2010 rockwell publishing lesson 4: encumbrances principles of california real estate

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© 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

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© 2010 Rockwell Publishing Encumbrances are either: financial (liens), or nonfinancial (easements, private restrictions, etc.). Encumbrances

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Page 1: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Lesson 4: Encumbrances

Principles of California Real Estate

Page 2: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Encumbrances

Encumbrance: Nonpossessory interest in real property held by someone other than owner.

Does not give ownership or right to exclusive possession.

Page 3: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Encumbrances are either:financial (liens), ornonfinancial (easements, private

restrictions, etc.).

Encumbrances

Page 4: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

LiensSecurity interest

Financial encumbrance (lien) is security interest in real property.

Security interest: Creditor’s interest that makes property security (collateral) for debt.

Page 5: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

LiensSecurity interest

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.

Page 6: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

LiensVoluntary vs. involuntary

Voluntary lien: Property owner voluntarily grants lien to creditor.

Examples: mortgage, deed of trust.

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

Example: tax lien.

Page 7: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

LiensGeneral vs. specific

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

Example: judgment lien.

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

Example: mortgage.

Page 8: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

LiensTypes of liens

MortgagesDeeds of trustMechanic’s liensJudgment liensAttachment liensTax liensSpecial assessment liens

Page 9: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensMortgages

Mortgage: Specific, voluntary lien created by contract between property owner and lender.

Owner (Borrower) = MortgagorLender = Mortgagee

Page 10: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensDeeds of trust

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

Borrower = Trustor or GrantorLender = BeneficiaryNeutral third party = Trustee

Trustee handles foreclosure, if necessary.

Page 11: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensMechanic’s liens

Mechanic’s lien: Specific, involuntary lien attaching to real property undergoing construction work.

Can be claimed by anyone providing labor, materials, or services.

If owner fails to pay as agreed, lienholder can foreclose on property.

Page 12: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Mechanic’s LiensPreliminary notice

Must give owner, general contractor, and construction lender (if any) preliminary notice of right to claim lien within 20 days of starting to provide services or materials.

Page 13: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Mechanic’s LiensDeadlines

Deadlines for filing liens vary depending on whether owner files:

notice of completion: must be filed within 10 days after project completed

notice of cessation: can be filed only after work has stopped for 30 continuous days (whether project finished or not)

Page 14: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

If owner files notice of completion or cessation, mechanic’s lien must be filed within 30 days (60 days for original contractors).

If owner doesn’t file notice, mechanic’s lien must be filed within 90 days after work stops.

Mechanic’s LiensDeadlines

Page 15: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Mechanic’s LiensForeclosure

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

Page 16: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensJudgment liens

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

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

debtor’s property sold to satisfy judgment.

Page 17: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

A judgment lien:attaches to property owned by judgment

debtor in any county where abstract of judgment is filed

can also attach to new property acquired by debtor

Types of LiensJudgment liens

Page 18: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensAttachment liens

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

Court issues writ of attachment.When writ is recorded in county where

property is located, it creates involuntary, specific lien.

Valid for three years.

Page 19: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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

Just provides notice; doesn’t create lien.If property is sold, new owner is bound by

any resulting judgment.

Attachment LiensLis pendens

Page 20: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensProperty tax liens

Property tax lien: Involuntary, specific lien created by general real estate taxes.

Attaches only to property being taxed.Government can foreclose and collect

unpaid taxes from foreclosure sale proceeds.

Page 21: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensSpecial assessment liens

Special assessment lien: Involuntary, specific lien based on levy, to pay for specific improvements such as street paving or sewer lines.

Only attaches to properties subject to special assessment (because they benefit from project).

Page 22: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of LiensIRS liens

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

Page 23: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

SummaryBasic Definitions

• Encumbrance• Lien• Mortgage• Deed of trust

• Mechanic’s lien• Judgment lien• Attachment lien• Tax lien

Page 24: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Lien priority: Determines order in which lienholders will be paid, in foreclosures with multiple lienholders.

