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- A preliminary title report is the title company's offer to insure, subject to the exceptions it lists, and those exceptions are the working list of what a sale has to clear.
- Each deed of trust is paid from its own payoff demand statement, and a licensed escrow holder can demand one directly under Civil Code section 2943.
- A recorded abstract of judgment is a lien on real property until 10 years after the judgment was entered, and a mechanics lien expires if the claimant does not sue within 90 days of recording it.
- A federal tax lien comes off the building through an IRS certificate of discharge, applied for on Form 14135.
- When the price will not cover every lien, each lienholder being paid less has to agree to take less and release its lien.
Every lien recorded against the building has to be paid from the sale or released by whoever holds it before the buyer can take the building free of it. Escrow does the paying, one written payoff figure at a time, and the list starts with the preliminary title report.
When the price covers everything, the liens are a closing task. When it does not, each lienholder that will receive less than it is owed has to agree, and the sale date on the first loan decides how long you have to get those agreements.
Start with the preliminary title report
Under Insurance Code section 12340.11, a preliminary report is furnished with an application for title insurance, and it is an offer to issue a title policy subject to the exceptions it states. The same section says it is not a representation of the condition of title. It sets out the terms on which the title company is willing to insure.
Read it the day it arrives. It is a list of what the title company would leave out of the buyer's policy. Each deed of trust, abstract of judgment, mechanics lien or tax lien it names is a claim secured by the building, and each one needs a payoff figure or a release before closing. If you know of a recorded lien the report leaves off, tell the title officer at once. A lien found late costs days, and against a sale date there may not be days to spare.
Second loans and other deeds of trust
Each deed of trust has its own payoff. Civil Code section 2943 requires the beneficiary to deliver a payoff demand statement within 21 days after it receives a written demand from an entitled person. A licensed escrow holder counts as one, so escrow can ask every lender for its figure directly. The statement gives the amount needed, as of its date, to satisfy everything that loan secures, and escrow pays it from the proceeds.
On the loan in foreclosure, the schedule has a cutoff. After a notice of default is recorded, the 21-day duty covers only a demand the lender receives before the notice of sale is first published, which is why the payoff demand belongs in the first week after the notice.
A second lender is watching the same calendar you are. At a trustee's sale on the first loan, section 2924k pays the costs of the sale and then the first loan before any junior lienholder sees a dollar, and junior liens are paid from what remains in order of priority. A second lender whose loan the auction would not reach has its own reason to want a sale that pays it something.
When is a judgment a lien on the building?
A money judgment becomes a lien on real property once the creditor records it. Under Code of Civil Procedure section 697.310, recording an abstract of the judgment with the county recorder creates the lien, and it lasts until 10 years after the date the judgment was entered, unless the judgment is paid, the lien is released or the judgment is renewed.
Paying one through escrow works much like a loan payoff. Get the creditor's payoff figure in writing, have escrow pay it from the proceeds, and get a written release of the lien so the title company can insure without it. A creditor who agrees to take less than the full judgment should put the reduced amount and the release in the same signed document.
Mechanics liens and their deadlines
Someone who worked on the building and was not paid can record a claim of lien, but only inside fixed windows, and then has a deadline to sue.
| Claimant | Must record the claim of lien before the earlier of | Must sue to enforce it |
|---|---|---|
| Direct contractor, section 8412 | 90 days after the work of improvement is complete, or 60 days after the owner records a notice of completion or cessation | Within 90 days after recording |
| Any other claimant, section 8414 | 90 days after completion, or 30 days after the owner records a notice of completion or cessation | Within 90 days after recording |
The direct contractor also has to wait until it has finished its own contract, and any other claimant until it has stopped providing work. The deadline to sue comes from Civil Code section 8460. If the claimant does not start an action within 90 days after recording, the claim of lien expires and is unenforceable. The exception is an extension of credit the owner and claimant agreed to and recorded, which moves the deadline to 90 days after the credit ends and never past one year after the work was completed.
So an old mechanics lien on the report may have expired already. Have your attorney check its recording date against any lawsuit before escrow pays it.
Federal tax liens
An IRS lien comes off a building through a certificate of discharge. The Internal Revenue Manual describes a discharge under Internal Revenue Code section 6325(b) as removing specific property from the lien, used most often when the taxpayer is selling the property after a Notice of Federal Tax Lien has been filed. The application is Form 14135, and Publication 783 explains how to apply.
The form lists the grounds for a discharge. One applies when the property still subject to the lien is worth at least double the tax owed plus any encumbrances senior to the lien, under section 6325(b)(1). Another applies when the IRS receives at least the value of its interest in the property being discharged, under section 6325(b)(2)(A), which is the one that matters when the sale will not pay the whole tax debt. Start the application once there is a signed contract, because the lien stays on the building until the IRS is paid or discharges it. Releasing the lien as a whole is a separate request, a certificate of release, with its own instructions in Publication 1450.
Unpaid property taxes go through escrow the same way, and escrow pays the county Tax Collector out of the same proceeds.
When the price will not cover every lien
Take made-up numbers for a building that sells for $1,500,000. The first loan's payoff is $1,180,000, the second loan's is $260,000, a judgment lien is $64,000 and a mechanics lien is $41,000. The liens add up to $1,545,000, which is $45,000 more than the price, before a single cost of the sale is paid.
That gap closes only by agreement. Each lienholder that will be paid less than it is owed has to accept a reduced payoff and release its lien, which makes the sale a short sale on at least one of those debts. The IRS has its own version of that agreement in section 6325(b)(2)(A), and a mechanics lien whose claimant never sued within 90 days of recording has expired and cannot be enforced against the building.
The order of payment at a trustee's sale gives those talks their shape. Under section 2924k the costs and the first loan come ahead of every junior lien, so a junior lienholder weighing a reduced payoff is comparing it with whatever the auction would leave. More lienholders means more signatures. The first loan's sale date keeps running while you gather them.
Negotiating a reduced payoff with a judgment creditor, or deciding whether a mechanics lien has expired, is work for a California real estate attorney. Shaya's part is the number every payoff is measured against: what the building will bring from a buyer, supported by its rent roll and recent sales nearby.