Four Encumbrances, Twelve Days, and a 1031 Deadline
A seller contracts to sell a warehouse for $780,000, closing in 12 days. The title commitment lists: (1) a $46,000 judgment entered against the seller 14 months ago in the county where the property is located; (2) a $62,000 mechanics' lien recorded 30 days ago by a roofer for work completed 8 months ago; (3) $9,400 in unpaid homeowners' association assessments, four quarters delinquent, plus $1,200 in fines; and (4) the current-year county property tax bill, not yet payable. The seller says the judgment is "on appeal and will be reversed," the roofer "was paid in full," and the association charge is "only fines." The buyer must close on time to meet an exchange deadline.
1. For each of the four items, state whether it must be cleared before closing, handled through escrow, or merely excepted on the policy - and why.
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1. Judgment lien ($46,000). A judgment entered in the county where the debtor owns land generally attaches as a lien on that land. An appeal does not suspend or dissolve the lien unless a stay or supersedeas bond is in place, and even a later reversal would not automatically clean the record. Treat it as a lien to be cleared: obtain a payoff and a recorded satisfaction, or hold funds. "It will be reversed" is not a title curative.
2. Mechanics' lien ($62,000). In most states the lien's priority relates back to commencement of the work or first furnishing, not to its recording date - so it can prime a deed of trust recorded long before it. The seller's assertion of payment is unverified. Require a recorded release, or evidence of payment plus a release; if the roofer disputes it, pay it, escrow it, or obtain a release bond, depending on state practice.
3. Association charges ($9,400 + $1,200). Assessments are usually a lien by force of the recorded declaration; many states give a limited "super lien" priority for recent regular assessments that can prime a first mortgage. Fines are frequently not lienable. Get an association estoppel/statement, pay the regular assessments through closing, obtain a release if one is recorded, and confirm in writing that the fines are not secured.
4. Current-year taxes. Not yet due and payable - prorate per the contract; the policy will except taxes for the current year not yet due, while insuring that prior years are paid.
2. The buyer's new lender will record a deed of trust at closing. Explain the priority exposure created by the roofer's lien and what you can and cannot do about it.
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The exposure. If the work predates the new deed of trust, the roofer's relation-back priority means the new lender's mortgage takes subject to the lien. The lender's closing instructions and its loan policy expectations will not tolerate that: the title company cannot issue a clean loan policy while an unsatisfied, potentially senior lien of record exists.
What works:
- A recorded release from the roofer (best).
- A payoff at closing with funds escrowed and a release to follow, backed by a written indemnity and a holdback large enough to cover the claim plus costs and statutory interest.
- A release bond or a court-ordered deposit, where the state allows it and the roofer will not release.
- Subordination of the lien to the new mortgage.
What does not work: insuring over the lien on the strength of the seller's oral assurance or a personal indemnity alone. A seller's indemnity is only as good as the seller's balance sheet after closing, and lenders' counsel routinely reject it. Do not let the exchange deadline convert a senior lien into "an acceptable risk."
3. The seller's attorney proposes that you close now, record the deed of trust, and let him clear the roofer and the judgment in the following weeks, with a personal guarantee. How do you respond, and what protects the buyer's exchange?
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Response: no disbursement against an uncleared senior lien. The proposal shifts the risk to the buyer and to the insurer - the buyer takes title subject to a lien that may prime its lender, and the loan policy would have to except it. The insurer would also be on the hook if the attorney's guarantee proves uncollectible.
A structure that can work:
- Close and record, but hold back in escrow an amount sufficient to pay each disputed item (typically the claim plus a margin for interest, fees, and costs), with a written escrow agreement signed by buyer, seller, and lender.
- Require the releases and satisfactions to be recorded within a defined period (usually 30–60 days) as a condition of disbursement; if not delivered, the escrow agent pays the claimant or the buyer, at the buyer's election.
- Issue the owner's policy (and loan policy, with the lender's written consent) showing the item as an exception or with affirmative pending-disbursement language until the release is recorded; obtain a date-down endorsement when the releases record.
- Escrow the exchange proceeds with a qualified intermediary so the identification and 180-day clocks are protected even if a portion of the consideration is held back.
The judgment call to state plainly: deadline pressure is never a reason to insure an unquantified senior risk. Hold the money, not the file.