Lien Priority

Page 25: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Foreclosure sale proceeds are paid to each lienholder in order of 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

Page 26: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Lien PriorityRecording date

Recording date: Date lien was filed in county’s public records office.

Generally determines lien priority except for:tax and assessment liens (always have

highest priority)mechanic’s liens (priority based on date

work began)

Page 27: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

LiensHomestead Law

Homestead law: State law that gives homeowners limited protection against foreclosure for judgment and attachment liens.

Does not apply to:voluntary liens (mortgages, deeds of trust) mechanic’s liensliens for child support or spousal

maintenance

Page 28: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Homestead: Owner-occupied dwelling, plus land and attached buildings.

Homestead protection may be claimed by filing declaration of homestead in county office. Or:

owner (or authorized person) may claim homestead protection after foreclosure started

LiensHomestead Law

Page 29: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Person can only claim one homestead at a time.

Homestead protection terminates when:owner files declaration of homestead on

different propertyoriginal property is solddeclaration of abandonment is filed

LiensHomestead Law

Page 30: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

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

LiensHomestead Law

Page 31: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Homestead LawExemption

Homestead exemption: Homestead property is exempt from judgment liens up to exemption amount.

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

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

Page 32: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Current exemption amounts:$75,000 standard exemption $100,000 if debtor is part of family unit$175,000 if debtor is:

over 65over 55 and low income, orunable to work because of disability

Homestead LawExemption

Page 33: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

SummaryLien Priority and Foreclosure

• Lien priority• Foreclosure• Homestead laws• Exemptions

Page 34: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

EncumbrancesNonfinancial encumbrances

While liens usually affect owner’s title only (not use of property), nonfinancial encumbrances often affect both title and use.

Nonfinancial encumbrances include:easementsprivate restrictions

Page 35: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Easement: Right to use someone else’s land for particular purpose.

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

Nonfinancial EncumbrancesEasements

Page 36: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Easements Types of easements

Two basic types of easements:easements appurtenanteasements in gross

Page 37: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of EasementsEasements appurtenant

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.

Page 38: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Easement appurtenant runs with the land. Continues to exist even if dominant or

servient tenement is sold. The benefit and burden are automatically

passed on to all subsequent owners.

Types of EasementsEasements appurtenant

Page 39: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Ingress/Egress: Easement in which dominant tenant has right to drive over part of servient tenant’s land in order to reach or leave her property.

Types of EasementsIngress and egress

Page 40: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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).

Burden of easement in gross runs with the land.

Page 41: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Types of EasementsEasements in gross

Easements in gross can be personal or commercial (such as access rights for utility company).

In California, both kinds of easements in gross are transferable, through assignment or inheritance.

Many other states do not allow transfer of personal easements in gross.

Page 42: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

SummaryEasements

• Easement• Easement appurtenant• Running with the land• Easement in gross

Page 43: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Main ways to create easement are: express grantexpress reservationimplicationprescription

EasementsCreating easements

Page 44: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Express grant: Property owner clearly grants someone easement on her property.

May be purchased by person needing an easement.

May be created when part of larger property is sold.

Creating EasementsExpress grant

Page 45: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Express grant must be in writing and signed by grantor (statute of frauds).

Exact location of easement need not be specified in grant.

Document creating easement should be recorded (to give notice).

Creating EasementsExpress grant

Page 46: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Express reservation: Owner selling part of property may reserve easement against parcel being sold and to benefit parcel she’s keeping.

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

Creating Easements Express reservation

Page 47: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Easement by implication: Can be implied grant or implied reservation; also known as easement by necessity.

Example: Part of larger parcel is sold, but grantor fails to create easement in deed, leaving one of the lots without access. This creates an easement by implication.

Creating Easements Implication

Page 48: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Requirements for easement by implication:must be reasonably necessary for

enjoyment of dominant tenementprior use of the easement should have

been apparent to parties

Creating Easements Implication

Page 49: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Easement by prescription: Easement established by using another’s property without permission, similar to adverse possession.

