Can I Sell My Property If It Has A Lien On It?
A “lien” is typically defined as a right to enforce a charge upon property of another for payment or satisfaction of a debt or claim. Stated another way, in the real estate context, it is a claim of a security interest in someone’s property to secure the payment of a debt. Liens can either be voluntary (such as in the case of a mortgage or deed of trust), or they can be involuntary, such as in the case of a judgment lien, mechanic’s lien, tax lien, or HOA lien. Most commonly, laypeople use the word “lien” to refer to involuntary liens, although that definition is narrower than the true universe of liens. In almost all instances, liens take the form of a formal document recorded with the county recorder’s office. There can be uncommon scenarios where a lien is valid, though unrecorded.
It is a common misconception that “placing a lien” on someone’s property results in a legal prohibition on selling that property. But the reality is that real estate can still generally be validly sold or transferred, with or without a lien. However, if the lien is properly recorded prior to the sale, the buyer or transferee will receive title to their property subject to the lien. This means, for example, that the obligation of the debtor under the lien (who is often the seller of the property) can be enforced against the property even after the sale. Such post-sale enforcement of the lien, of course, would be to the detriment of the buyer. It makes no difference whether the buyer was actually aware of the lien; so long as it was properly recorded, the buyer is deemed to have been on notice of the lien at the time of the sale (the legal term for this is “constructive notice”).
A prudent buyer will generally not proceed with a property purchase without obtaining a title insurance policy. This involves the title company issuing a title report prior to the sale, informing the prospective buyer of any liens discovered through a search of the public records. The buyer, and/or the buyer’s lender (if there is financing for the purchase) will normally scrutinize the title report, and either demand that liens be cleared prior to closing, or else refuse to proceed to closing of the sale. In some instances, buyers will decide to proceed with a purchase even though a lien still encumbers the title. Sometimes buyers do this knowing and accepting that the lien is valid. Sometimes buyers decide that the lien is unlikely to be enforced or that it may be invalid, and therefore believe that closing on the sale is worth it despite the low risk of the lien(s) still of record.
In summary, while liens do not legally prevent the sale of property, they tend to make property far less desirable to prospective buyers who are looking to buy free and clear and avoid risks. In a large percentage of cases, the buyer, seller, or lender in a transaction will instruct escrow to pay off a lien as a condition of the sale. This usually involves escrow reaching out to the lienholder and obtaining an agreement to release the lien in exchange for payment of a fixed amount (usually but not always the full amount due). While having a lien is not a guarantee that the creditor will be paid at the time of a sale, the practical effect is to greatly increase the chances of payment.
The lawyers at Beresford Booth have a wealth of experience assisting with real estate transactions and disputes. Whether you are a lienholder, a prospective lienholder, a seller, a buyer, or a lender, we are here to help. To learn more, please contact Beresford Booth at info@beresfordlaw.com or by phone at (425) 776-4100.
