Encumbrances/Liens +7California · Real Estate · English

An encumbrance is any right or interest in property held by a stranger to the title that affects the owner's estate value but does not prevent enjoyment or conveyance. Two categories exist: those affecting title (liens) and those affecting the physical condition or use (easements, restrictions, encroachments).

• ✓An encumbrance affects value but does not prevent selling/conveying fee title
• ✓Encumbrances affecting title are liens (monetary claims)
• ✓Encumbrances affecting condition/use include easements, restrictions, zoning, encroachments

A lien is a charge imposed on property as security for a monetary claim or performance of an act. Liens may be voluntary (home mortgage) or involuntary (overdue taxes), and specific (trust deed, mechanic's lien) or general (money judgment, income tax lien). All liens are encumbrances, but not all encumbrances are liens.

• ✓Voluntary lien = created by owner (e.g., mortgage); involuntary = imposed by law (e.g., tax lien)
• ✓Specific lien affects a particular property; general lien affects all non-exempt property of the owner
• ✓A lien secures a monetary claim or performance of an act

A cloud on title is any outstanding claim or encumbrance that, if valid, would impair the owner's title. While a cloud remains the owner cannot convey marketable title. Examples: a paid-off but unreconveyed deed of trust; a missing heir's signature; a lingering lis pendens after case dismissal.

• ✓A cloud on title prevents conveyance of marketable title
• ✓Examples include unreconveyed satisfied trust deeds, missing heir signatures, and stale lis pendens
• ✓Removal may delay closing until a clean title insurance policy can be issued

Under Civil Code Section 1624, contracts that must be in writing and signed by the party to be charged include: agreements not performable within one year; promises to answer for another's debt; leases longer than one year or sale of real property; agreements employing an agent to buy/sell/lease real estate for compensation; agreements not performable during the promisor's lifetime; agreements assuming mortgage debt; and loan commitments over $100,000 not for personal purposes.

• ✓Sale of real property or leases longer than one year must be in writing
• ✓An agreement employing a broker to sell real estate for commission must be in writing and signed
• ✓Agreements not performable within one year must be in writing
• ✓An agent's authority to sign a real property contract must also be in writing

A commission agreement must be in writing and signed by the party to be charged for a broker to collect. This applies to leases exceeding one year. Oral broker-to-broker commission sharing agreements are not covered. Unwritten agreements to pay assumed mortgage debt are invalid unless assumption is provided in the conveyance.

• ✓A broker's commission agreement must be in writing and signed by the party to be charged
• ✓Oral agreements between brokers to share a commission are enforceable (not within the statute)
• ✓An unwritten mortgage assumption agreement by a purchaser is invalid unless in the conveyance

The Statute of Frauds relates to remedy, not substantial validity. A noncompliant contract is unenforceable, not void, and is effective until its invalidity is urged in an action. It is a defense only. Significant partial performance can excuse the lack of a writing. A fully performed contract is beyond the statute's reach.

• ✓Noncompliance makes a contract unenforceable, not void
• ✓The statute is a defense only and cannot be a basis for affirmative action
• ✓Significant partial performance can excuse the lack of a writing
• ✓A fully performed contract is not subject to the Statute of Frauds

The required writing may be in any form (even a series of letters) but must contain all material terms so a court can determine the agreement, and must bear the signature of the party to be charged. The party bringing the action can add their signature later.

• ✓The memorandum must contain all material terms of the contract
• ✓It must be signed by the party to be charged
• ✓The party bringing suit may add their signature later

Recording does not affect a deed's validity but is extremely important because recordation protects the grantee. If a grantee fails to record and another document is recorded, the first grantee is in jeopardy. The recording system shows the sequence of transfers. Possession of property also gives notice of the rights of persons in possession, so buyers should investigate occupants rather than rely solely on a title policy.

• ✓Recording does not affect validity but protects the grantee against later recorded documents
• ✓The recording system establishes the sequence of transfers affecting property
• ✓Possession gives notice of the possessor's rights; buyers should investigate occupants

California law protects owners from unauthorized encumbrances. Most instruments affecting real property must be executed and acknowledged or proved by the owner before recordation. Covered instruments include conveyances, mortgages, trust deeds, agreements for sale, option agreements, deposit receipts, commission receipts, and affidavits referring to them. Any instrument transferring or encumbering community property must be executed by both spouses.

