrances commonly affect both title and use.

EncumbrancesNon-financial encumbrances

While liens usually affect only owner’s title (not use of property), non-financial encumbrances commonly affect both title and use.

Non-financial encumbrances include:easementsprofitsprivate restrictions

Easement: A right to use someone else’s land for a particular purpose.

Non-financial EncumbrancesEasements

Easement: A right to use someone else’s land for a particular purpose.

Easement holder may use property in some specific, limited way, but may not take possession of the property.

Non-financial EncumbrancesEasements

Easements Types of easements

Two basic types of easements: easements appurtenant easements in gross

Types of EasementsEasements appurtenant

Easement appurtenant: Burdens one piece of land (servient tenement) for benefit of another piece of land (dominant tenement).


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.


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.

Easement appurtenant runs with the land.

It continues to exist even if either the dominant or the servient tenement is sold.


Easement appurtenant runs with the land.

It continues to exist even if either the dominant or the servient tenement is sold.

The benefit and the burden are automatically passed on to all subsequent owners.


Types of EasementsEasements in gross

Easement in gross: Benefits particular person rather than parcel of land.

No dominant tenement, only servient tenement (parcel burdened by easement).




Benefit is considered a personal right, cannot be assigned to someone else.




Benefit is considered a personal right, cannot be assigned to someone else.

Burden of easement in gross still runs with the land.

Easements in GrossCommercial easements

Commercial easement: Easement in gross held by a company for business purposes.



Exception to rule: Commercial easement in gross can be assigned from one entity to another.



Exception to rule: Commercial easement in gross can be assigned from one entity to another.

Example: Easement to install and maintain utility lines.

SummaryEasements

Easement Easement appurtenant Running with the land Easement in gross Commercial easement in gross

Easements are created by: express grant express reservation implication prescription reference to a recorded plat dedication condemnation

EasementsCreating easements

Property owner deliberately grants someone else an easement on her property.

Creating EasementsExpress grant

Property owner deliberately grants someone else an easement on her property.May be purchased by the person

needing the easement.


Property owner deliberately grants someone else an easement on her property.May be purchased by the person

needing the easement.May be created when one part of a

larger property is sold.


Grant of easement must be in writing and signed by grantor (required by statute of frauds).


Grant of easement must be in writing and signed by grantor (required by statute of frauds).

Document creating easement should always be recorded to provide public notice.


Owner selling part of her property may reserve easement against parcel she’s selling, to benefit parcel she’s keeping.

Creating Easements Express reservation

Owner selling part of her property may reserve easement against parcel she’s selling, to benefit parcel she’s keeping.

Easement by express reservation must be in writing, and the document should be recorded.

Creating Easements Express reservation

Called easement by implication, implied easement, or easement by necessity.

Creating Easements Implication

Called easement by implication, implied easement, or easement by necessity.

Example: Part of a larger parcel is sold, but grantor neglects to create easement in deed, leaving one of the parcels without an access route. An easement would be created by implication.


Requirements for an easement by implication: must be reasonably necessary for

enjoyment of dominant tenement


Requirements for an easement by implication: must be reasonably necessary for

enjoyment of dominant tenement apparent prior use of the easement


Easement by prescription: An easement established by using someone else’s property without the owner’s permission. Also called a prescriptive easement.

Creating Easements Prescription

Requirements: Open and notorious (conspicuous) use


Requirements: Open and notorious (conspicuous) use Hostile use


Requirements: Open and notorious (conspicuous) use Hostile use Claim of right or color of title


Requirements: Open and notorious (conspicuous) use Hostile use Claim of right or color of title Continuous and uninterrupted for 5 years


Requirements: Open and notorious (conspicuous) use Hostile use Claim of right or color of title Continuous and uninterrupted for 5 years If property taxes are assessed separately on

easement, easement claimant must pay them during five-year period.


When land is subdivided, purchasers acquire easements to use all roads and alleys shown in recorded plat map.

Creating Easements Reference to a recorded plat

Dedication: Private property owner transfers interest in property to government.

