Lien filings: Overview, definition, and example
What are lien filings?
Lien filings refer to the legal process of recording a claim or interest in a property or asset, typically to secure a debt or obligation. A lien gives the lienholder (the party who files the lien) a legal right to the property until a debt or obligation is satisfied. Lien filings are commonly used in situations like unpaid loans, contractor services, or disputes over property ownership.
In most cases, the lien is filed with a government agency, such as a local recorder's office or a land registry, making it a public record. Once the lien is filed, it ensures that the creditor has a claim on the property or asset, which can be used as collateral or to force a sale to recover the owed amount.
Why are lien filings important?
Lien filings are important because they protect the rights of creditors by ensuring they have a legal claim to a debtor’s property if the debt is not paid. By filing a lien, creditors establish their priority in receiving payment if the property is sold or otherwise transferred.
In real estate, for example, a mortgage lender may file a lien on a property to ensure they are paid first if the borrower defaults. Contractors or service providers may also file a mechanic’s lien if a homeowner or business fails to pay for services rendered.
For property owners, it’s important to be aware of lien filings because a lien can affect the ability to sell or refinance the property. A lien is typically cleared only once the debt is paid or resolved.
Understanding lien filings through an example
Imagine you hire a contractor to remodel your kitchen. The contractor completes the work, but you fail to pay them the agreed amount. As a result, the contractor files a mechanic’s lien against your property. This lien is a public record, stating that the contractor has a legal claim to your property due to the unpaid debt.
If you attempt to sell your home or refinance your mortgage, the lien will need to be resolved (typically by paying the contractor) before the sale or refinance can proceed. The lien ensures that the contractor has a claim to your property until the debt is paid, protecting their right to be compensated.
Example of a lien filing clause
Here’s an example of how a lien filing clause might appear in a contract:
“If the Contractor fails to receive payment in full within [X] days of the final invoice date, the Contractor reserves the right to file a lien against the property for the outstanding balance. The Contractor shall provide written notice to the Owner prior to filing the lien. The lien shall remain in effect until the debt is satisfied.”
Conclusion
Lien filings are an essential legal tool that provides protection to creditors by giving them a claim on a property or asset until a debt is paid. Whether it’s a mechanic’s lien in real estate or a tax lien filed by the government, lien filings secure the creditor’s right to be compensated. For property owners, understanding the potential impact of lien filings is crucial, as it can affect the ability to sell or refinance property until the lien is resolved. Properly handling lien filings ensures that both parties in a transaction are aware of their rights and responsibilities.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.