• ✓Most real property instruments must be acknowledged or proved by the owner before recordation
• ✓Any instrument transferring or encumbering community property must be executed by both husband and wife

Complete record title requires a direct name connection between owners in the chain of title. Any substantial variation between a grantee's name in one instrument and the grantor's name in the next renders title defective, even if identity can be shown off-record. A legal name consists of one given name and one surname; omission or addition of a middle name/initial is generally immaterial, but a variance may make title defective.

• ✓Substantial name variation in the chain of title renders record title defective
• ✓Omission or addition of a middle name is generally immaterial, but a variance may cause defect
• ✓A subsequent instrument with variant names cannot impart constructive notice

With limited exceptions, a person whose name changed after taking title must, in a conveyance, set forth the name in which title was taken (e.g., 'Mary Doe Smith, formerly Mary Doe'). A conveyance failing this does not impart constructive notice to later purchasers/encumbrancers but is valid between the parties and those with actual notice. Title can be cleared via a special action under Code of Civil Procedure Section 770.020.

• ✓A grantor must set forth the name in which title was originally taken
• ✓Noncompliant conveyances do not impart constructive notice but remain valid between parties
• ✓Incorrect names may be cleared under Code of Civil Procedure Section 770.020

A deed to a purely fictitious (false or feigned) person is void, but a deed to a real person under a fictitious name they use or assume is valid. A misnamed grantee can be corrected by a second deed under the true name. The grantee must be an existing natural or artificial person capable of taking title; a deed to a dead person is void, and a deed to the estate of a deceased is questionable.

• ✓A deed to a purely fictitious person is void
• ✓A deed to a real person under an assumed fictitious name is valid
• ✓A deed to a dead person is void; a deed to a decedent's estate is questionable

Escrow instructions must contain mutuality, reflecting the understandings and intentions of the principals. Instructions must be clear and certain. The escrow holder does not have and must not exercise discretionary authority; it acts on behalf of, not in place of, the principals. It is the principals themselves who must perform the escrow contract.

• ✓Escrow instructions must contain mutuality reflecting the principals' understandings and intentions
• ✓The escrow holder must not have or exercise discretionary authority
• ✓The escrow holder acts on behalf of, not in the place and stead of, the principals

The escrow holder does not act as a mediator or arbitrator and does not participate in controversies among principals or parties. It is prohibited from offering legal advice and must suggest disagreeing parties consult an attorney (or a real estate broker when the matter is within the license scope). The escrow holder may offer advice within the course and scope of the instructions.

• ✓The escrow holder does not act as a mediator or arbitrate disputes among principals
• ✓The escrow holder is prohibited from offering legal advice and must refer disagreeing parties to an attorney or broker
• ✓The escrow holder may offer advice only within the course and scope of the escrow instructions

Escrow is a limited/special agency relationship governed by the content of the escrow instructions. As agent for both principals (and sometimes the lender), the escrow holder acts only upon specific written instructions. When the escrow is completed/perfected and closed, the escrow holder becomes the agent for each principal regarding those things to which each has become entitled.

• ✓Escrow is a limited/special agency relationship governed by the escrow instructions
• ✓The escrow holder acts only upon specific written instructions of the principals
• ✓When escrow closes, the escrow holder becomes agent for each principal for the items each is entitled to

The escrow holder must avoid vague or ambiguous terms. It must immediately forward recordable instruments to the title insurance company and furnish copies to concerned principals/parties. Without authorization, it may only accept claims, demands, instruments, and funds contemplated by the instructions. The escrow trust account must be maintained with extreme care; overdrawn accounts (debit balances) are strictly forbidden.

