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- July 27, 2021
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Lien Rights: To Assign or Not to Assign (Should you ask the question?)
- By Michael Swartz,
Assignment of lien is a powerful but underused section of Ontario’s Construction Act . Assignment allows a party with lien rights to transfer their rights (and rights to any related court lawsuit or arbitration) to a third party. Unlike many other sections of the Construction Act that contain detailed and specific rules, the Construction Act does not provide much in the way of guidance to parties considering making or taking assignment of a construction lien, except that the assignment must be made in writing. This provides parties with broad latitude to create assignment arrangements that fit their individual needs.
What is assignment of construction lien rights?
Lien rights are a remedy available to those who supply services and/or materials to construction projects in Ontario. A party who has construction lien rights has a unique form of security for claims of non-payment in the form of a charge on the project property and on any holdbacks that are retained from payments on the project, or a charge on any security posted into court to remove the lien from title to the property.
Lien rights arise on the supply of services and/or materials to an improvement to a property and are for the price of the service and/or materials supplied. Construction lien rights are governed by the rules and procedures contained in the Construction Act . Subject to certain exceptions, a claim for lien is typically registered on title to the property to which the party with lien rights supplied the services and/or materials.
An assignment is the process by which Party A, who has a claim, account receivable, or some other legal right or benefit (including construction lien rights), transfers that legal right or benefit to Party B. Often, Party B will provide some sort of benefit to Party A in return for the assignment of legal rights, such as a payment of money and/or as part of a settlement. As discussed above, the Construction Act specifically allows for lien rights to be assigned to a third party.
Why assign construction lien rights?
Assignment has several benefits for the party with the lien rights. If you have lien rights, the assignment of those rights may be part of a settlement arrangement allowing you to be paid more quickly. Assignment also allows you avoid the time, expense, and risk of litigation. It allows you to move on from the claim, except for any assistance you may agree to provide the party who is taking assignment of the lien rights.
Assignment can also be beneficial for the party taking assignment of the lien rights. In complex disputes with multiple parties and claims, it can simplify and consolidate the dispute by allowing one party to take control of the claims. For example, in construction projects with multiple owners, assignment may allow one owner to clear title to their property while advancing the claim against the other owners. A contractor could also take assignment of claims from its subcontractors and advance the claims together up to the owner.
Assignment can also be helpful as a means for an insurer or surety to take control of a claim and recover amounts paid out to an insured.
What do you need to do for an assignment?
The only direct rule in the Construction Act with respect to assignment is that the assignment must be in writing. Courts have held that this is a requirement for a valid assignment. While this one rule may seem simple, an assignment agreement written on the back of a napkin likely will not be sufficient. There are many considerations that need to carefully be taken into account, including:
- the lien rights are valid and capable of being assigned under the Construction Act ;
- proper protections are in place for both the party assigning the lien rights and the party taking assignment of the lien rights;
- the assigning party’s assistance with any litigation relating to the lien claim is properly addressed;
- the proper steps are taken to ensure the party taking the assignment can advance a lawsuit or arbitration relating to the lien claim, if necessary; and
- where the assignment is part of a settlement, that the terms of the settlement are agreed and properly documented.
For assistance regarding the assignment of lien rights, or with construction liens, disputes, and contracts more generally, please contact Michael Swartz and Paul Conrod .
The information and comments herein are for the general information of the reader and are not intended as advice or opinion to be relied upon in relation to any particular circumstances. For particular application of the law to specific situations, the reader should seek professional advice.
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Whenever you borrow a loan for buying an asset such as a car or a house, the institution from which the loan has been borrowed will place a lien on the asset. In simple terms you can say that if you buy a car on loan, the bank that you borrowed the loan from will grant a lien on that car. But what does this lien mean? Well to make it simple for you to understand you can say that it gives your lender the legal right to take away the asset for which you have borrowed the loan in case you fail to repay the loan amount in the given time period. The term lien plays an important role in the financial world and hence it is important to understand. To understand this term and its importance in detail, we will go through the basics of this term and see how it works and what different types of liens are there.
