Lesson 5: Encumbrances - Metro Brokers

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Lesson 5: Lesson 5: EncumbrancesEncumbrances

Real Estate Principles of Georgia

1051 of 64

© Copyright 2006, Rockwell Publishing, Inc.

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

Does not give ownership or right to exclusive possession.

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Encumbrances are either:financial (liens)or

non-financial (easements, private restrictions, etc.)

Encumbrances are either:financial (liens)or

non-financial (easements, private restrictions, etc.)

Financial vs. Non-financialEncumbrances

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LiensSecurity interest

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

If property owner fails to repay debt, secured creditor may foreclose.

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LiensVoluntary vs. involuntary

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.

Example: mechanics lien

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.

Example: mechanics lien

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LiensGeneral vs. specific

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

Example: judgment lien

Specific lien: Lien attaches only to a specific piece of real property.

Example: mortgage

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

Example: judgment lien

Specific lien: Lien attaches only to a specific piece of real property.

Example: mortgage

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LiensTypes of liens

Security deedsMortgagesDeeds of trustMechanic’s liensJudgment liensAttachment liensTax liensProperty tax liensSpecial assessment liensIRS liens 107


Types of LiensSecurity deeds

Security deed: Lien created by contract between property owner and lender.Borrower gives lender deed as security for repayment of loan, with property serving as collateral.Non-judicial foreclosure only in GeorgiaMost common security instrument in Georgia.

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Types of LiensMortgages

Mortgage: Lien created by contract between property owner and lender.

Owner (Borrower) = MortgagorLender = Mortgagee

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

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Types of LiensDeeds of trust

A deed of trust is similar to mortgage but has different foreclosure procedures.

Borrower = Trustor or GrantorLender = Beneficiary

Neutral third party = Trustee(Trustee handles foreclosure, if necessary.)

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Types of LiensMechanic’s liens

Mechanic’s lien: Lien attaching to real property.

Can be claimed by anyone providing labor, materials, or services. If owner fails to pay as agreed, lienholder can foreclose on property.

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Mechanic’s LiensClaim of lien

Generally, a notice of a right to claim lienmust be filed with the property owner and contractor recorded in County within a certain period. • This period varies from state to state.• 30 days in Georgia.• This notice is not necessary if the claimant

has a contract directly with the owner.

30 days 108

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Mechanic’s LiensDeadlines

Filing a claim of lien is called perfecting the lien.

Mechanics lien statutes also sets a deadline by which a claimant must file a court action to satisfy the lien (12 months in Georgia).

Filing a claim of lien is called perfecting the lien.

Mechanics lien statutes also sets a deadline by which a claimant must file a court action to satisfy the lien (12 months in Georgia).

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Types of LiensJudgment liens

Judgment lien: Lien resulting from financial judgment against losing party in a lawsuit (the judgment debtor).

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Types of LiensAttachment liens

Attachment lien: Lien used to prevent a defendant from selling property.

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Lis pendens: a notice recorded by plaintiff informing anyone who purchases a specified property that a lawsuit exists that may affect title.

Just provides notice; doesn’t create lien.

Lis pendens: a notice recorded by plaintiff informing anyone who purchases a specified property that a lawsuit exists that may affect title.

Just provides notice; doesn’t create lien.

Types of Liens

Lis pendens

Lis pendens

Lis pendens

Lis pendens

Lispen

dens

Lispen

dens

Lispen

dens

Lispen

dens

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Types of LiensProperty tax liens

Lien created by general real estate taxes.

Attaches only to property being taxed.

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

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Types of LiensSpecial assessment liens

Lien based on special assessment levied to pay for specific improvements such as street paving or sewer lines.

Attaches only to properties subject to the special assessment (properties that benefit from the project).

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Types of LiensIRS liens

General lien that attaches to all property belonging to a taxpayer who has failed to pay federal income taxes.

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SummaryBasic definitions

EncumbranceLienMortgageDeed of trust

Mechanic’s lienJudgment lienAttachment lienTax lien


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

Any surplus goes to the foreclosed property owner.

If proceeds aren’t enough to pay off all liens, lienholders with lowest priority do not get paid.

Lien Priority

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Lien PriorityRecording date

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

Determines lien priority except for:tax and assessment liens (always have higher priority)mechanic’s liens (priority based on date work began)

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LiensHomestead Protection Law

Gives homeowners some protection against foreclosure of judgment liens.

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 110


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

A person can only have one homestead at a time.

LiensHomestead Protection Law

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Homestead LawHomestead Protection

When a judgment creditor forecloses on a homestead, the property is protected by a homestead protection, which means that a portion of the property’s value is exempt from creditors’ claims.

For example in Georgia, if a judgment creditor were to foreclose on an owner’s home, at least $5,000 of the foreclosure sale proceeds would go to the owner.

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SummaryLien Priority and Foreclosure

Lien priorityVoluntary liensTax liensConstruction liensSurplus Homestead exemption


EncumbrancesNon-financial encumbrances

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

Non-financial encumbrances include:easementsprofitsprivate restrictions

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

Non-financial encumbrances include:easementsprofitsprivate restrictions

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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

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EasementsTypes of easements

Two basic types of easements:easements appurtenanteasements in gross

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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 (estate).Owner of servient tenement is servient tenant.

