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1 Printable Lesson Materials Print these materials as a study guide These printable materials allow you to study away from your computer, which many students find beneficial. These materials consist of two parts: graphic summaries of the content and a multiple choice quiz. Graphic Summaries This portion of your printable materials consists of dozens of frames that summarize the content in this lesson. The frames are arranged on the page to make it easy for you to study the material and add your own notes from your textbook or the online course. Quizzes Many students learn best from sets of questions, and this multiple choice quiz allows you to focus your review of the material to important topics Rockwell Institute NE 20th Street Bellevue, WA

2 California Real Estate Law Lesson 14: Involuntary Liens Introduction This lesson will discuss: mechanic s liens attachment liens judgment liens tax liens lien priority homestead law Introduction Voluntary lien: attaches to property with owner s consent (mortgage, deed of trust) Involuntary lien: attaches to property without owner s consent 1

3 Mechanic s lien: lien available to party who provides materials, labor, or other professional services for improvement of real property also known as construction lien involuntary, specific lien Specific lien: attaches only to property that is improved by work or materials Lien ensures that party will be paid for labor or materials. If debt isn t paid, lienholder can force sale of property to satisfy debt. Mechanic s lien is intended to prevent unjust enrichment of property owner. Unjust enrichment: benefiting from labor or materials without paying California state constitution provides for mechanic s liens. State statutes (mainly Civil Code) contain procedures for filing and enforcing liens. 2

4 Mechanic s lien claimants Civil Code specifies who can file mechanic s lien: contractors and subcontractors architects and engineers surveyors builders material suppliers and equipment providers artisans and laborers Mechanic s lien claimants To be subject of lien, work and materials must have: been installed into or onto property improved property in some way Example: Contractor will not have valid lien if work never actually started on project. Mechanic s lien claimants Property owner must have agreed to pay for materials or labor, either directly or through agent. Any contractor, subcontractor, etc. who has charge of all or part of project is considered to be owner s agent. 3

5 Creating a mechanic s lien Mechanic s lien isn t the only remedy if contractors or suppliers aren t paid. contractors may sue for breach of contract but mechanic s liens quicker, more efficient However, valid mechanic s lien can be created only by following very specific rules. Creating a Mechanic s Lien Notice requirements Notice requirements apply to: potential lien claimants (example: contractors) property owners Notice Requirements Preliminary notice Some (but not all) potential lien claimants must provide property owner with preliminary notice. Preliminary notice: formal notice of right to claim mechanic s lien required of subcontractors and materials suppliers not required of contractors who work directly for property owner 4

6 Notice Requirements Preliminary notice Preliminary notice must be served: on property owner, original contractor, and any construction lender within 20 days after first providing labor or materials Notice Requirements Preliminary notice Preliminary notice preserves right to mechanic s lien, regardless of: how long project takes how many times supplies are delivered Notice Requirements Notices of completion and cessation Property owners may obtain some protection from mechanic s liens by filing notices of completion or cessation. Notices of completion and cessation: filed by property owner when work stops for any reason if properly recorded, notices shorten time potential claimants have to file claim of lien 5

7 Notice Requirements Notices of completion and cessation Notice of completion: notice filed by property owner that work is completed must be filed within 10 days of project completion Notice of cessation: notice filed by property owner that work has stopped on project for at least 30 continuous days before notice is recorded Creating a Mechanic s Lien Claim of lien To create mechanic s lien, claimant records claim of lien. must be recorded in county where property is located Creating a Mechanic s Lien Claim of lien Once all work stops on project, window of time to file claim of lien: contractor: 90 days subcontractor: 60 days If property owner has recorded notice of completion or cessation: contractor: 60 days subcontractor: 30 days 6

8 Foreclosure Within 90 days of filing claim of lien, holder of mechanic s lien must: file a lien foreclosure action, OR grant owner a written extension of credit Foreclosure Foreclosure action: must be brought within 90 days of claim of lien, or lien is void should be filed with lis pendens to give notice to subsequent owners or lenders Foreclosure Extension of credit: must be recorded must state all terms and conditions If debt is still owed at end of credit term, lienholder has 90 days to file foreclosure action. 7

9 Foreclosure Lienholder may grant more than one extension of credit. However, foreclosure action must be filed within one year of project s completion. or lien becomes void Terminating mechanic s liens Valid mechanic s lien is terminated when underlying debt is paid. Invalid mechanic s lien remains a cloud on title until property owner takes action to remove it: sends request to claimant to remove files petition with court for decree to release property Design liens Design lien: available to design professionals who provide services under written contract during construction project s planning phase Examples of design professionals: architects, engineers, surveyors 8

