Liens

A lien is a right or claim against some interest in property to secure a debt or another obligation. The significance of the lien is that its holder, who is called a lien creditor or lienholder, has the right to force a sale of the property if there is a default in paying the debt or performing the obligation. The procedure for the lien creditor to follow varies considerably, depending on the nature of the lien and relevant state and federal laws that govern liens and debtor-creditor relations more generally. Often the lien creditor will have to bring an action in court against the property owner in order to foreclose the lien. If the lien creditor proves its case, the typical procedure is for the court to order an auction sale of the property, with the sale proceeds going first to pay the lien creditor. If the property sells for more than the debt owed to the creditor, the surplus sales proceeds go to the property owner.

A lien may attach to any type of property, including goods such as appliances, furniture, and automobiles and intangible property such as stock in a corporation and patents. With respect to housing, however, liens attaching to the real property are of primary importance.

Liens may be created in two basic ways. In law and business, the term lien is sometimes used broadly to include both consensual liens, which are created by agreement between the property owner and the holder of the obligation, and nonconsensual liens, which arise by operation of law. A consensual lien arises when the property owner consents; that is, the owner grants the lien to a creditor or otherwise agrees that the creditor will have a lien on the property. For real property, most consensual liens are documented as mortgages. In many states, a mortgage holder is said to have a mortgage lien on the real property. Another type of lien is the homeowners’ association lien, which arises when an owner fails to pay required assessments to a condominium association or another type of homeowners’ association.

In all states, real property is subject to annual property taxation, often called ad valorem taxes, based on the assessed value of the property. If the owner fails to pay the property tax when due, the government has a lien on the property to secure payment. Failure to pay delinquent taxes can result in foreclosure of the tax lien, by which the property is sold to satisfy the unpaid taxes. Other types of taxes can also result in the imposition of liens on residential properties. For example, if a property owner fails to pay federal income taxes, a federal tax lien arises.

A mechanic's lien arises when a property owner contracts for improvements or services on credit. For example, a homeowner may hire a contractor to paint the house or to install a new heating and air conditioning system. If the owner does not fully pay the contractor after the work is finished, the contractor will have a mechanic's lien to secure payment of the price.

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