Also called prescriptive easement.

Creating Easements Prescription

Page 50: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Requirements:open and notorious usehostile useclaim of rightcontinuous use for at least 5 yearsif property taxes assessed separately on

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

Creating Easements Prescription

Page 51: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

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SummaryCreating Easements

• Express grant• Express reservation• Implication• Prescription

Page 52: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Terminating Easements

Easements can be terminated by:releasemergerfailure of purpose abandonmentprescription

Page 53: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Release: Someone with interest in property gives it up to someone else.

Easement is terminated if dominant tenant releases servient tenant, in writing.

Usually done through quitclaim deed.

Terminating Easements Release

Page 54: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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

If same party becomes owner of both dominant and servient property, easement terminates by merger. (No need for easement on your own property.)

Terminating Easements Merger

Page 55: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Since easement is a right to use another’s property for a particular purpose, if that purpose ceases to exist the easement terminates.

Terminating Easements Failure of purpose

Page 56: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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

Non-use (alone) generally not sufficient.Exception: Prescriptive easement

terminates automatically after 5 years of non-use.

Terminating Easements Abandonment

Page 57: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Easement is terminated by prescription if servient tenant prevents dominant tenant from using easement for 5 years.

Example: building brick wall around property.

Terminating Easements Prescription

Page 58: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

SummaryTerminating Easements

• Release• Merger• Failure of purpose• Abandonment• Prescription

Page 59: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Nonfinancial EncumbrancesRelated concepts

LicensesEncroachmentsNuisances

Not classified as encumbrances.Not considered interests in real property.

Page 60: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Related Concepts Licenses

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

Need not be in writing.Temporary.Revocable.Doesn’t create a property interest.Not assignable.Doesn’t run with the land.

Page 61: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Related Concepts Encroachments

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

Most encroachments unintentional. Considered trespass rather than

encumbrance.

Page 62: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Landowner who believes her property is being encroached upon can sue for an ejectment.

Remedy may be removal and/or damages.

Statute of limitations: 3 years (for owner to bring legal action).

Related Concepts Encroachments

Page 63: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Nuisance: Activity or condition on a neighboring property that interferes with enjoyment of one’s own property.

A private nuisance affects at most a few properties.

A public nuisance affects a larger community.

Related Concepts Nuisances

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© 2010 Rockwell Publishing

• License• Encroachment• Nuisance

SummaryRelated Concepts

Page 65: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Private restrictions limit how owner may use his own property; also known as deed restrictions or restrictive covenants.

Nonfinancial EncumbrancesPrivate restrictions

Page 66: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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

Nonfinancial EncumbrancesPrivate restrictions

Page 67: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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

Unenforceable restriction in deed does not make deed void—only restriction is void. 

Private RestrictionsIllegal or unconstitutional

Page 68: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Private RestrictionsCC&Rs

CC&Rs (covenants, conditions, and restrictions) are usually imposed by developer of residential subdivision.

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

Provides constructive notice to subsequent lot owners.

Page 69: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

CC&Rs allow homeowners to restrict neighbor actions that will negatively affect property values.

If one owner violates CC&Rs, other owners can seek enforcement through courts.

Private RestrictionsCC&Rs

Page 70: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

Private RestrictionsCovenants vs. conditions

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

Violation can result in injunction or damages.

Condition: Ownership of property depends on compliance with restriction.

Violator may actually forfeit title to property. (Courts tend to avoid this harsh result.)

Page 71: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

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

against other violatorscharacter of neighborhood has changed

so much it’s difficult to comply

Private RestrictionsTermination of restrictions

Page 72: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

© 2010 Rockwell Publishing

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, more restrictive one usually applies.

Private RestrictionsIn conflict with zoning

Page 73: 2010 Rockwell Publishing Lesson 4: Encumbrances Principles of California Real Estate

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SummaryPrivate Restrictions

• Private restrictions• CC&Rs• Covenants• Conditions