10 Design liens Design liens are similar in function and purpose to mechanic s liens. key difference: claimed before construction starts Design liens Requirements: lien must be placed on property that is subject of design lien can t be used for single-family, owneroccupied homes that cost less than $100,000 to build can t be recorded unless building permit or other official approval has been obtained Design liens Once design professional knows project will not be built, she has 90 days to record claim of lien. must first give property owner written demand for payment at least 10 days before filing claim 9

11 Design liens Design lien terminates automatically if: lienholder fails to file suit within 90 days of recording claim of lien construction work begins on project Design liens Once construction work begins, design lien terminates. design professional may obtain mechanic s lien Summary Mechanic s lien Preliminary notice Notice of completion Notice of cessation Claim of lien Design lien 10

12 Attachment Liens Attachment lien: general lien against real or personal property of a defendant in a lawsuit created before trial begins prevents defendant from selling or giving away property before it can be used to satisfy lawsuit claim Attachment Liens When attachment allowed Attachment liens: only allowed for claims over $500 only allowed in disputes arising from business contracts not allowed in small claims court Attachment Liens When attachment allowed To create attachment lien, court issues writ of attachment. Court will first hold hearing to make sure that: claim is one for which attachment lien can be used property to be attached is not exempt from attachment plaintiff s underlying claim is not frivolous 11

13 Attachment Liens When attachment allowed Once writ of attachment issued, it s recorded by plaintiff. creates lien against all property owned by defendant in county where recorded Attachment Liens Property subject to attachment Property subject to attachment liens: bank accounts and securities any interest in real property (except lease of less than one year) crops, uncut timber, farm products minerals, oil, or gas not yet extracted California court can only attach property located in California. Attachment Liens Terminating an attachment lien Once attachment lien is created, property remains attached even if it s sold or transferred. Attachment lien terminated by judgment in lawsuit. If plaintiff wins, attachment lien merges into judgment lien. If defendant wins, attachment lien is released. 12

14 Attachment Liens Terminating an attachment lien Unless merged or released, attachment lien expires three years from date issued. Court may: extend lien term up to one year grant one-year extension up to five times Summary Attachment Liens Attachment lien Writ of attachment Judgment Liens Judgment lien: placed against property to secure payment of a money judgment awarded by a court involuntary, general lien created after trial (attachment lien is created before trial) 13

15 Judgment Liens Judgment lien is created by recording abstract of judgment in county where judgment debtor owns property. when used to enforce child support awards, lien created by recording copy of support order Judgment Liens Property affected by judgment liens Judgment lien attaches to: all debtor s property in county where abstract of judgment recorded any interest in real property (present, future, vested, contingent, etc.) any property in county that debtor may acquire in future Judgment Liens Property affected by judgment liens If debtor owns property in more than one county, abstract must be recorded in each county separately. If creditor is from different state, Full Faith and Credit Clause requires California to honor out-ofstate judgment. 14

16 Judgment Liens Renewal and termination Once created, judgment lien remains valid even if property is transferred. lien lasts for 10 years from date judgment entered, unless released To get property released, judgment debtor must: pay amount owed obtain certificate of satisfaction from judgment creditor Judgment Liens Renewal and termination Judgment lien may be renewed before 10-year period is up (but at least five years after it was created). creditor can file application for 10-year renewal Judgment Liens Renewal and termination Exception: judgment liens based on child support obligations do not expire don t have to be renewed remain until debt is paid 15

17 Summary Judgment Liens Judgment lien Abstract of judgment Tax Liens Federal, state, and local governments may place liens against real property to ensure payment of: property taxes special assessments federal income tax Tax Liens Property taxes Property taxes: single largest source of income for local governments also called general real estate taxes property taxes apply to all real property unless specifically exempted Property taxable in county where located, regardless of where owner resides. 16

18 Tax Liens Property taxes Exempted property includes property owned by: churches hospitals other charitable organizations Property Taxes Assessments Assessment: valuing a property for tax purposes Annual property tax depends on value of property. sometimes referred to as ad valorem taxes Ad valorem: Latin for according to value Property Taxes Assessments When property is assessed, it s placed on assessment role. assessment roll: county s official list of all taxable property within its boundaries Property s assessed value is multiplied by annual tax rate to determine taxes for that year. 17

19 Property Taxes Assessments CA constitution amended in 1978 by Proposition 13. Under Prop 13, tax rates generally can t exceed 1% of property s assessed value. Property Taxes Assessments Under Prop 13, assessed value of property generally can t increase more than 2% per year. regardless of fair market value unless property transferred to new owner unless new construction completed Property Taxes Assessments When ownership changes or construction is completed: property assessed at its full cash value Full cash value: usually fair market value Base year value: full cash value as of the last date property changed owners, or construction completed 18