• ✓The escrow holder must immediately forward recordable instruments to the title insurance company
• ✓Without authorization, the escrow holder may only accept items contemplated by the instructions
• ✓Overdrawn escrow trust accounts (debit balances) are strictly forbidden

Escrows are privileged and confidential; the escrow holder must not give information to third parties (non-principals) without the principals' approval. As agent, facts known by the escrow agent are imputed to the principals, so the escrow holder owes a duty to communicate material facts acquired within the agency that might affect a principal's decision. Any detrimental or new undisclosed material information must be disclosed to principals for instructions.

• ✓Escrows are privileged and confidential — no information given to non-principals without principal approval
• ✓Facts known by the escrow agent are imputed to the principals
• ✓The escrow holder must communicate material facts affecting a principal's decision

The escrow holder must remain strictly neutral, not favoring any principal including the lender, and avoid actions causing gain to one principal to the detriment of another. It must maintain neat, orderly records and files with check sheets. Before closing, the escrow holder must audit the file, accounting for all items including cleared funds. Funds may not be disbursed until all checks/drafts have cleared and become available for withdrawal as an automatic right — a holding period of 1 to 10 days depending on the institution.

• ✓The escrow holder must remain strictly neutral and avoid favoring any principal
• ✓Before closing, the escrow holder must audit the file and account for cleared funds
• ✓No funds may be disbursed until items clear (holding period of 1 to 10 days)

When all principals sign mutual (conforming) instructions, the escrow becomes perfected. If only one principal has signed, that principal may terminate the proposed escrow any time before the other signs conforming instructions. Lenders typically reserve the right to withdraw their instructions, instruments, funds, and documents if buyer/seller instructions do not conform to the lender's instructions.

• ✓An escrow becomes perfected when all principals sign mutual/conforming instructions
• ✓A single signing principal may terminate the escrow before the other signs conforming instructions
• ✓Lenders reserve the right to withdraw if buyer/seller instructions do not conform to lender instructions

If parties fail to specify the term, statutory presumptions apply: for lodgings/dwellings/residential property, the term equals the rent payment period (presumed one month if unaddressed - CC 1944); for agricultural or grazing property, one year; for all other property with no custom, one month unless otherwise designated in writing (CC 1943).

• ✓Residential term defaults to the rent payment period, presumed one month (CC 1944)
• ✓Agricultural/grazing property term defaults to one year
• ✓Other property defaults to one month unless in writing (CC 1943)

Statutory restrictions supersede specified terms: agricultural/horticultural leases cannot exceed 51 years; town or city lots cannot exceed 99 years; leases for production of minerals/oil/gas cannot exceed 99 years; leases of property owned by an emancipated minor or incompetent person cannot exceed what a probate court authorizes. A lease commencing on a future event is invalid if the term does not commence within 30 years of full execution.

• ✓Agricultural/horticultural leases cannot exceed 51 years
• ✓Town or city lots and mineral/oil/gas leases cannot exceed 99 years
• ✓A future-event lease is invalid if the term does not commence within 30 years of execution

A lease renewal creates a new and distinct tenancy - parties should execute a new instrument. A lease extension is a continuation under the original lease and may occur when a tenant holds over with permission. If a tenant holds over and the landlord accepts rent, the parties are presumed to have renewed month-to-month (if rent is monthly), never longer than one year.

• ✓A renewal creates a new tenancy; an extension continues the original lease
• ✓A holdover with landlord acceptance of rent presumes a month-to-month renewal
• ✓A presumed holdover renewal never lasts longer than one year

A residential lease with an automatic renewal/extension clause is voidable by the party who did not prepare it, UNLESS the clause is printed in 8-point boldface type AND a recital appears in 8-point boldface type immediately above the signature line. Options to extend must be reasonably specific with material terms; 'to be mutually agreed upon' is unenforceable.

• ✓Automatic renewal clauses must be in 8-point boldface with a recital above the signature line
• ✓Extension options require specific material terms; 'to be mutually agreed' is unenforceable
• ✓An unexercised option creates no property right until exercised strictly per its terms

Commingling occurs when licensees deposit others' money into a non-trust account or improperly integrate property. Funds must be placed in a trust account, neutral escrow, or delivered to the principal within three business days.

