Publications
Lien on Me
Published June 5, 2004 as
Understanding ins, outs of liens
The use of the term “lien” is more likely to be discussed in terms of misunderstanding rather than its correct usage. Most people have heard the word and understand that it does something bad to real estate, but most people do not really understand what it is, how it works and that there are different types of liens.
To begin with, a lien is a document which is recorded against real estate, personal property or cash and represents a claim for money which is provided for by either court order or state law. A lien is defined as “a claim, encumbrance or charge on property for payment of some debt, obligation or duty.” [Black’s Law Dictionary, Abridged Sixth Edition, Henry Campbell Black, West Publishing Co., St. Paul, MN – 1991]
The most important things to understanding about liens are:
1. There are many different kinds.
2. A superior lien trumps an inferior lien.
3. A lien in and of itself does not collect money, it merely clouds the title to property so it makes it difficult (sometimes impossible) to convey.
4. It must be a perfect document, strictly following proper procedure and filed in a timely fashion or a reviewing court will throw it out.
Here are some of the most common liens that associations deal with:
I. Homeowner Association Liens
The concept of a condominium or homeowner’s association (and in some instances a cooperative) being able to record a notice of lien against a member’s saleable property. By virtue of a purchaser accepting a deed to a lot which is subject to a declaration of covenants recorded against the property binds that purchaser to the provisions of that declaration as it is a covenant running with the land.
The terms and conditions of levying assessments, collections, default, etc. are generally set forth in some detail in the governing documents, with a proviso that the association has a continuing lien against the real property once the assessments were deemed to be in default. Further, most declarations provide that the association has the right to foreclose their lien although without exception there is no explanation as to that procedure and there is no statute on this subject.
There is almost always a provision reflecting the priority of the lien of a first mortgagee and occasionally it even states the point in time when the first mortgagee assumes the obligation to pay assessments in the event of a foreclosure.
II. Condominium Assessment Liens
Since 1963, with the inception of the Illinois Condominium Property Act, condominiums were granted, without exception, the ability to record a notice of lien against a unit owner that defaults in the payment of assessments to the association [765 ILCS 605/9 et. seq.] A series of cases have further clarified what charges constitute a lien, the various priorities of lienholders, in addition to assessments as well as elaborating on the rights of second mortgagees.
Therefore, the pecking order for priority of lienholders now reflects taxes, special assessments and special taxes of state, federal, municipal or other political subdivisions as having the highest priority, prior recorded encumbrances (such as a mortgage lien) as the second level of priority and since 1984, second mortgages or trust deeds.
What most people do not understand is that the Illinois Condominium Property Act and all declarations of condominium written in the last 20 years provide that the lien of the mortgage company is superior to the lien for unpaid assessments. Further, if there is a foreclosure on a property that has only a nominal amount of equity and no outsiders bid for the property at the foreclosure/sheriff’s sale, the lender’s lien will “wipe out” the association‘s lien for unpaid assessments and the lender will only be liable for assessments from the first day of the month following the sheriff’s sale [765 ILCS 605/9(g)(3)]
Since the possibility exists that an association may lose the entire delinquent amount, it would then seem reasonable for associations to attend foreclosure sales and bid the amount of their lien plus the mortgage amount and buy the property. The problem is, if there is no equity, then the association could be overpaying for the property. After the costs of repaying real estate brokers’ commissions, back taxes, etc., the association would actually lose money. That is why only a limited number of units are purchased by associations in order to collect the debt.
III. Lien Procedure
As previously stated, a lien can only be liquidated if it is foreclosed, in statutory mandated foreclosure proceedings. The reason associations do not use foreclosure as a remedy is two-fold:
1. The association would have to buy the unit and pay off all prior lienholders (mortgages, judgments, etc.)
2. There is no statute outlining an association assessment lien and foreclosure procedure.
3. Court costs and filing fees alone are close to $1,000.
Procedures can be adapted from mechanics’ lien and mortgage foreclosure law, but because of the uncertainties and lengthy time frame necessary, in addition to enormous costs, Forcible Entry and Detainer (eviction) is the preferred method of collecting assessments in Illinois.
IV. Mechanics’ Liens
In Illinois, a service provider, contractor, materials supplier, etc. has a right to record a lien if they are not paid. This lien must follow strict procedures with regard to the sending of notice and deadlines for recording.
In the event of a dispute between an association and a contractor, it is very difficult for the contractor to properly record a lien, because of the complexity of association ownership rights. Once a mechanics’ lien is recorded, the contractor has two years in which to foreclose, however, what if the claim is disputed? The association’s position might be that the work is poor or not completed. An association can make arrangements with local title companies to sign an indemnification agreement with the title company while the dispute is pending so owners and purchasers do not have a problem obtaining new mortgages.
Also, Section 9.1 of the Illinois Condominium Property Act allows an owner to pay their proportionate share and receive a release. In a large association this could be a nominal mount of money, but generally an owner who agrees to escrow his share will have to pay 1-1/2 times the amount of their proportionate share.
V. Bankruptcies
Another common misunderstanding is when a delinquent owner files bankruptcy, the association loses its lien rights.
There are two aspects to an association’s claim for lien; the personal liability and the claim against the real estate. In the event an owner files bankruptcy under Chapter 7 (Chapter 13 is a payment plan so it will not be discussed here), the personal obligation will be discharged when the bankruptcy is finalized. However, if a claim for lien was filed against the unit, that cannot be discharged in bankruptcy and as a result, the entire balance is still owed. That is why it is crucial to record liens against delinquent units.
VI. Mortgage Foreclosures
Another reason to record a notice of lien is in the event of a mortgage foreclosure where there is equity in the property and you have the owner, a second mortgagee, a judgment creditor and/or an interested bidder all fighting over the property. The association’s interest can be protected and its priority preserved by attending the sheriff’s sale and bidding for the property. If the amount of the lien is added to the successful purchase price by virtue of the association bidding, they will be paid in full without having to buy the property.
Lastly, you must remember that a notice or claim for lien is a legal document and must be prepared by a licensed attorney, as it could be considered the unauthorized practice of law.
After reading this very basic overview of liens, you can see how important liens are and how important it is to get legal advice.