Chapter 6

ENCUMBRANCE.

An encumbrance is any interest or claim in another’s land which in some manner burdens or diminishes the value of the property. There are four types of encumbrances: (1) liens, which affect title, such as mortgages, legal attach­ ments, mechanic’s liens, and tax liens, (2) encroachments which burden or limit the use of land, (3) restrictions and (4) easements. Easements and encroachments are discussed in Chapter 4.

LIENS

A lien may be defined as a charge or claim against property as security for the payment of a debt. A lien remains in effect until discharged by the creditor or by law. Liens are said to ’’run with the land" since they are unaffected by a transfer of title or by subsequent liens. While liens do not prohibit alienation of title, they do affect the salability of the property.

All liens arise as the result of a debt. Liens may be voluntary or involuntary. Voluntary liens are created by agreement, such as a mortgage. Involuntary liens may be statutory, arising by operation of law, such as a property tax or mechanic's lien, or they may be equitable liens, arising from common law, such as an attachment. Liens may be held by private creditors, by municipalities for taxes and assessments and by state and federal government for estate, income and payroll taxes.

Liens may be classified as either general or special. A general lien attaches all the property of a debtor in a given jurisdiction to secure payment of the property owner’s personal debt. Examples of general liens are attachments arising from lawsuits and government liens for non-payment of income taxes. Special liens affect only a specific property. Examples are real estate tax liens and mechanic’s lien. Special liens are also called "specific" liens.

PRIVATE CREDITORS’ LIENS

Private creditors’ liens always arise from a debt, and can be created by agree­ment (voluntary) or by operation of law (involuntary). Private creditors’ liens consist of: (1) mortgages, (2) attachments, (3) judgments and (4) mechanic’s liens.

MORTGAGES. Although a mortgage is a conditional conveyance of title, it is also treated as a lien to secure the repayment of a debt. A mortgage is a special lien created voluntarily by contract.

ATTACHMENTS. An attachment is an involuntary, equitable lien, which can be general or special. An attachment is a legal process, filed during a pending court action, to charge the defendant's real estate as security for the satisfaction of a judgment. The attachment is intended to stop the defendant from transferring title in order to hide assets. Notice of the attachment is made public by the recording of a lis pendens (suit pending) at the registry of deeds.

JUDGMENTS. A judgment is a decree or verdict issued by a court setting forth the amount of money owed by a debtor to a creditor. In some jurisdictions, judgment automatically becomes a general lien against real property. In Massachusetts, pay­ment of an unpaid judgment is recoverable through court action. The court issues a writ of execution directing a sheriff to seize (levy) and sell the debtor’s property to satisfy the debt. In Massachusetts, a debtor has one year following a sheriff's sale to pay the debt plus interest and costs, and to redeem title.

MECHANIC’S LIENS

A mechanic's lien is a statutory, special lien created in favor of contractors and laborers to secure payment for materials supplied and services rendered in the improvement, repair or maintenance of real property. To establish a mechanic’s lien there must be either an expressed or implied contract between the supplier and the property owner. The lien accrues in favor of sub-contractors, suppliers, and laborers independently of the original contractor. Subcontractors have a direct lien against the owner and do not have to go through the primary contractor. Payment for services rendered by an architect may also be secured by a mechanic’s lien. A materialman’s lien covers building materials only.

The purpose of a mechanic’s lien is to give the contractor or laborer a priority of payment of the price or value of work performed and materials furnished in erecting or repairing a building or other structure. It assures them of being paid for their work or material supplied if the owner defaults or the property is foreclosed or sold prior to payment. A mechanic’s lien will dissolve automatically unless, within a specific time after performance has commenced or ended, a notice of the claim is filed with the registry of deeds. The notice must state the details of the claim and that payment is overdue. In Massachusetts, a mechanic’s lien may be enforced by a civil action in the superior court. The court may order a sale of all or part of the property to satisfy the claim.

Recording Requirements for Mechanic’s Liens. Depending upon the type of lien, recording may or may not be required at the commencement of the work or contract. A labor lien begins automatically, without recording, when the work starts. A labor lien ends forty-five days after completion of the work unless, within that time, the person who supplied the labor records a statement of account indicating that payment is overdue. A lien to secure payment under a written contract for labor and/or materials does not begin until the contractor records a notice of contract with the registry of deeds. The lien will dissolve thirty days after completion of the contract unless, within that time, the contractor records a statement of account indicating payment is overdue.

Since a mechanic’s lien for labor does not have to be recorded, a person buying property which was recently constructed or repaired should obtain an affidavit from the seller that there has been no work performed on the property within forty-five days of the closing.

MUNICIPAL LIENS

Municipal liens are involuntary, statutory liens on a specific property to secure the payment of real estate taxes, sewer and water charges, and special assessments for public improvements.