20 Property Taxes Assessments Some transfers don t trigger reassessment. certain transfers between parents and children Property Taxes Supplemental assessments When property is reassessed upon transfer: supplemental assessment added to tax roll supplemental bill sent to new owner Property Taxes Change in ownership statement Change in ownership statement: must be filed by person who acquires interest in real property Filed with county recorder or assessor: at time transfer is recorded, or within 45 days of change of ownership, if transfer not recorded 19

21 Property Taxes Lien foreclosure In California, anyone who owns taxable property on lien date is liable for annual property taxes. Lien date: previous January 1 Example: For fiscal year running from July 1, 2007 June 30, 2008, lien date is January 1, On that date, at 12:01 AM, a lien for property taxes automatically attaches. Property Taxes Lien foreclosure Bills due in two installments: November 1 (delinquent as of December 10) February 1 (delinquent as of April 10) Property Taxes Lien foreclosure If taxes not paid on time, state will impose penalties. If taxes and penalties go unpaid, state may eventually foreclose. California taxpayers are given 5-year grace period before foreclosure occurs. After 5 years, property is considered taxdefaulted and foreclosure process begins. 20

22 Property Taxes Lien foreclosure Property owner must receive notice of impending sale 45 days before sale takes place. owner has right to redeem property before sale by paying delinquent amount, accrued interest, and penalties After sale, purchaser takes title immediately. former owner has no right of redemption Tax Liens Special assessments Special assessments: taxes levied by local governments to pay for specific improvement projects such as street paving, sidewalks, drainage systems, and sewers Tax Liens Special assessments Special assessments involuntary, specific liens in general, apportioned to (levied against) properties that actually benefit from improvements Apportioned: taxes divided between property owners proportionately, based on value or benefit received 21

23 Tax Liens Special assessments In California, some special assessments require voter approval. Statutes authorizing special assessments include: Vrooman Street Act Street Improvement Act of 1911 Improvement Bond Act of 1915 Mello-Roos Community Facilities Act of 1982 Tax Liens Special assessments Mello-Roos Community Facilities Act of 1982: passed after Prop 13 limited ad valorem taxes local governments needed new ways to fund infrastructure development and community services Tax Liens Special assessments Mello-Roos assessments can be used for greater variety of improvements, facilities, services than traditional special assessments. not apportioned not required to directly benefit taxed properties accelerated foreclosure process (180 days vs. 5 years) must be disclosed to potential buyers Notice of Special Tax 22

24 Tax Liens Federal tax liens Income tax liens arise automatically when federal income taxes aren t paid. involuntary, general liens attach to all personal and real property attach to current property, and any acquired in future Tax Liens Federal tax liens Income tax liens arise automatically, but IRS will file notice of tax lien. Notice of tax lien: when filed with county recorder in county where property located, establishes priority of IRS lien Tax Liens Federal tax liens To remove lien, taxpayer must pay entire delinquent amount. IRS will issue certificate of release 23

25 Summary Tax Liens Ad valorem taxes Assessment roll Proposition 13 Lien date Special assessments Mello-Roos Lien Priority Lien priority: order in which creditors are paid, usually determined by date of recording Priority of some liens determined differently: tax liens and special assessments (first priority, rather than date of recording) mechanic s liens (priority based on date work begins, rather than date the claim of lien recorded) Lien Priority When property sold to satisfy debt: proceeds are not prorated first priority liens paid first junior liens may receive nothing 24

26 Summary Lien Priority Lien priority Priority of tax liens Priority of mechanic s liens The Homestead Law Homestead law : California law that gives homeowners limited protection against foreclosure by judgment creditors protects equity in debtor s principal residence, up to specified amount Homestead: principal residence The Homestead Law Homestead exemptions Homestead exemption amounts: $50,000 generally $75,000 if: debtor is member of family unit, and at time of sale, at least one member of family unit owns no interest or only community interest in property 25

27 The Homestead Law Homestead exemptions $150,000 if: debtor is unable to work due to mental or physical disability, or is 65 or older, or is 55 or older with less than $15,000 in income The Homestead Law Judgment creditor cannot foreclose unless property is worth enough to cover: all liens against it, AND homestead amount The Homestead Law Example: home is worth $630,000 mortgage on property of $570,000 $44,000 judgment lien attaches to property total liens = $614,000 (mortgage + judgment lien) total liens ($614,000) + homestead exemption ($50,000) = $664,000 $664,000 is more than home value ($630,000), so judgment creditor cannot foreclose 26

28 The Homestead Law Homestead exemption provides protection only against judgment liens. Does not apply to: mortgages or deeds of trust mechanic s liens tax liens liens for child support or spousal maintenance liens imposed by homeowners associations The Homestead Law In California, homeowners protected by automatic exemption. no recorded document required debtor must reside in home when claimed only available when forced sale of property does not apply to proceeds of voluntary sale The Homestead Law Instead of relying on automatic exemption, can file declaration of homestead in county where property located. 27