Creating Easements Dedication

Dedication: Private property owner transfers interest in property to government.

Example: Philanthropist dedicates his land to city for a park, or dedicates an easement across his land for access to the park.


Dedication may be:voluntary (easement should be put into

writing and recorded), or



writing and recorded), orinvoluntary (by implication)



writing and recorded), orinvoluntary (by implication)

If public uses private property over a long period without owner’s permission, easement may be created by implied dedication.


Condemnation: Legal process used to force private owner to sell land or an easement to the government.

Creating Easements Condemnation

Condemnation: Legal process used to force private owner to sell land or an easement to the government.Property or easement must be used for a

public purpose.


Condemnation: Legal process used to force private owner to sell land or an easement to the government.Property or easement must be used for a

public purpose.Property owner must be compensated.


SummaryCreating Easements

Express grant Express reservation Implication Prescription Reference to recorded plat Dedication Condemnation

Terminating Easements

Easements can be terminated by: release merger failure of purpose abandonment prescription

Release: When someone who has a specified interest in a property gives it upto someone else.

Terminating Easements Release


Easement is terminated if dominant tenant releases servient tenant from it in writing.



Easement is terminated if dominant tenant releases servient tenant from it in writing.

Dominant tenant executes and records quitclaim deed in favor of servient tenant.


Merger: When two adjacent properties come under the same ownership.

Terminating Easements Merger


If the same party becomes owner of both the dominant and the servient property, easement terminates by merger.



If the same party becomes owner of both the dominant and the servient property, easement terminates by merger.

You can’t have an easement against your own property.


Easement is a right to use another’s property for a particular purpose, and once that purpose no longer exists, easement is terminated.

Terminating Easements Failure of purpose

Abandonment: Easement holder (dominant tenant) does something indicating intent to stop using easement forever.

Terminating Easements Abandonment


General rule: Non-use is not sufficient to indicate abandonment.



General rule: Non-use is not sufficient to indicate abandonment.

Exception: Servient tenant can sue to have a prescriptive easement terminated after 5 years of non-use.


Easement is terminated by prescription if servient tenant takes action to prevent dominant tenant from using easement, and is successful for 5 years.

Terminating Easements Prescription

SummaryTerminating Easements

Release Merger Failure of purpose Abandonment Prescription

Profit: The right to take something from land belonging to someone else.

Non-financial EncumbrancesProfits

Profit: The right to take something from land belonging to someone else.Must be created in writing or by

prescription.

Non-financial EncumbrancesProfits

Non-financial EncumbrancesRelated concepts

Licenses

Encroachments

Nuisances

Non-financial EncumbrancesRelated concepts

Licenses

Encroachments

Nuisances

These are not classified as encumbrances.

They affect someone else’s property, but aren’t considered interests in real property.

Related Concepts Licenses

License: Right to enter and use land belonging to another person.


License: Right to enter and use land belonging to another person.Does not need to be in writing


License: Right to enter and use land belonging to another person.Does not need to be in writingRevocable


License: Right to enter and use land belonging to another person.Does not need to be in writingRevocableDoes not create a property interest


License: Right to enter and use land belonging to another person.Does not need to be in writingRevocableDoes not create a property interestNot assignable


License: Right to enter and use land belonging to another person.Does not need to be in writingRevocableDoes not create a property interestNot assignableDoes not run with the land

Related Concepts Encroachments

Encroachment: Occurs when a physical object from one property intrudes onto neighboring property.


Encroachment: Occurs when a physical object from one property intrudes onto neighboring property.Most encroachments are unintentional.

Landowner who believes her property is being encroached upon can sue neighbor. Called an ejectment action.


Landowner who believes her property is being encroached upon can sue neighbor. Called an ejectment action.Court may order defendant to remove

encroachment or pay damages.


Landowner who believes her property is being encroached upon can sue neighbor. Called an ejectment action.Court may order defendant to remove

encroachment or pay damages.Statute of limitations: 3 years.


