Real Estate - Liens
( Originally Published 1911 )
Definition of a lien.—A sale of real property may be brought about as the consequence of an act which in its inception was intended rather as assurance for a debt or security for a claim than an intention to sell. Such an act is the creation of a lien on real property.
A lien is the right of a creditor to have a debt or charge satisfied out of property belonging to another. The definition involves the elements of debtor and creditor: in order that there may be a lien, there must be a debt to be secured. Liens are of two kinds, general and specific.
General and specific liens.—A lien is general when it affects all property of the debtor or all property of a class. A lien is special when it affects, only specific property. If a judgment were recovered against a person, that judgment is a claim against all the property he owns, or acquires, and is a general lien. If A employ B to build a house for him and does not pay for it, B has a claim on the house he has built, not on all A's property; and his claim is a specific lien.
In order that there may be a lien, the debt must be one which is enforceable at law against the will of the debtor. If A make B a voluntary promise that some time in the future he will give him $10,000, and to the fulfillment of that promise pledge a house or all of his property, there can be no lien upon that voluntary, unenforceable promise.
Some of the liens which will be considered are: judgments, mechanics' liens, conditional bills of sale, the lien of decedent's debts, transfer tax, taxes and assessments and—most important—mortgages. There may be liens upon personal property as well as upon real property, but this consideration of liens is concerned only with relations to real property.
Lien of judgment.—A judgment is the determination of the rights of parties by action at law. All judgments are not liens upon real property. In order to be a lien upon real property a judgment must determine the rights of a creditor to receive payment of a debt. For example, a judgment which enjoins a person from constructing a tenement house upon property which has been restricted against the erection of tenements is not a lien. There is no direction that anything shall be sold in order to raise money. That judgment may award a sum of money for damage and another sum of money for costs, and direct that property shall be sold by execution in order to satisfy those money demands, which demands may then be a lien. A lien of judgment involves necessarily the relation of debtor and creditor for money only.
How enforced, and property affected.—A judgment which finally determines that the creditor shall receive a sum of money from the debtor is enforceable by sale of the property by the sheriff. The sheriff is an executive officer whose duty it is, among other things, to perform the mandates of the courts.
In order that there may be public notice of the fact that a judgment has been awarded for a specific sum of money it is required that a note of the judgment be made upon a book of public record kept according to alphabetical index (indexed against the name of the debtor), which is known as a "Judgment Docket." The judgment becomes a lien from the time of docket. It is enforced by a writ of execution, under which the sheriff sells the right, title and interest of the debtor in any property which the sheriff can find belonging to the debtor at the time of docketing, or which comes into the ownership of the debtor at any time thereafter, before the date of sale.
The lien of judgment continues to bind all property of a debtor and all property which comes into his possession for a definite time governed by statute, from the time of recovery of the judgment. So long as a judgment has validity and remains a lien it continues to attach to the property even though that property pass out of the possession or ownership of the debtor. If this were not so, liens would be of little value. A judgment may be enforced by execution as often as the creditor thinks there is property in the hands of the debtor.
Selling the right, title and interest of a debtor means that the sale does not purport to be a sale of the entire property, but only of such interest in it as may have been in the hands of the debtor while the lien continues. The fact that the lien attaches only to such interest as a debtor may have, causes the result that unless it be provided otherwise by statute, if the debtor have parted with the property before a lien attached, even though no instrument be of record, the lien is cut out, i. e., a lien is not a good lien as against a delivered but unrecorded deed, or a delivered but unrecorded mortgage. It may be a question of fact when the instrument was ,delivered which is said to cut out the lien, but if a deed has been delivered in good faith before a judgment is recorded against a debtor and title has passed out of the hands of a debtor and there be no statute to the contrary, the lien does not attach. In making searches for judgment liens, the search is made against the name of the debtor or the person through whom the property has come, and not specifically for liens against the property.
How lien of judgment may be discharged.—If the person against whom a judgment is recovered feels aggrieved by the decision and intends to appeal, it is competent instead of paying the judgment and looking for restitution, to give a bond by which the debt is sufficiently secured. The lien of judgment will then be discharged under proper supervision of the court in which the judgment was recovered: the judgment lien will be lifted from the property to which it applied, and the judgment will be, "Suspended on appeal." For every lien there is an appropriate instrument of discharge or satisfaction. When a judgment is paid a Satisfaction of Judgment is filed with the clerk where the judgment was filed.
Mechanics' lien.--A mechanics' lien is a lien upon real property given by statute to mechanics and material men for the price or value of the labor or material furnished in the improvement of real property. A mechanics' lien must be founded upon a contract relation. That contract relation may be directly with the owner or may be with a person with whom the owner has contracted to improve property. The lien is in favor of all persons who contributed to the improvement of the property either directly contracting with the owner, or by contracting to furnish material or labor to others who are in direct contractual relation with the owner.
How asserted. —A mechanics lien must usually be asserted by the filing of a notice in a public office, claiming the lien. This must be done within a specified time fixed by statute after the material is supplied or the work done for which the claim is made. The notice must set forth with particularity the property against which the claim is made, the ground of complaint and it must be sworn to. The right of a mechanics' lien usually attaches to property as against all unrecorded instruments. In that respect it differs from a lien of judgment.
Enforcement of mechanics' liens.—Having filed his claim the lienor must begin an action to foreclose, and in that suit he must prove his claim. All other lienors who are brought in have the same rights, and all rights are adjusted. If the lienors succeed in establishing their claims and there is a balance due from the owner, he must pay that balance. It is then divided under the direction of the court, or if payment be not made, the property is sold in order to raise the fund. The sale is by an officer of the court.
