Property Liens and Real Estate Transactions

11% of transaction delays are caused by unresolved title-related issues on a property according to the 2017 Realtors Confidence Index.  The most common of these issues is the lien – a legal and financial barrier to prevent sale of a property until a debt has been resolved

How Liens Delay Property Sales

In most cases, liens have the effect of forcing the property owner to pay the debt prior to passing the title deed on to a new owner.  How? Because the liens are said to “cloud” the title.  If detected in a title search, such clouds need to be cleared before most purchasers would be willing to take possession of the title of the property.  This is because the holder of a property’s title is responsible for payment of any lien made against it.

Since most buyers do not want to assume the debts of the seller, liens against a property’s title must be resolved by the seller before a transaction can take place.

Who can place a lien?

In all cases, county court judgements are required to place the lien on a property’s title. There are several different parties who may appeal to the courts to have a legal hold on your property in the form of a lien.

First and foremost is the federal government.  The IRS may place a lien on your property for unpaid back taxes.  Federal liens are the most formidable of the lien-types that can be levied against your property. This is because the Federal government has a right to its money before any other creditor is allowed to collect their debt.  The complexity of tax law and the nature of an IRS tax lien means that the assistance of a real estate attorney and possibly an experienced CPA will be needed to resolve the matter.  Once resolved, the lien can be removed.

Second in priority are liens placed by Florida state or local counties’ departments of Revenue.  In these cases, the lien could be placed as a means of collecting past due amounts.   The most common case of local government liens are related to unpaid property taxes.

Thirdly are debts that are owed to a licensed construction contractor whom you may you may still owe for improvements made on your property. These liens are made according to Sections 713.001-713.37 of Florida Statute, collectively called Florida Construction Lien Law.  Such liens can be placed by contractors, materials suppliers and other licensed providers of construction services and goods contracted by the property owner.  In the case that payment of the due amounts is delayed, the contractors have the right to seek remedy under the law by placing a lien on the property equal to the amount due.

A fourth type of lien is related to debts owed to Homeowners Associations for penalties, fees and fines incurred over the years.  For example, disputes over HOA fines levied for breaking community rules can lead to your HOA having the right to assess your property for the amount owed.  Such a lien on your property will remain as a cloud on your title in very much the same way as a municipal fine or tax debt lien.

The above examples are by no means an exhaustive list of the people and organizations that could place a lien on a property as a means of collecting a debt.  Ex-spouses (for court-ordered alimony and child support) and corporate creditors (banks, credit card companies and others) may also attempt to recover the money due to them via a lien.

While a lien can remain on a title for years, it is wise to remove it even if there is no intention to sell or mortgage a property.  Liens are likely to negatively impact your credit score and thus severely affect your financial standing.

“… liens against a property’s title must be resolved by the seller before a transaction can take place.”

Removing a Lien

Regardless of the source, all liens have one thing in common – they cloud your title and will delay the sale of your property until they are cleared.

Clearing a lien often starts with the discovery of the lien during the title search conducted by a title agency or real estate lawyer.  In many cases, a real estate lawyer is also required to clear the lien.  Other cases, especially those involving overdue tax debt, may require the intervention of an experienced accountant. Depending on the type, scale and scope of the lien there could be six different ways to clear the title:

1. Full Payment

Fully paying the debt is the fastest and most straightforward way to remove a lien on a property’s title.  Once paid-in-full real estate lawyer may be able to expedite the process of removing the lien.  If there are no other clouds on the title, then the transaction would be able to proceed normally.

2. Settlement

Sometimes the seller cannot afford to pay the whole amount required to lift the lien and clear the title.  In this case, an agreement can often be made with the entity that placed the lien.  For example, if the seller owns a second home perhaps the lienholder will agree to a partial payment now with the balance due transferred to the second property.

3. Posting of a Bond

One option in many cases is for the seller to agree to post a surety bond for the amount of the payment as a replacement to the lien.  Once the bond is paid for and posted, the title is cleared of the lien and the transaction (assuming no other clouds are discovered) can go forward.  It is important to note that placing a bond is often a very expensive solution in the long-run.  This is because the value of the bond is higher than the value of the debt due. A percentage of the total value must be paid at the time that the bond is posted.

4. Paying from the Proceeds of the Transaction

Where there is scope to do so, a real estate attorney can draft into the purchase agreement that the sale amount can be assessed for the debt due.  This means that the debt will be paid out of the money that the buyer pays the seller.  In this case, the money for the debt is removed from the total sum paid into the real estate lawyer’s escrow account.  Then the difference (if any) is passed on to the seller.  This is possible only in cases where the lien value is less than the owner’s equity in the property.

5. Appeal and Dispute

In some cases, the seller may be able to successfully dispute the value of a debt.  In this case, the lien can be removed once the debt has been reduced and paid or eliminated all together.  One example of this is the fairly complex matter of property tax appeals.  Counties in Florida levy taxes on an ad valorem basis, which means that the owner’s tax liability is based on the assumed value of the property.  If an experienced real estate lawyer can prove that the ad valorem tax assessed is too high, then the debt amount of the lien can be reduced. Once reduced and the balance paid, the tax lien can be lifted and the title cleared.

6. Filing a Claim with your Title Insurance Company

In rare cases, a title search may fail to uncover liens on a title. If the seller purchased title insurance when she bought the property, then that insurance company would be obligated to pay the debt corresponding to any unknown or hidden liens once they are discovered.  Because not all title searches reveal all liens, it is important that buyers purchase title insurance. Without title insurance, buyers may become liable for liens and other clouds on the title that they did not originally incur.  This can seriously affect their financial position.

Preventing Lien-Related Delays

Delays due to liens are avoidable. Here are the four most proactive ways to ensure that a lien does not hold up your transaction:

1. Paying Your Debts

The most straightforward way of avoiding property liens involves the sometimes difficult task of not taking on any more financial obligations than you can afford.  By avoiding debt, you avoid the risk of having a judgement placed against you and a lien placed on your properties title.  Of course, this is not always as simple as it sounds, however the decision to take on debt or make expensive improvements on a property does come at a risk if at some point your obligations become overwhelming.

2. Avoiding Transgressions

If you live under the authority of a Homeowners’ Association then it is wise to follow the community rules and avoid fines, disputes and penalties.  By doing so, and paying all dues on time, you can avoid the chance of the HOA applying for a lien against your property’s title.

3. Being Upfront with your Real Estate Advisors

What if you already know you have a lien on your property?  If this is the case, then the most efficient way to handle the situation is to make your liens known to all parties in a transaction. The earlier you mention that your title has a cloud on it, the faster your real estate attorney, title agent and real estate agent can salvage the transaction.

Having a lien on your property can make a transaction more difficult and can slow things down considerably.  However, if handled properly and early this obstacle can be overcome.

Nima Ajabshir, Esq. is the Managing Partner at South Florida Law, with an emphasis in Real Estate Law. Mr. Ajabshir received his Bachelor’s Degree in Political Science from Florida State University, where he graduated Cum Laude.  Mr. Ajabshir, Esq. attended and received his Juris Doctorate from St. Thomas University School of Law.  In addition to being an attorney licensed to practice in the State of Florida, Mr. Ajabshir, Esq. has his real estate license, so he has experience in both the legal and transactional facets of Florida real estate.

 

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