- What is a Lien?
The term lien refers to a legal claim or legal right which is made against the assets that are held as collaterals for satisfying a debt. A lien can be established by a creditor or a legal judgement. The purpose of the lien is to guarantee an underlying obligation such as the repayment of the loan. In case the borrower fails to satisfy this underlying obligation, the lender or the creditor has the legal right to seize the asset that is subject of the lien. Many types of liens are used to secure assets.
The three main types of lien are bank, real estate and tax. When it comes to property, the contract on the property needs to be paid. In case the contract is not paid, the lender has the legal right to seize the property as well as to sell the property. Liens can be of various types depending on who they are generated by. A creditor, legal judgement or tax authority can generate a lien.
- How does a Lien work?
When giving out a loan to a borrower, the creditor is always faced with a risk that the borrower may fail to repay the given amount on time or just won’t repay it at all. To avoid this, the concept of a lien is considered to be highly useful. A lien provides the creditor with the legal rights to seize and sell the collateral assets or property which is the subject of the lien without the consent of the lien holder or the borrower. When the lien is granted on an inventory or any other unfixed property, it is known as a floating lien.
Although, liens are often voluntary and consensual like the lien on the property for a loan, there also exist involuntary or statutory liens. Involuntary liens are where the creditor or the lender seeks a legal action against the borrower for nonpayment of the loan. After such legal action is taken, a lien can be placed on assets including property as well as bank accounts.
Some liens are also filed with the government in an effort to let the public know that the lienholder has an interest on the property or on the asset. Having a public record of a lien helps the people to know that a particular asset or property is subject to a lien and if they are interested to buy that particular asset or property, the lien first needs to be released as the asset or property cannot be sold with the lien. This is something that will help all the interested buyers to know about the financial record of the asset or the property before making a decision of buying it.
- What are the different types of Liens?
Now that we know what the term lien stands for and we have seen how it works and why it is important in the financial world, it is time to learn about the different types of liens that are out there. As discussed above, there are many types of liens and lien holders. A lien can be placed by governments, financial institutions, as well as by small businesses. We are going to see five of the most common types of liens, which are bank lien, judgement lien, mechanic’s lien, real estate lien, and tax lien. To understand each of these types better let us go through each one of them individually.
Bank Lien Bank lien is the lien which is often granted when the individual takes a loan from a bank to purchase an asset. For instance, you borrow a loan from a bank to buy yourself a car. The price of the car will be paid by the loan amount. This gives the bank the legal right to grant lien on the car. Now, in case you fail to repay the loan and interest that was promised at the time of borrowing the loan, the bank has the right to take the asset that is the car, into their possession. However, if you successfully pay off the loan on time, the bank will release the lien and you will become the rightful owner of the car.
Judgement lien When a lien is placed on the asset by the court, usually as a result of a lawsuit, it is referred to as a judgement lien. This judgement lien can be helpful to the defendant in getting paid back in a nonpayment case by liquidating the assets of the accused.
Mechanic’s lien The lien attached to real property in case the owner fails to pay a contractor for the services he has rendered is referred to as a mechanic’s lien. In case the owner never goes through with the payment, the contractor has every right to take the debtor to the court and get a judgement in which usually the property or assets are auctioned off to pay the lien holder.
Real estate lien The legal right to seize or sell a real estate property on nonfulfillment of a contract is referred to as a real estate lien. In case you borrow a loan from a bank in order to buy a house, a lien is placed on the house by the bank until you pay off the mortgage. If you fail to repay the mortgage the bank has the legal rights to seal your property.
Tax liens Tax liens are the liens created by law. The law often allows tax authorities to put liens on properties of taxpayers who do not pay the taxes on time.
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Assignment of Mechanics Lien: What Contractors Need To Know
Because a lien claim is an asset, most states allow you to assign the claim to another person or entity. In other words: You can transfer or sell your right to a mechanics lien claim from one party (the assignor) to another party (the assignee). In that case, the party who receives the right to the claim has the right to collect on the lien.
