The lien with the highest priority in real estate is typically the first mortgage lien. Lien priority refers to the order in which different liens are paid in the event of a foreclosure or bankruptcy. In general, liens are prioritized based on the date they were recorded, with earlier liens having higher priority.
This means that if a property owner defaults on their mortgage and the property is foreclosed, the proceeds from the sale will first go towards satisfying the first mortgage lien before any other liens are paid. Subsequent liens, such as second mortgages or judgment liens, will be paid in the order of their recording date. Understanding lien priority is crucial when evaluating the potential recovery for creditors in bankruptcy cases or when considering investments in real estate.
In this post, we will delve into the fundamental concepts of liens and priorities in the context of real estate transactions. Understanding these concepts is crucial for buyers and homeowners in California, as liens can have a significant impact on property ownership and obligations. In the second part of this series, we will explore a recent case that sheds light on lien priority and simultaneous recordings. So, let’s begin by defining liens and their role in real estate transactions.
Liens are charges imposed on specific property, serving as security for the performance of an obligation.
A deed of trust, commonly used in California home purchases, is considered a lien.
Liens can be created by operation of law or by contract.
California follows a “first in time, first in right” system of lien priorities, giving priority to the first recorded conveyance.
This priority system is known as the “race-notice” theory, favoring a purchaser or encumbrancer who acquires a lien in good faith and for valuable consideration.
Proper recording of an instrument is essential for establishing priority.
Exceptions to the priority rule exist, such as the priority of a purchase-money mortgage over other liens.
Understanding Liens in Real Estate Transactions
When Buying a House in California, purchasers generally obtain a loan that is secured by a deed of trust. A deed of trust is considered a lien. California Civil Code Section 2872 defines a lien as “a charge imposed in some mode other than by a transfer in trust upon specific property by which it is made security for the performance of an act.” In the example above, the deed of trust secures the homeowner’s obligation to pay the loan by taking an interest in the property. If the homeowner defaults on the loan, the lien holder can foreclose on the property.
Liens are created in two ways: (1) by operation of law, and (2) by contract (Civ. Code, § 2881). The deed of trust is an example of a lien created by contract. (Monterey S. P. Partnership v. W. L. Bangham, Inc. (1989) 49 Cal. 3d 454, 460.)
The “First in Time, First in Right” System of Lien Priority
California adheres to a “first in time, first in right” system of lien priorities, under which a conveyance recorded first generally has priority over any later-recorded conveyance. (See Civ. Code, §§ 1214, 2897; First Bank v. East West Bank (2011) 199 Cal. App. 4th 1309, 1313.) This system of priorities is also known as the “race-notice” theory. To quote the statute, priority is given to “a purchaser or incumbrancer who in good faith and for a valuable consideration acquires a title or lien by an instrument that is first duly recorded.” (Cal. Civ. Code § 1107.) Good faith requires the absence of actual or constructive notice of the prior interest. (See Gribble v Mauerhan (1961) 188 Cal. App. 2d 221, 227.)
Proper Recording of Instruments for Lien Priority
To properly record an instrument, the instrument must be duly acknowledged or proved and certified, and be deposited in the Recorder’s office, with the proper officer, for record. (Cal. Civ. Code § 1170.)
The above rule on priority does not always apply. The “explicit caveat in applying the “first in time, first in right” rule . . . is that all other things must be equal.” (DMC, Inc. v. Downey Savings & Loan Assn (2002) 99 Cal. App. 4th 190, 195-96.) A purchase-money mortgage is one of the exceptions. Once the existence of a purchase-money mortgage is established, the purchase-money lien has priority over all other liens on real property. (Id.)
Schorr Law’s Expertise in Real Estate Matters and Liens
Our real estate attorneys at Schorr Law have a great deal of experience with real estate matters and disputes, including liens and priorities, the recording of liens, as well as the removal of them. To see if you qualify for a free 30-minute consultation, contact us today!