Everything was going smoothly for the sellers of a condominium in north Los Angeles County. They were less than two weeks from closing escrow.
Then came a major roadblock. The sellers lived in a condo complex that is having a dispute with a contractor who repaired and remodeled the common areas. The contractor reacted with a mechanics' lien of more than $1.8 million covering each of the more than 160 units in the complex--including the sellers'.
As soon as the lien was filed, no title company was willing to issue a title insurance policy on the sellers' unit. And without title insurance, the sale was in jeopardy. The deal was saved by the sellers' condo association, which agreed to sign a mechanics' lien indemnity.
With the association's promise to indemnify the title insurer for any claims related to the multimillion-dollar lien, sale of the unit was able to close nearly as scheduled last month.
This situation faced by the Antelope Valley condo sellers isn't unique. In fact, your home or condo may be encumbered by all sorts of claims unbeknown and unfamiliar to you. It is relatively simple for many types of creditors to record liens against your real property, and often you may not even learn about them until you try to sell or to refinance.
A lien is an encumbrance in the form of a notice attached to certain property. A lien that is recorded with the county recorder basically warns everyone else of a creditor's claim on your property. Because liens cloud the "clear title" needed to sell a piece of real property, creditors use liens as a way to guarantee that they will eventually be paid what they are owed.
Although most creditors need a court judgment before they can place a lien on a debtor's real property, there are also certain types of liens that do not require a judgment. The most common type of lien is the type associated with your home mortgage or automobile loan. These are voluntary liens.
There are also many involuntary liens, including liens for property taxes, federal and state income taxes, child support, excess Medi-Cal payments, homeowner association fees, design professionals and so-called mechanics' liens that protect contractors who work on your property.
"Sellers are either not aware of a lien on their property or they do not realize what an impediment the lien can be in closing escrow," said Tammy Freni, an escrow officer at Warner Center Escrow in Woodland Hills.
Sellers should check the public record before they place a home on the market, Freni said. And if a contractor is working on a home that is for sale, she added, it is advisable for the property owner to resolve any disputes with the contractor before they lead to the recording of a mechanics' lien.
Property owners are often shocked to learn how easily someone can record a lien against their property. With judgment liens, there is a court hearing before any lien is recorded. But with non-judgment liens, a creditor just notes what he or she thinks is owed; often the amount isn't correct.
"It's very common that people don't even know about liens against their property," said Robin Leonard, a Berkeley attorney who is author of "Money Troubles: Legal Strategies to Cope With Your Debts" and "How to File for Bankruptcy," published by Nolo Press. In the case of property taxes, "sometimes you think you are paying your taxes on time through an impound account with your lender, and then when you try [to] sell the property, you find out there's a lien for unpaid taxes," she said. "It's a surprise to many homeowners."
As if the lien wasn't bad enough by itself, Leonard said, it can also do damage to your credit. When the IRS records a lien against your property, she said, many other creditors take it as a sign that you are having trouble paying your taxes. But the IRS can make mistakes.
Mechanics' liens lead to some of the most frequent lien-related disputes. Under California's mechanics' lien law, any contractor, subcontractor, laborer, supplier or other person who helps improve your property, but is not paid for his or her work or supplies, has a right to enforce a claim against your property in the form of a lien.
After a court hearing, the creditor may become a judgment creditor and "execute" on the lien by having an officer of the court seize your property, arrange for a public sale and use the proceeds of the sale to satisfy the money owed. This does not happen very often, however, because the process is time-consuming and expensive. Also, the judgment creditor is only paid after other earlier creditors, including your mortgage holder.
Even if you pay your contractor in full, subcontractors, laborers or suppliers who remain unpaid may record a lien. In some instances, such claimants are required to provide the property owner with a preliminary notice of the claim. Although the preliminary notice is not a lien, it may lead to one if the subcontractors and suppliers are not paid.
Attorneys and reputable contractors suggest that homeowners get an unconditional lien waiver and release signed by the contractor and each material supplier, subcontractor and laborer. This cuts off the right of any of these parties to record a lien on the residence.
Other liens that are recorded against your property are best satisfied with a payment or should be challenged as soon as they become known to you. Homeowners may also want to check once every year or two for any documents recorded with the county recorder that may not belong in the record.
Ron Galperin is a real estate attorney with Wolf, Rifkin & Shapiro in West Los Angeles and a syndicated columnist with the Real Estate News Group.