Related Concepts Nuisances

Nuisance: Activity on or condition of property that interferes with neighboring owner’s use of her property.


Nuisance: Activity on or condition of property that interferes with neighboring owner’s use of her property.Private nuisance: Affects a few people,

like smell of neighbor’s pet pigs.


Nuisance: Activity on or condition of property that interferes with neighboring owner’s use of her property.Private nuisance: Affects a few people,

like smell of neighbor’s pet pigs.Public nuisance: Affects many

landowners, like pollution from nearby factory.

Property owner affected by a private or public nuisance can sue for:an injunction to stop the nuisance


Property owner affected by a private or public nuisance can sue for:an injunction to stop the nuisance compensatory damages


Attractive nuisance doctrine: If property has feature that is dangerous and attractive to children, owner will be liable for any harm resulting to trespassing children.


Attractive nuisance doctrine: If property has feature that is dangerous and attractive to children, owner will be liable for any harm resulting to trespassing children.

Example: an unfenced swimming pool.


Profit License Encroachment Nuisance

SummaryProfits, Licenses, and Encroachments

Private restrictions restrict how an owner may use her own property.

Non-financial EncumbrancesPrivate restrictions


Commonly created when transferring title, to restrict all subsequent owners.



Commonly created when transferring title, to restrict all subsequent owners.New restrictions may be stated in deed

or recorded at county recorder’s office



Commonly created when transferring title, to restrict all subsequent owners.New restrictions may be stated in deed

or recorded at county recorder’s office

Private restrictions often called deedrestrictions or restrictive covenants.


Private restrictions may also be imposed when there’s no change of ownership.


Private restrictions may also be imposed when there’s no change of ownership.Sometimes owner will impose restriction

on own property in return for payment.


Private restrictions may also be imposed when there’s no change of ownership.Sometimes owner will impose restriction

on own property in return for payment.

If put into writing and recorded, private restrictions run with land, just like easements.


Private RestrictionsCC&Rs

Stands for covenants, conditions, and restrictions.



Usually imposed by original developer of residential subdivision.




Recorded, and a reference included in first deed for each lot in subdivision.




Recorded, and a reference included in first deed for each lot in subdivision.

Provides constructive notice to subsequent owners of the lot.

CC&Rs allow homeowners to prevent neighbors from doing things that will have a negative effect on property values.


CC&Rs allow homeowners to prevent neighbors from doing things that will have a negative effect on property values.

If one owner violates CC&Rs, other owners can file a lawsuit against the violator.


Private restrictions may be stricter than public land use controls, such as zoning laws.

Private RestrictionsIn conflict with zoning

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, the more restrictive one usually applies.

Private RestrictionsIn conflict with zoning

Private restrictions that violate law or constitutional provisions are not enforceable.

Private RestrictionsIllegal or unconstitutional

Private restrictions that violate law or constitutional provisions are not enforceable. An unenforceable restriction in a deed

does not make the deed void. Only the restriction is void.


Private restrictions that violate law or constitutional provisions are not enforceable. An unenforceable restriction in a deed

does not make the deed void. Only the restriction is void.

Any restriction on property owner putting up

“For Sale” signs is typically void.


Private RestrictionsCovenant vs. condition

Covenant: Legally enforceable promise to do or not do something.


Covenant: Legally enforceable promise to do or not do something. Violation can result in injunction or

damages.



damages.

Condition: Ownership of property depends on compliance with restriction.



damages.

Condition: Ownership of property depends on compliance with restriction.Violator may actually forfeit title to

property. Conditions are rare today because this result is so harsh.

Restriction may not be enforceable if: owners in subdivision failed to enforce it

against other violators

Private RestrictionsEnforcement


against other violators character of neighborhood has changed

drastically



against other violators character of neighborhood has changed

drastically property owner suing to enforce restriction

is also in violation


SummaryPrivate Restrictions

Private restrictions CC&Rs Covenants Conditions

Documents

Lesson 4: Encumbrances Principles of California Real Estate