Banking & Finance Law
Lien Priorities: Who Gets Paid First?
For many Americans, the purchase of property is among the most important and most expensive purchases that they make. Most property owners borrow money in order to buy real estate. In order to protect their purchase, it is important for property owners, and those who lend them money that is secured by the property, to understand the importance of recording liens and title according to the laws of the state where the property is located.
Recording Statutes
Almost every jurisdiction has a system for recording real estate transactions and liens. The recording systems exist so that potential lenders can determine what liens are outstanding on the property and the priority of those liens if the buyer were to default on his or her repayment obligations. The recording systems also allow potential buyers to determine who owns the property and with what restrictions, if any.
While the purpose of the recording system is the same from state to state, the system of recording and determining priority is different among the states. There are three general types of recording laws that are used in the United States. They include:
· Notice Jurisdictions: in jurisdictions with notice statutes, a subsequent purchaser or lender has priority if s/he had no notice of prior claims. Prior purchasers or lenders can protect themselves by recording their documents according to state law. If they do so then all subsequent purchasers and lenders are deemed to have notice. If they do not do so then they may have failed to provide the required notice and lose their priority claim.
· Race Jurisdictions: under a race statute, it is literally a race to the recording office. Whoever records a lien or deed first has priority. This is true regardless of who executed their document first and regardless of whether the parties to the second transaction knew about the prior transaction.
· Race – Notice Jurisdictions: race notice jurisdictions follow the general “first to file, has priority” rule as in pure race jurisdictions. However, if parties to subsequent transactions had notice of the prior transactions then they are prevented from recording their transaction and claiming priority.
Who Gets Paid First?
In general, the first one to execute a legal transaction has a priority claim. This is often referred to as the first in time first in right rule. However, in the event of a sale or loan default, the recording statutes become very important. If the parties to the first transaction did not follow the recording statutes in their jurisdiction they may no longer have the priority that they otherwise would have been entitled to if they had complied with the recording statutes.
Real estate is a big investment and the recording statutes provide lenders with a way to secure their place in the line of lien priorities on the property. That way, if a borrower becomes unable to repay the loans that are secured by the property the lenders have a clear idea of where they stand in the line to be repaid by any foreclosure money collected or other collection attempts on the property.