29 The Homestead Law Declaration of homestead provides greater protection: applies to voluntary sale (not just forced sale) protects proceeds in voluntary sale for up to 6 months no residency requirement can be filed by anyone with interest in property The Homestead Law Property owner can only have one homestead at a time. to record new declaration of homestead, must first file declaration of abandonment on first property Summary The Homestead Law Homestead law Automatic exemption Declaration of homestead Declaration of abandonment 28

30 Legal Aspects of Real Estate Lesson 14 Cumulative Quiz 1. A mechanic's lien is a/an: A. involuntary and general lien B. involuntary and specific lien C. voluntary and general lien D. voluntary and specific lien 2. Which of the following parties is able to file a mechanic's lien? A. Architect B. General contractor C. Lumber supplier D. All of the above 3. Which of the following parties is not required to provide preliminary notice of her status as a potential lien claimant? A. General contractor B. Lumber supplier C. Plumber who is subcontractor D. Roofer who is subcontractor 4. Which party would file a notice of completion, once a project is finished? A. General contractor B. Materials supplier C. Property owner D. Subcontractor 5. A notice of cessation has been filed. How many days does a general contractor have to file a claim of lien? A. 30 B. 60 C. 90 D Under what circumstances may a design lien be foreclosed? A. Only if actual construction never starts B. Within 30 days of the cessation of construction C. Within 90 days of the cessation of construction D. Within 90 days of the completion of the project 2009 Rockwell Publishing 1

31 7. A contractor doesn't meet the timeline for filing a mechanic's lien. What recourse does he have? A. He may file a mechanic's lien against other real property owned by the property owner B. He may file an attachment lien against the property C. He may still file a suit for breach of contract and, if he wins, file a judgment lien D. He may still file a tort action and, if he wins, file a judgment lien 8. What type of lien is obtained after filing a lawsuit, and lasts until the trial ends? A. Attachment lien B. Homestead lien C. Judgment lien D. Special assessment lien 9. Under which circumstances is an attachment lien not terminated? A. The defendant wins the lawsuit B. The lien expires after three years C. The plaintiff wins the lawsuit D. The property is sold to a third party 10. A judgment lien is a/an: A. involuntary and general lien B. involuntary and specific lien C. voluntary and general lien D. voluntary and specific lien 11. Dana sues Don over a business agreement that failed. Dana lives in Washington; Don lives in California, in a house that he owns. The business at issue was based in Arizona. Dana wins her case in a superior court in Washington. Where does she record her abstract of judgment? A. Arizona B. California C. Washington D. Dana cannot reach Don's property 12. Which of the following statements regarding property taxes is false? A. Properties are valued by the county assessor B. Property is taxed in the county where it is located, regardless of where the owner lives C. Property owned by nonprofits such as hospitals and churches is not subject to property taxes D. Proposition 13 limited property taxes to 2% of a property's assessed value 2009 Rockwell Publishing 2

32 13. A new owner takes title to a property, but doesn't record the transfer. How many days does the owner have to file a change in ownership statement with the county, for tax purposes? A. 30 B. 45 C. 60 D Property tax payments are due in two installments. On what two dates do these installments become delinquent, if not paid? A. December 10 and April 10 B. January 1 and April 15 C. January 1 and July 1 D. November 1 and February A federal income tax lien is a/an: A. involuntary and general lien B. involuntary and specific lien C. voluntary and general lien D. voluntary and specific lien 16. Foreclosure may begin if payment on a Mello-Roos lien has been delinquent for how long? A. 3 years B. 5 years C. 90 days D. 180 days 17. A property is subject to a first mortgage that was recorded August 12, 2008, a property tax lien that attached January 1, 2009, a second mortgage that was recorded January 15, 2009, and a mechanic's lien that was recorded on February 1, 2009, for a project that began December 20, Which lien has the highest priority? A. First mortgage B. Mechanic's lien C. Property tax lien D. Second mortgage 18. A property is subject to a first mortgage that was recorded August 12, 2008, a property tax lien that attached January 1, 2009, a second mortgage that was recorded January 15, 2009, and a mechanic's lien that was recorded on February 1, 2009, for a project that began December 20, Which lien has the lowest priority? A. First mortgage B. Mechanic's lien C. Property tax lien D. Second mortgage 2009 Rockwell Publishing 3

33 19. California's homestead law offers protection against foreclosure of: A. judgment liens B. mechanic's liens C. mortgages and deeds of trust D. All of the above 20. Which of the following is a false statement about declaration of homestead? A. A person may have only one homestead at a time B. Declaration of homestead applies to voluntary sales as well as forced sales C. Declaration of homestead may be filed by any person living on the homestead property with an ownership interest in the property D. There is a residency requirement at all times with a declared homestead 2009 Rockwell Publishing 4