GOVERNMENT LIENS

Liens may be filed by federal and state government for non-payment of income taxes and employer payroll deductions. Liens for estate and inheritance taxes are statutory and must be discharged by the administrator or executor prior to conveying title to property in a deceased person’s estate.

DISCHARGE OF LIENS

Since liens reduce the value of property due to the potential threat of creditors suing to enforce their liens, the affected property is not marketable. Liens may be discharged in several ways:

1. Payment and satisfaction of the debt.

2. The filing of a bond.

3. By agreement of the parties.

4. Dissolution by operation of law.

PRIORITY OF LIENS

Liens usually take priority in order of the date they are recorded. Liens for real estate taxes and special assessments take priority over other liens, regard­ less of their effective date. For example, a mortgage is foreclosed and the property is sold to satisfy the debt. The proceeds of the sale are applied first to the payment of real estate taxes and special assessments; the remainder is used to pay other outstanding liens in the order of their priority. In Massachusetts, a lien for up to six month’s unpaid condominium fees has priority over a mortgage and must be paid first at foreclosure sale.

The priority of mechanic’s liens varies according to state law. In Massachu­ setts, an attachment recorded prior to the filing or recording of the notice of contract for labor and material will prevail against the lien. However, a personal labor lien will take priority over all previously recorded attachments. A lien for personal labor is not subject to a mortgage if the work started prior to the recording of the mortgage.

Federal tax liens for estate taxes, income, and payroll taxes, are not subject to prior recorded liens. Federal tax liens are subject to local real property taxes and assessments, regardless of when notice of the federal tax lien was recorded. However, a federal tax lien, which is recorded after a mortgage, is not subject to a foreclosure by power of sale, unless the federal government receives written notice of the sale and has an opportunity to collect the money owed from the proceeds of the sale. Note: A tax lien always has priority over other real estate liens.

A subordination agreement is an agreement between lienholders to make one lien subordinate to another. For example, the holder of a second mortgage may agree to put his or her mortgage behind a new, first mortgage in a refinancing situation.

REAL ESTATE TAXATION

One of the limitations of ownership imposed by government is the right to levy real property taxes to finance necessary public expenditures, such as schools and government. Real estate tax liens are involuntary, statutory, special liens that take effect automatically at the beginning of the calendar year. Since tax liens are not publicly recorded, information regarding their current status can only be obtained from the town or city where the property is located. The status of municipal liens may be obtained by requesting a "Certificate of Liens" from the town or city clerk.

AD VALOREM TAXES. Real estate taxes are determined on an ad valorem basis, which means according to the value of the property without regard to the owner’s income. An assessment is the value of the property as determined by the city or county assessors. Land and buildings are assessed separately. A tax rate is established, which when multiplied by the assessed value, determines the annual tax due on the property.

The tax rate is expressed in mills, which is one-tenth of one cent. For example, a tax rate of 42 mills with a property assessed at $50,000 would produce a tax of $2,100 (i.e. 0.042 x $50,000). In Massachusetts, the tax would be computed as $42 per $1,000.

REAL ESTATE TAX EXEMPTIONS. Property owned by a county, city, state or the federal government is exempt from real estate tax, as well as property owned by religious societies, hospitals and educational institutions. Tax reductions or exemptions may also be granted to veterans, senior citizens, and farm owners.

ABATEMENTS. A property owner, seeking a tax reduction, may file for abatement with the local tax assessor. The owner may appeal an unfavorable decision to a state court.

SPECIAL ASSESSMENTS FOR IMPROVEMENTS. Assessments may be levied to pay for public improvements, such as streets, sidewalks, lights and sewerage. An improvement, which increases the value of property, is known as betterment. Special assessments become a lien on the property and may be paid in installments over a designated period of time.

PAYMENT OF TAXES. Taxes are billed either on the basis of a calendar year or on a fiscal year and become due and payable at some date prior to the end of the tax year. In Massachusetts, towns and cities have the option to collect taxes in four quarterly installments. Overdue taxes are subject to interest and penalty charges.

ENFORCEMENT OF TAX LIENS. If taxes are not paid when due, the tax collector, after making proper demand, may collect the tax by a public sale (similar to a mortgage foreclosure). At a public tax sale, the collector sells, by auction, the smallest undivided part of the property that will bring the amount of taxes and interest due, as well as necessary intervening charges. If no person offers to take an undivided part, the whole amount of the property is sold for the amount due. Each jurisdiction differs as to the time when a tax sale may take place and as to how much time, after default, the collector has to enforce the lien.

RIGHT OF REDEMPTION AFTER TAX SALE. In Massachusetts, the purchaser at a tax sale receives title subject to the defaulted owner’s statutory right of redemption. The buyer is not entitled to possession until the redemption period has been terminated by petition to the Land Court. The right to redeem may not be terminated until six months after the tax sale and continues until terminated by the Land Court. To redeem the property, the defaulted owner must pay the amount paid at the tax sale plus twelve percent interest and charges.

KEY WORDS AND PHRASES