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Easement appurtenant runs with the land.

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

Benefit and burden are automatically passed on to all subsequent owners.

Types of EasementsEasements appurtenant

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Types of EasementsEasements in gross – Personal & Commercial

Easement in gross: Benefits particular person rather than a 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. Burden of easement in gross may still run with the servient land.Personal easement terminates with death/sale 113


Easements in GrossCommercial easements

Commercial easement ingross held by a company to use a parcel of land for business purposes. Commercial easement in gross can be assigned from one entity to another.

Example: Easement to install and maintain utility lines.

Commercial easement ingross held by a company to use a parcel of land for business purposes. Commercial easement in gross can be assigned from one entity to another.

Example: Easement to install and maintain utility lines. 113

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SummaryEasements

EasementEasement appurtenantRunning with the landEasement in grossCommercial easement in gross


Easements are created by: express grantexpress reservationimplicationprescriptiondedicationcondemnation

EasementsCreating easements

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

May be purchased by person needing 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), and should be recorded as well.

Creating EasementsExpress grant

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

Reservation must be in writing and should be recorded.

Creating Easements Express reservation

Must be in writing

and recorded

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Easement by necessity: Arises when property can’t be accessed by its owner (i.e., property entirely surrounded by other privately owned land).

Creating EasementsNecessity

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Necessity

For example, if a property has no access to a public street, the owner is entitled to an easement running from the property to the nearest street.

An easement by necessity is created automatically; no written document is required.

For example, if a property has no access to a public street, the owner is entitled to an easement running from the property to the nearest street.

An easement by necessity is created automatically; no written document is required.

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

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

Creating Easements Prescription

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Requirements:Open and notorious (conspicuous) useHostile useContinuous and uninterrupted for statutory period (seven years) in Georgia.

Unlike adverse possession, prescriptive easement doesn’t require exclusive use of property.

Requirements:Open and notorious (conspicuous) useHostile useContinuous and uninterrupted for statutory period (seven years) in Georgia.

Unlike adverse possession, prescriptive easement doesn’t require exclusive use of property.

Creating EasementsPrescription

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Dedication: Private property owner transfers interest in property to the government. May be:

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

Creating Easements Dedication

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

Property or easement must be used for a public purpose.Property owner must be compensated.

Creating Easements Condemnation

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SummaryCreating Easements

Express grantExpress reservationImplicationPrescriptionDedicationCondemnation


Terminating EasementsTerminating Easements

Easements can be terminated by:releasemergerfailure of purpose abandonmentprescription

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

Terminating Easements Release

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Merger: An easement terminates by merger if someone becomes owner of both the dominant and servient tenements.

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

Terminating Easements Merger

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Failure of purpose: An easement is a right to use another’s property for a particular purpose. Once that purpose no longer exists, the easement terminates.

Terminating Easements Failure of purpose

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

Terminating Easements Abandonment

Terminating Easements Abandonment

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SummaryTerminating Easements

ReleaseMergerFailure of purposeAbandonmentPrescription


Non-financial EncumbrancesRelated concepts

Licenses

Encroachments

These are not classified as encumbrances.They affect someone else’s property, but aren’t considered interests in real property.

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Related ConceptsLicenses

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

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Related ConceptsEncroachments

Encroachment: Occurs when a physical object on one property intrudes onto a neighboring property (e.g., a fence).

Most encroachments are unintentional.

Landowner who believes her property is being encroached upon can sue neighbor (ejectment action).

Court may order defendant to remove encroachment and/or pay damages. 116


ProfitLicenseEncroachmentNuisance

SummaryProfits, Licenses, and Encroachments

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

Commonly created when transferring title; restricts 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.

Non-financial EncumbrancesPrivate restrictions

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

Sometimes an owner will impose restriction on her own property in return for payment.

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

Non-financial EncumbrancesPrivate restrictions

Will run with land if in

writing and recorded

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Private RestrictionsCC&Rs

Covenants, conditions, and restrictions.

Usually imposed by original developer of residential subdivision.Recorded, with reference to the recording in first deed for each lot (provides constructive notice to subsequent owners). 118

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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 RestrictionsCC&Rs

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

If two restrictions (one public and one private) both address the same issue, the more restrictive one usually applies.

Private RestrictionsIn conflict with zoning

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

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

Any restriction on property owner selling their property is void.

Private RestrictionsIllegal or unconstitutional

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

May be contractual or found in Deeds.Violation can result in injunction or damages.

Condition (Found only in Deeds): 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.

Covenants and Conditions

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Restriction may not be enforceable if:owners in subdivision failed to enforce it against other violatorscharacter of neighborhood has changed drasticallyproperty owner suing to enforce restriction is also in violation

Private RestrictionsEnforcement of Covenants

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Private restrictions may terminate if:subdivision residents failed to enforce particular restriction in the past; orpurpose of the restriction is not reasonably achievable.

Private RestrictionsTermination

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SummaryPrivate Restrictions

Private restrictionsCC&RsCovenantsConditions

Lesson 5: Encumbrances - Metro Brokers

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