A lien is a legal claim filed against property by a creditor to secure payment of a debt. When someone dies and leaves real property to their estate, that property may be subject to various liens filed by creditors during the deceased's lifetime — judgment liens filed in connection with lawsuits the deceased lost, tax liens filed by the IRS or New York State, mechanic's liens filed by contractors who worked on the property, or other liens. Before the estate can sell the property with clear title, these liens must be removed or satisfied. Understanding what liens might affect the property, how to locate them, and how to negotiate their removal is essential to successful estate property sales.
In Brooklyn, Queens, Staten Island, and throughout New York, lien removal is one of the executor's critical responsibilities. Failure to address liens can prevent the sale from closing, can result in the property being subject to foreclosure by a lienholder, or can leave the estate without funds to pay beneficiaries. Taking a proactive approach to lien identification and removal early in estate administration is the key to a smooth process.
What Liens Can Attach to Estate Property?
Several types of liens can attach to real property and complicate the sale:
- Judgment liens: Filed after someone obtains a judgment against the property owner in court. The judgment creditor then files an abstract of judgment (in New York) in the county where the property is located, which creates a lien on all real property the judgment debtor owns in that county. These liens commonly arise from unpaid credit card judgments, personal loan defaults, or other civil lawsuits the deceased lost.
- Federal tax liens: Filed by the IRS when someone owes federal income taxes. These liens are powerful because they give the government priority in claiming estate property proceeds to satisfy the tax debt.
- State tax liens: New York State files a tax lien when someone owes state income taxes or property taxes.
- Mechanic's liens: Filed by contractors, subcontractors, or material suppliers who performed work or provided materials to improve the property but weren't paid. Under New York's lien law, these creditors have a specific window of time to file a lien, but once filed, the lien can remain for a number of years.
- Mortgages and home equity lines of credit: These create a consensual lien (the property owner voluntarily agreed to it). Mortgages are always satisfied at closing from sale proceeds, so they're expected and manageable.
- Other liens: Code violation liens (if the city has fined the property for housing code violations), homeowners association liens (for unpaid condo or cooperative fees), or mechanic's liens from utility providers.
Identifying Liens: The Title Search and Lien Search
To identify liens on estate property, the executor and their team order a title search from a title company. The title search reveals judgment liens, federal tax liens, and state tax liens that have been properly recorded. However, a title search doesn't always reveal all liens. Some liens may be filed in places a standard title search doesn't cover, or some liens may have been filed improperly and won't appear on the title record.
To conduct a more thorough search for liens, the executor should:
- Request a UCC search (Uniform Commercial Code search) to identify any personal property liens that might indirectly affect the property
- Check with the county assessor for any tax assessment liens
- Contact the city or town to inquire about any code violations or code enforcement liens
Additionally, the executor should review the deceased's financial records and correspondence. Unpaid bills, court notices, and financial statements may reveal creditors who might have filed liens. If the deceased received notice of lawsuits or judgments before death, liens likely resulted.
A thorough title search early in estate administration allows the executor to understand what liens exist and begin working to resolve them before the property is listed for sale.
Negotiating Lien Removal or Reduction
Once liens are identified, the executor has several options:
- Pay off the lien from estate proceeds at closing. This is straightforward: the lienholder receives payment and releases the lien. However, if the estate lacks sufficient funds to pay all liens and pay estate debts and beneficiary distributions, the executor must prioritize how funds will be used.
- Negotiate a reduced payment. For example, if a judgment creditor is owed $50,000 but the estate only has $200,000 in assets and multiple liens and debts to pay, the executor might approach the creditor and offer to pay $15,000 immediately in exchange for the creditor releasing the lien and forgiving the remaining debt. Many creditors, especially after years have passed and collection seems unlikely, are willing to accept a settlement for a portion of what's owed.
- Negotiate to pay from sale proceeds. Many lienholders will agree that their lien will be satisfied from the proceeds of a property sale, allowing the property to be marketed and sold with that understanding. This allows the sale to proceed, with the lienholder's payment coming from the sale proceeds rather than requiring the estate to have cash on hand.
For a tax lien, the executor should contact the IRS or New York Department of Taxation and Finance. These agencies may be willing to subordinate the lien (agree that another lender's lien takes priority) or to agree that their claim will be satisfied from sale proceeds, allowing the property to be sold and financed more easily.
Removing Mechanic's Liens and Other Problematic Liens
Mechanic's liens can be particularly problematic because they're often filed by contractors or suppliers who no longer exist or can't be located. If a mechanic's lien is still on the property's title but the contractor can't be found, the executor may need to take legal action to remove it.
Under New York law, the property owner can file a court action seeking to strike or cancel a mechanic's lien under specific circumstances. If the contractor didn't provide written notice before performing the work, or if the statutory timeframe for filing the lien has expired, the lien may be removable through a court action. The executor can file a motion to strike the lien, and if successful, the court will order the lien removed from the title.
Alternatively, the executor can obtain a lien removal bond. A bonding company posts a bond for the amount of the lien, and in exchange, the lienholder agrees to discharge the lien. The bond protects the lienholder if they later claim the lien should have been honored. This allows the property to be sold with clear title, and the bond remains in effect to protect against future claims.
For other liens that can't be easily removed, the executor and their team may negotiate with the lienholder or seek the title company's agreement to insure over the lien.
Priority of Liens and Allocation of Sale Proceeds
When estate property is sold, liens are satisfied in order of priority. First mortgages are typically first in priority. Judgment liens, federal tax liens, and state tax liens generally have lower priority than mortgages but may have priority over other claims.
The executor must understand the priority of liens when determining how sale proceeds will be allocated. If there aren't sufficient proceeds to satisfy all liens, funds are allocated according to priority. This means the highest-priority lienholder is paid first, and if funds run out, lower-priority lienholders may not be fully paid.
The executor is responsible for ensuring that liens are satisfied in the correct order and that sale proceeds are properly allocated. The title company or escrow agent helps coordinate this process, but the executor must ensure it's done correctly. If liens aren't satisfied, the title company won't insure clear title, and the sale won't close.
How Keystone Pinnacle Can Help
Whether you're navigating an estate property sale, exploring investment opportunities, or need guidance through a complex real estate transaction, Keystone Pinnacle Property Advisors is here to help. Our team specializes in guiding families through the real estate aspects of estate settlement throughout Brooklyn, Queens, Nassau County, and the greater New York area.
Contact us today for a free consultation, or call (516) 703-6942 to speak with an advisor.
