1 Real Estate Principles of Georgia Lesson 5: Encumbrances 2 Encumbrances Encumbrance: A nonpossessory interest in real property held by someone other than the owner. y Does not give ownership or right to exclusive possession. 3 Financial vs. Non-financial Encumbrances Encumbrances are either: financial (liens) or non-financial (easements, private restrictions, etc.) 4 Liens Security interest Security interest: Creditor’s interest in a property based on a lien, which makes the property security (collateral) for owner’s debt. y If property owner fails to repay debt, secured creditor may foreclose. 5 Liens Voluntary 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 6 Liens General vs. specific General lien: Lien attaches to all of debtor’s real or personal property. y Example: judgment lien Specific lien: Lien attaches only to a specific piece of real property. y Example: mortgage 7 Liens Types of liens Security deeds Mortgages Deeds of trust Mechanic’s liens 1 Judgment liens Attachment liens Tax liens Property tax liens Special assessment liens IRS liens 8 Types of Liens Security 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 Georgia Most common security instrument in Georgia. 9 Types of Liens Mortgages Mortgage: Lien created by contract between property owner and lender. Owner (Borrower) = Mortgagor Lender = Mortgagee Borrower gives lender mortgage as security for repayment of loan, with property serving as collateral. 10 Types of Liens Deeds of trust A deed of trust is similar to mortgage but has different foreclosure procedures. Borrower = Trustor or Grantor Lender = Beneficiary Neutral third party = Trustee (Trustee handles foreclosure, if necessary.) 11 Types of Liens Mechanic’s liens Mechanic’s lien: Lien attaching to real property. y Can be claimed by anyone providing labor, materials, or services. y If owner fails to pay as agreed, lienholder can foreclose on property. 12 Mechanic’s Liens Claim of lien Generally, a notice of a right to claim lien must be filed with the property owner and contractor recorded in County within a certain period. 2 • 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. 13 Mechanic’s Liens Deadlines 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). 14 Types of Liens Judgment liens Judgment lien: Lien resulting from financial judgment against losing party in a lawsuit (the judgment debtor). 15 Types of Liens Attachment liens Attachment lien: Lien used to prevent a defendant from selling property. 16 Lis pendens: a notice recorded by plaintiff informing anyone who purchases a specified property that a lawsuit exists that may affect title. y Just provides notice; doesn’t create lien. 17 Types of Liens Property tax liens Lien created by general real estate taxes. y Attaches only to property being taxed. y Allows government to foreclose and collect delinquent taxes from proceeds of foreclosure sale. 18 Types of Liens Special assessment liens Lien based on special assessment levied to pay for specific improvements such as street paving or sewer lines. y Attaches only to properties subject to the special assessment (properties that benefit from the project). 19 Types of Liens IRS liens General lien that attaches to all property belonging to a taxpayer who has failed 3 to pay federal income taxes. 20 Summary Basic definitions 1 Encumbrance Lien Mortgage Deed of trust 2 Mechanic’s lien Judgment lien Attachment lien Tax lien 21 Lien Priority 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. 22 Lien Priority Recording date Recording date: The date a lien was filed for recording in county’s public record. Determines lien priority except for: y tax and assessment liens (always have higher priority) y mechanic’s liens (priority based on date work began) 23 Liens Homestead Protection Law Gives homeowners some protection against foreclosure of judgment liens. Homestead law does not apply to: y voluntary liens (mortgages, deeds of trust) y mechanic’s liens y liens resulting from failure to pay child support or spousal maintenance 24 Homestead: Dwelling occupied by owner, plus land and any attached buildings. A person can only have one homestead at a time. 25 Homestead Law 4 Homestead 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. 26 Summary Lien Priority and Foreclosure Lien priority Voluntary liens Tax liens Construction liens Surplus Homestead exemption 27 Encumbrances Non-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: y easements y profits y private restrictions 28 Non-Financial Encumbrances Easements 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. 29 Easements Types of easements Two basic types of easements: easements appurtenant easements in gross 30 Types of Easements Easements appurtenant Easement appurtenant: Burdens one piece of land (servient tenement) for benefit of another piece of land (dominant tenement). 5 y Owner of dominant tenement is dominant tenant (estate). y Owner of servient tenement is servient tenant. 31 Easement appurtenant runs with the land. y It continues to exist even if dominant or servient tenement is sold. y Benefit and burden are automatically passed on to all subsequent owners. 32 Types of Easements Easements in gross – Personal & Commercial Easement in gross: Benefits particular person rather than a parcel of land. y No dominant tenement, only servient tenement (parcel burdened by easement). y Benefit is considered a personal right, cannot be assigned to someone else. y Burden of easement in gross may still run with the servient land. y Personal easement terminates with death/sale 33 Easements in Gross Commercial easements Commercial easement in gross 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. 34 Summary Easements Easement Easement appurtenant Running with the land Easement in gross Commercial easement in gross 35 Easements Creating easements Easements are created by: express grant express reservation implication prescription dedication condemnation 36 Creating Easements Express grant 6 Property owner deliberately grants someone else an easement on her property. y May be purchased by person needing easement. y 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. 37 Creating Easements Express reservation 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. 38 Easement by necessity: Arises when property can’t be accessed by its owner (i.e., property entirely surrounded by other privately owned land). 39 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. 40 Creating Easements Prescription Easement by prescription: An easement established by using someone else’s property without owner’s permission. Also called a prescriptive easement. 41 Requirements: Open and notorious (conspicuous) use Hostile use Continuous and uninterrupted for statutory period (seven years) in Georgia. Unlike adverse possession, prescriptive easement doesn’t require exclusive use of property. 42 Creating Easements Dedication Dedication: Private property owner transfers interest in property to the 7 government. May be: If public uses private property for long period without owner’s consent, easement may be created by implied dedication. 43 Creating Easements Condemnation Condemnation: Legal process used to force private owner to sell land or easement to government. y Property or easement must be used for a public purpose. y Property owner must be compensated. 44 Summary Creating Easements Express grant Express reservation Implication Prescription Dedication Condemnation 45 Terminating Easements Easements can be terminated by: release merger failure of purpose abandonment prescription 46 Terminating Easements Release Release: When