• ✓Funds must be placed in trust, neutral escrow, or delivered to principal within 3 business days (B&P §§ 10145, 10146)
• ✓Trust accounts are broker accounts, not available to salespersons; salespersons must immediately deliver funds to the broker
• ✓Broker may keep up to $200 of own funds for service charges without commingling (10 CCR § 2835)
• ✓Co-owned funds must be disbursed no later than 25 days after deposit if no dispute exists
• ✓Separate records required for each beneficiary (10 CCR § 2831.1); FDIC coverage extends per identified beneficiary

Agent authority may be actual (express) or ostensible (apparent/implied). Actual authority is intentionally conferred; ostensible authority is what the principal causes third persons to believe the agent possesses. An agent's authority is limited to what has been actually or ostensibly conferred.

• ✓Civil Code § 2315: agent has authority the principal actually or ostensibly confers
• ✓Civil Code § 2316: actual authority is intentionally conferred or allowed to be believed by the agent
• ✓Civil Code § 2317: ostensible authority is what the principal causes third persons to believe
• ✓Civil Code § 2319: agent may do everything proper/usual to effect the agency purpose

Express authority precisely delineates authorized activities. Implied authority is reasonably necessary to accomplish the agency and cannot conflict with express authority. Apparent authority depends on reasonable expectations of third parties led to believe the agent is authorized.

• ✓Express authority is precise; an agent authorized to buy at $100,000 cannot buy at $105,000
• ✓Implied authority is reasonably necessary to accomplish objectives but cannot conflict with express authority
• ✓Apparent authority estops the principal when actions create appearance of authority and third parties reasonably rely
• ✓Uncommunicated limitations on ordinary authority usually do not bind the third party

An agent has expanded authority in an emergency, including power to disobey instructions when clearly in the principal's interest and no time to obtain instructions. An agent can never have authority to defraud the principal and generally cannot act in his own name.

• ✓Emergency broadens authority (e.g., property manager making urgent repairs)
• ✓An agent can never have authority to commit a fraud upon the principal (Civil Code § 2315 et seq.)
• ✓Agency to sell does not authorize modifying/canceling the contract of sale after it is made
• ✓A real estate broker who negotiates a loan generally has no authority to collect payments without written servicing authority

A principal may ratify an unauthorized act and become bound. Ratification requires the agent professed to represent the principal, the principal was capable at both times, knew all material facts, ratified the entire act, and did so before the third party withdrew.

• ✓Civil Code §§ 2310 et seq.: five conditions for ratification
• ✓Ratification in real property dealings must generally be in writing
• ✓Once ratified, consequences are the same as if originally authorized

A power of attorney is a written instrument giving authority to an agent (attorney in fact). Special POA authorizes prescribed acts; general POA authorizes all business. Brokers should not be given a POA in the same matter for which they are a compensated agent.

• ✓Special POA = prescribed acts; general POA = all business of the principal
• ✓POAs are strictly construed; general authority limited to accomplishing specific purposes
• ✓Brokers should not hold a POA in the same compensated matter (avoid self-dealing)

A broker limited to producing a buyer has no authority to accept a deposit from the buyer; if he does, he acts as the buyer's agent. Most listing forms give the broker express authority to accept an earnest money deposit for the seller.

• ✓Without authority, a broker accepting a deposit acts as the buyer's agent (loss falls on buyer)
• ✓Virtually all listing forms give express authority to accept an earnest money deposit for the seller
• ✓Once the seller accepts the purchase contract, title to a down payment vests in the seller
• ✓Deposit under a valid liquidated damages clause is generally not recoverable by a breaching buyer (Civil Code §§ 1057.3, 1671)

A check held per buyer's written instructions must not be negotiated until acceptance, but the seller must be informed in writing no later than presentation of the offer. Post-dated checks should not be accepted as they resemble promissory notes.

• ✓Seller must be notified in writing that the buyer's check is being held and not negotiated (B&P § 10176(a))
• ✓Notice must be acknowledged by seller prior to or concurrent with acceptance
• ✓Broker must enter check receipt into trust fund records and hold it safely (10 CCR §§ 2831, 2832)
• ✓A post-dated check may be treated as a promissory note and should not be accepted without disclosure

A broker who impliedly represents receiving cash while accepting a non-negotiable promissory note violates the Real Estate Law. Use of promissory notes as earnest money should be reviewed by legal counsel in advance.