You may know why you should file a mechanics lien , but you should also consider whether your state provides the right to assign a mechanics lien—and what to consider if “assignment of lien” is on your radar.
Table of Contents
Are mechanics lien rights always assignable?
Lien rights are not always assignable, and it typically comes down to state law to determine if you’re able to assign your mechanics lien rights.
Since a lien claim is an asset, most states will allow it to be assigned. There are, however, a few states that do not authorize the assignment of a mechanics lien claim.
If you are not allowed to assign your mechanics lien claim and you try to do so, you may cause some serious problems to the claim. Not only may your claim face invalidation, but you may also get yourself into legal trouble with the other party for assigning a claim you had no right to assign.
Why would you assign a mechanics lien claim?
Choosing to assign your mechanics lien rights means you’ll enter into a negotiation. The buyer will offer you some amount of money (which will be less than the full value of the claim) to obtain the full value of your rights. You’ll need to evaluate the offer and decide if the amount is high enough for you to walk away from the claim.
Since a mechanics lien claim requires foreclosure and legal effort to collect, usually liens are assigned for a fraction of their worth. If you want to sell your lien claims, be prepared to take a significant discount. The benefit, of course, is that you will be paid now—without a potentially lengthy legal fight.
Follow proper procedure when assigning a mechanics lien
While most states allow claim assignment, there are usually some procedures that must be followed to effect the assignment.
Vincent Pallaci of the New York Mechanic’s Construction Payment Blog just posted an article about assignment requirement in New York: “ Assigning a mechanic’s lien in New York? Make sure you record your assignment .”
This article does a great job of highlighting on very important step that assignors and assignees must take when executing an assignment: Recording the assignment.
This is an example of just one procedure in one state. If you decide to assign your mechanics lien claim (or to buy a mechanics lien claim) make sure you consult with a construction attorney to do it right.
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Scott Wolfe Jr
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2022 Code of Alabama Title 35 - Property. Chapter 11 - Liens. Article 5 - Liens of Particular Persons or Classes of Persons. Division 8 - Mechanics and Materialmen. Section 35-11-233 - Assignment of Lien; Transfer of Lien on Real Property to Other Security.
Assignment of lien; transfer of lien on real property to other security.
(a) Any claim for which a lien is provided in this division may be assigned; and the assignee shall thereby be invested with all the rights of the original holder of the lien, and be entitled to all his remedies to enforce them. The assignee shall have the right to consolidate all such claims in one statement to be filed as herein provided; and the length of time for the filing of said claim shall be measured by the greatest length of time for the filing of any class of claims held by the assignee.
(b) Any lien claimed on real property under this division may be transferred by any person having an interest in the real property upon which the lien is imposed or the contract under which the lien is claimed, from such real property to other security by first filing with the court in which the action is brought, a copy of the lien which has been duly filed and recorded as required by law, and by either:
(1) Depositing with the court in which the action is brought a sum of money; or
(2) Filing with the court a bond executed as surety by a surety insurer licensed to do business in this state, either of which shall be in an amount equal to the amount demanded in such claim of lien plus interest thereon at eight percent per year for three years plus $100.00 to apply on any court costs which may be taxed in any proceeding to enforce said lien.
Such deposit or bond shall be conditioned to pay any judgment or decree which may be rendered for the satisfaction of the lien for which such claim of lien was recorded and costs not to exceed $100.00. Upon making such deposit or filing such bond the court shall make and record a certificate showing the transfer of the lien from the real property to the security and mail a copy thereof by registered or certified mail to the lienor named in the claim of lien so transferred at the address stated therein. Within 10 days from the date of the receipt of the said certificate, the lienor may by motion, petition the court in which the action is pending for a hearing on the sufficiency of the amount in question or on the qualifications of the surety insurer. In such an event, the ruling of the court on the said motion, shall be a final determination. Upon the expiration of the said 10 days, or in the event a petition has been filed with the court, upon the determination of the court, and upon filing the certificate of transfer in the court where the lien was filed, the real property shall thereupon be released from the lien claimed and such lien shall be transferred to said security. The court shall be entitled to a fee for making and serving the certificate in the sum of $2.00. Any number of liens may be transferred to one such security.