The lien lasts only a specified time fixed by statute in each state. It must be asserted by suit, or renewed before the expiration of that time. If the lien is paid the owner is entitled to a discharge of record.
As matter of commercial practice, installments on construction contracts are paid at certain times in the construction, and a fund of 10 per cent or 15 per cent held back until the final completion of the building. If a contract be entered into to make payments at certain times, and any sum be paid before it is due, then, if the general contractor fail to pay his material men or sub-contractors, they can hold the owner as if he had not made an anticipated payment.
How property may be discharged from mechanics' lien.—The mere fact that a man claims he has furnished work, labor or material for a building, does not necessarily preclude the owner from contesting that claim in a court of law. If, while such litigation was pending, it were necessary that the property lie under notice that a lien was claimed against it, this would affect the owner's ability to sell his property, or use it as security for a loan, so it is possible in cases of this sort to lift the lien from the property without actually paying the debt.
The owner may deposit in the office of the clerk with whom the notice of lien is filed a sufficient sum of money to answer to the amount claimed. If such a deposit be paid, the lien will be lifted from the property and marked, "Discharged by deposit," and any further litigation with regard to that claim will proceed against the fund which has been brought into court. Or the owner may file a bond, under the direction of the court, by which it is agreed that if the claim should succeed, the amount claimed, and all costs and expenses will be paid—not out of the property—but by the sureties who gave the collateral security. The lien will then be marked, "Discharged by bond," and any litigation that may go on with regard to that mechanics' lien will proceed with respect to the security on the bond and the recovery be only against the sureties. With regard to the money which is deposited or the bond which is given, if at the end of the time when the lien would expire the claimant has not begun action to foreclose, the lien is canceled, and any security given or deposit made with respect to that lien will be released.
When the debt for which a lien stands as security is paid in every case the person thus paying his debt is entitled not only to have his property discharged, but to have an instrument upon the same public record which showed the lien showing a discharge of that record.
Conditional bill of sale.—The conditional bill of sale is not strictly a lien upon real property, but upon personal property which may be in or be used in connection with real property. Appurtenances may have been purchased upon condition that title should not pass until they were paid for. In many states it is required that such conditions be expressed in a written instrument, which instrument is valid between the buyer and seller of the property ; and if it be filed in the proper office of public record its conditions are enforceable not only against the parties directly concerned, but against any other person thereafter coming into possession of the property.
If a builder buys an elevator for an apartment house upon condition that title to the elevator shall not pass to him until it is paid for, and a conditional bill of sale be properly filed in the office of public record, then, if a purchaser buy that house subject to that claim, and the elevator be not paid for, the holder of the conditional bill of sale may take it out. All things which may be taken from the property without destroying the structure may become the subject of conditional bills of sale, which, if properly filed, may be valid as against subsequent purchasers of the real property.
One of the difficulties of dealing with conditional bills of sale lies in searching for them. If the person who has sold to the builder has bought the property from some one else, and the middleman has bought from some one prior to that, upon a conditional bill of sale, it is practically impossible to know when, where or how to make search. Sometimes in important transactions an inspection will be made of the important articles which might be the subject of conditional bills of sale, their makers or manufacturers ascertained and numbers taken, and the title of the property traced back absolutely to the manufacturer by direct inquiry of each person through whose hands each specific piece of property has passed. Fortunately, a conditional bill of sale must be filed and renewed within a fixed time in many states. It follows that if the property has been attached to or in the building for more than the stated period the owner is probably safe against the possibility of having it taken from him under a conditional bill of sale ; but with new buildings it is very uncertain, especially if they have come through a foreclosure against a builder who has failed in business.
Lien of decedent's debts.—When the owner of property dies, from the moment of death the creditors have a claim upon his property, both real and personal: it must be administered by his representatives so that before his heirs or next-of-kin receive anything justice shall be done and his debts shall be paid.
The ordinary procedure is that personal property which has not been specifically bequeathed shall be applied first to the payment of debts. If that property be insufficient, the personal property which has been specifically bequeathed shall then be applied to the payment of debts. If all the personal property be insufficient, the creditors have a right to resort to the real property of the decedent for the payment of debts.
During a specified statutory period from the time letters of administration or letters testamentary are issued, or, if no letters are issued, during another period from the death of the decedent, a general lien applies to all property which has come from the decedent to any person claiming through or under him upon all property of the class thus designated. A creditor may at any time within the statutory period require that the executors or the administrators shall sell the property, or sufficient of it to pay all debts of the decedent. The proceeding is regulated by law, and the property sold under the supervision of the surrogate's court.
Transfer tax.—Another lien which arises by reason of death is the state's lien for a special transfer tax. The State of New York and a very large number of other states in the Union, tax the act of transferring property from a decedent to those who claim to succeed. The tax is really not upon the property but upon the privilege of succeeding to the property: to that ex-tent it is more in the nature of an excise than a tax. In its effect, however, it is a true tax, because it is taken out of the thing as it is transferred, and before it reaches the recipient.
The state can require that all property of the decedent, or sufficient to pay the tax, shall be sold. The property, no matter in whose hands it may be, is affected by the general lien of the tax. It is a general lien because it may affect any piece of property for the whole amount of the tax.
The rate of taxation differs in various states. Usually property going to descendants, husband, wife, father, mother, brothers and sisters is wholly or partly exempt, or taxable at a lower rate than property going to remoter collaterals or to strangers.