• ✓Implying cash receipt when a note was accepted violates the Real Estate Law
• ✓Full disclosure to the seller is required regarding the form of earnest money deposit
• ✓A broker has an affirmative duty to disclose all material facts influencing the principal's decision

When an earnest money deposit is paid into neutral escrow, the buyer conditionally delivers the money. The escrow holder generally will not return the deposit without concurrence of the seller. Escrow is defined statutorily.

• ✓Financial Code § 17003 and Civil Code § 1057 define escrow
• ✓Failure to execute return documents (absent a good faith dispute) may result in damages up to $1000 plus attorney's fees (Civil Code § 1057.3)
• ✓On full performance, escrow holder becomes agent of the seller for money and agent of the buyer for the deed
• ✓Escrow holder may file an interpleader action for disputes over deposits

A third party dealing with an agent has a duty to ascertain the fact, purpose, and scope of the agency. No liability is incurred by the principal for acts beyond the agent's actual or ostensible authority.

• ✓La Malfa v. Piombo Bros.: third parties are bound at their peril to ascertain agency and authority
• ✓The burden of proof of authority is on the party asserting it
• ✓Principal not liable for acts beyond the agent's actual or ostensible authority

An ARM provides for interest rate adjustment as market rates change, linked to an index plus a margin.

• ✓California authorized ARMs in 1981; lenders were required to offer fixed-rate mortgages as an option
• ✓Major indices include Prime/Reference Rate, LIBOR, Treasury Constant Maturity (TCM), and 11th District Cost of Funds (COFI)
• ✓Borrowers should select low margins and reasonable caps; some ARMs include interest rate floors and negative amortization risks
• ✓A HELOC is a revolving line of credit typically tied to the Prime Rate

A reverse mortgage lets elderly homeowners access equity; today's product is the FHA-insured Home Equity Conversion Mortgage.

• ✓Under a HECM the homeowner makes no loan payments and receives monthly income or a lump sum
• ✓Qualification is based on the equity/value of the security property and homeowner life expectancy, not retirement income or credit worthiness
• ✓HECM is due and payable when the last borrower permanently leaves, dies, or sells the property
• ✓FHA insurance protects continued cash flow if the lender becomes insolvent and covers shortfalls if balance exceeds property value
• ✓Existing mortgages must be paid in full at origination; high fees make short-term use ill-advised

In stable economies the long-term fixed-rate conventional loan is the typical residential financing vehicle.

• ✓Alternative financing instruments shifted market interest rate risk from lenders to borrowers
• ✓FHA insured/VA indemnified loans plus Fannie Mae and Freddie Mac maintained availability of fixed-rate mortgages

California authorized VRMs and RRMs as alternative mortgage instruments.

• ✓VRMs authorized in 1970; interest rate changes within a range as an index moves
• ✓RRMs authorized in 1980; a long-term loan (up to 30 years) of short-term loans renewable at intervals (e.g., 3-5 years), with lenders required to offer a fixed-rate option
• ✓If a borrower declines RRM renewal, the remaining balance plus accrued interest becomes due

GPMs provide partially deferred principal payments at the start of the loan term.

• ✓Payments increase substantially after the first five years to pay off the loan during the remaining term (e.g., 25 years)
• ✓GPMs may involve negative amortization; early sale could require repaying more than the original principal

Licensees recommending alternative or non-traditional loan products must understand risks and act within fiduciary duties.

• ✓MLBs/MLOs must explain benefits and risks throughout the anticipated loan term within their fiduciary duty to the borrower
• ✓Innovative or creative financing techniques generally should be avoided without knowledgeable legal counsel

ROMs (used extensively in Canada) are renegotiated loans with periodic rate resets.

• ✓The interest rate and monthly payment are renegotiated typically every five years
• ✓Payments are amortized on a 25 or 30-year basis with the term decreasing in five-year increments

A SAM gives the lender a percentage of property appreciation in exchange for a below-market rate.