(c) Any excess of the security over the aggregate amount of any judgments or decrees rendered plus costs actually taxed shall be repaid to the party filing the same or his successor in interest. Any deposit of money shall be considered as paid into court and shall be subject to the provisions of law relative to payments of money into court and the disposition of same.
(d) Any party having an interest in such security or the property from which the lien was transferred may at any time, and any number of times, file a complaint in the circuit court of the county where such security is deposited for an order to require additional security, reduction of security, change or substitution of sureties, payment or discharge thereof, or any other matter affecting said security.
(e) If no proceeding to enforce a transferred lien shall be commenced within the time specified, or if it appears that the transferred lien has been satisfied of record, the court shall return said security upon request of the person depositing or filing the same, or the insurer.
(Code 1886, §3047; Code 1896, §2752; Code 1907, §4783; Code 1923, §8861; Code 1940, T. 33, §64; Acts 1980, No. 80-757, p. 1581.)
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Lien vs. Encumbrance: What's the Difference?
J.B. Maverick is an active trader, commodity futures broker, and stock market analyst 17+ years of experience, in addition to 10+ years of experience as a finance writer and book editor.
Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.
Lien vs. Encumbrance: An Overview
A lien represents a monetary claim levied against property to secure payment—the settlement of an obligation from the property owner. An encumbrance is a much broader term, referring to any sort of claim against a property. Any lien is an encumbrance, but not all encumbrances are liens.
- A lien is a monetary claim against property intended to ensure payment.
- Any lien is an encumbrance, but the reverse is not always true.
- Encumbrance refers to any claim against a property, not just one to ensure payment.
Investopedia / Sabrina Jiang
A lien is a legal right granted by the owner of a property, by a law, or otherwise acquired by a creditor . A lien serves to guarantee an underlying obligation, such as the repayment of a loan. If the underlying obligation is not satisfied, the creditor may be able to seize the asset that is the subject of the lien.
Liens always represent a financial interest. A lien often results from secured loans such as auto loans and mortgages. It effectively gives the creditor the right to seize and sell the property that the creditor has a lien against to satisfy the outstanding debt. A common example: If a person fails to make the payments on a car loan, it can lead to the financing company repossessing and selling the car to obtain payment. Another type of common lien is a judgement lien resulting from a lawsuit initiated by a creditor . Upon winning the suit, a creditor can have a lien placed on the debtor's property in order to facilitate repayment of the debt. Liens may even include the right to attach funds in the debtor's bank account.
Liens attached by tax agencies are specifically referred to as tax liens . A federal tax lien is notable in that it takes precedence over any other claims by creditors, in most cases.
An encumbrance is a claim against a property by a party that is not the owner. An encumbrance can affect the transferability of the property and restrict its free use.
Encumbrances are not necessarily monetary, but they also include property use restrictions or easements . Encumbrances can be any interest in the property that burdens or reduces the property's value or clear title .
Easement is a real estate concept that defines a scenario in which one party uses the property of another party, where a fee is paid to the owner of the property in return for the right of easement. Easements are often purchased by public utility companies for the right to erect telephone poles or run pipes either above or beneath private property.
However, while fees are paid to the property owner, easements can negatively affect property values. For example, unsightly power lines can lower the visual appeal of a piece of land.
Liens and encumbrances are most commonly associated with real estate , but either one may be applied to personal property as well. If an individual fails to pay a debt, then a creditor or tax agency may attach a lien or an encumbrance to the individual's property. Having such a claim against the property creates an unclear title and can limit the ability to sell or otherwise transfer the property.
Any existing encumbrance is required to be disclosed by the owner of the property to potential buyers. A buyer will inherit the encumbrance upon purchasing the property. If a seller does not disclose existing encumbrances, he is subject to legal action by the buyer for his failure to do so.
Internal Revenue Service. " Priority of Federal Tax Lien: “First in Time, First in Right” ."
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