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When lending money for commercial real estate, creditors need assurances that they will be paid back. Banks and other lenders will often use commercial liens as a form of protection. Liens prevent property owners from further lending against or selling their property. Sometimes lienholders can even file for foreclosure and sell the property to get their money back.
A commercial lien is a legal claim against a piece of commercial property, giving the lienholder a legal interest in the property. Liens are typically granted by a property owner or a court and recorded with the local county. Once granted, the lien is filed against a part of the property as a form of collateral. According to Shaun Martin, owner and CEO of The Home Buying Company, there are a few reasons why commercial liens occur. If the property owner fails to pay their mortgage or other loan payments, the lender can exercise the lien on the property, giving them a legal interest in part of the property in the case of nonpayment.
If a property owner doesn’t pay their property taxes, the government can also file a lien against the property. Another instance in which the government can file a lien, Martin explained, is when the property owner makes improvements to the property without the proper permits and is fined. In the case of construction and renovations, contractors can file liens against a property when the owner does not pay them, said Jon Sanborn, a real estate investor and founder of SD House Guys.
If someone is owed money by a property owner for taxes, mortgage payments or anything else related to the property, that person can submit a lien. “Typically, anyone who has provided goods or services to the property owner can file a lien,” Martin said. “This includes contractors, suppliers and other service providers.” Sanborn added, “Under the right circumstances, anyone who furnishes labor, materials, services, fixtures or tools has the right to file a lien. It is enforced by sending a copy of the filed lien via certified mail to the property owner and lender.”
Liens are a form of secured interest in a property, but there are different types of liens one can file. Some are voluntary and granted by the property owner, while others are enforced by legal means and granted by courts or taken by the government. According to Martin, voluntary liens are placed on a property by the owner to secure financing. For instance, when taking out a loan to make improvements to a property, the lender might place a lien on the property as a form of collateral. On the other hand, involuntary liens are filed by creditors, and they occur when a property owner fails to pay their taxes, assessments, fees, judgements or other bills . Liens can be further broken down into specific types.
A mortgage lien is the most common type of lien, and it is taken by a mortgage lender whenever they provide a property loan. Mortgage liens are typically voluntary and are included in the mortgage agreement.
Tax liens are filed by the government when a property owner fails to pay their property taxes. If tax liens go unpaid, the government can sell the property to collect the money from unpaid taxes, as well as interest and penalties.
IRS liens are another type of lien filed by the government. These occur when commercial property owners fail to pay income taxes. They work the same way as a tax lien.
A mechanic’s lien occurs when a property owner hires someone to work on their property and then fails to pay them according to the terms of their agreement. If a property owner doesn’t pay the agreed-upon amount after the labor is complete, the contractor can file a mechanic’s lien against the property. Mechanic’s liens can also be filed by vendors who provide materials.
A judgment lien is a claim against a property that is awarded by a judge when the property owner loses a lawsuit and has failed to pay the winner of the lawsuit. To secure their claim, the winner can file a lien against the property.
The simplest way to remove a lien, Sanborn said, is by paying off the debt that is owed. To do so, property owners should review the terms of the debt with the lienholder to determine how much they owe. From there they can pay the lienholder and draft a lien release document the lienholder signs, giving up the lienholder’s interest in the property. Then, property owners need to submit the lien release to the local county recorder’s office. Sometimes the steps are even simpler. When paying off a mortgage, for instance, the lender signs a satisfaction of mortgage, automatically giving up the lien. This process requires no additional steps from the property owner. Another way to remove a lien is by contesting the lien in court and proving it’s invalid. In this scenario, Sanborn said, it’s best to contact a commercial real estate lawyer to determine what is best for you and your property.
While commercial liens can often be a nuisance to the property owner, they are an important part of the CRE world, as they ensure everyone gets paid what they are owed. Liens prevent property owners from skipping out on mortgages, tax payments and payments for goods and services. They are essential to keeping the business of commercial real estate going.