• ✓Lender receives an agreed percentage of the appreciation in market value at resale
• ✓SAMs are usually unavailable where real property is not appreciating

When there is a power of sale, the beneficiary directs the trustee to record a Notice of Default following breach. The trustee acts as a limited agent. Any one beneficiary in a fractionalized deed of trust may invoke the power of sale, subject to majority rule agreements under Civil Code 2941.9.

• ✓Beneficiary directs trustee to record Notice of Default after breach
• ✓Trustee acts as a limited agent (Civil Code 2924c, 2934a)
• ✓Non-judicial foreclosure is procedural law without state action
• ✓Any one beneficiary may invoke power of sale absent contrary agreement

The Notice of Default must state the beneficiary's election to declare the entire debt due. It is recorded at least three months before Notice of Sale. Within ten days of recording, copies must be mailed to those requesting notice and to the trustor. Within one month, notice goes to parties listed in Civil Code 2924b.

• ✓Notice of Default recorded at least three months before Notice of Sale
• ✓Copy mailed within 10 days to requesting parties and trustor
• ✓Notice mailed within one month to successors, junior lienholders, State Controller, IRS

The Notice of Sale sets a sale date no sooner than 20 days after recording. It must be recorded at least 14 days and mailed at least 20 days before the sale. It must be published once a week over at least 20 days (three publications, no more than 7 days apart) and posted for at least 20 days.

• ✓Sale date no sooner than 20 days after recording Notice of Sale
• ✓Recorded at least 14 days and mailed at least 20 days before sale
• ✓Published once a week for 20 days (three publications, 7 days apart max)
• ✓Posted at least 20 days in a public place and on the property

The sale is a public auction between 9 a.m. and 5 p.m. on a business day. Reinstatement is available until five business days before sale; thereafter payoff until bidding commences. Only the foreclosing beneficiary may credit-bid. Chilling the bidding process is unlawful. The trustee must disclose material facts.

• ✓Reinstatement until five business days before sale; payoff until bidding starts
• ✓Only foreclosing beneficiary may credit-bid up to amount owed
• ✓Chilling the bidding process is unlawful (Civil Code 2924h(g))
• ✓Postponement over 365 days total requires a new Notice of Sale

The successful bidder receives a trustee's deed with special recitals, without warranty, title relating back to the date the deed of trust was signed. A full credit bid eliminates the debt. Junior liens are extinguished; senior liens remain. There is no right of redemption after a trustee's sale.

• ✓Trustee's deed relates back to date deed of trust was signed
• ✓Full credit bid eliminates the debt and obligations
• ✓Junior liens extinguished; senior liens and super liens remain
• ✓No right of redemption after trustee's sale

The successful bidder is entitled to possession and may evict via Unlawful Detainer after a three-day Notice to Quit. Tenants under a lease junior to the foreclosed lien generally require a 60-day Notice to Vacate. Rent control tenants may not be extinguished. Rescission is possible within two years if unconscionable advantage was taken.

• ✓Owner-occupant evicted after 3-day Notice to Quit and Unlawful Detainer
• ✓Junior lease tenants require 60-day Notice to Vacate
• ✓Rescission available within two years if unconscionable advantage taken (Civil Code 1695.14)

Trustee distributes proceeds: (1) trustee's fees/costs/expenses; (2) beneficiary's full amount owed; (3) junior lien holders in priority; (4) surplus to the borrower. Disputes are resolved by a Complaint for Interpleader and Declaratory Relief.

• ✓Order: trustee fees, beneficiary, junior liens in priority, surplus to borrower
• ✓Junior liens paid whether or not their debt is matured
• ✓Disputes resolved by Interpleader and Declaratory Relief

A lender may underbid when a collateral action for fraud, waste, or malicious destruction is anticipated, or when a casualty loss with insurance coverage exists. Failing to underbid may result in denial of an insurance claim (Alliance Mortgage Co. v. Rothwell). Underbidding decisions require legal counsel.

• ✓Underbid preserves collateral action for fraud or waste
• ✓Underbid required to preserve casualty insurance claim (Alliance Mortgage v. Rothwell)
• ✓Full credit bid may waive insurance claim recovery