In order to understand what an equitable lien is, one must first understand what the legal definition of a lien is. In legal terms, a lien is a legal right of one person to retain possession of the goods of another person until that person’s claims are satisfied. A legal lien gives the person that holds the lien, known as the lienholder, the right to retain possession of a piece of property until the obligation that formed the lien is satisfied.
It is important to note that as a property right, for a traditional lien there is no right to sell the property held, and the lienholder is not granted an interest in the property. The same is not true for that of an equitable lien, as an equitable lien does create an interest in the property that the lienholder is granted.
As such, an equitable lien is different from a traditional lien, as it creates an interest in the property that is held and allows the lienholder to sell the property to enforce the lien that they have on the property. Equitable liens arise under real estate law, and are a lien that is imposed by a court of law, rather than created by statute.
It is important to note that equitable liens can arise regardless of whether or not the creditor has physical possession of the property subject to the lien. An equitable lien is typically imposed by a court in order to maintain a degree of fairness, or equity, in the situation surrounding the property subject to the lien.
It is also important to note that an equitable lien is not the same as an equitable mortgage. An equitable mortgage is an interest held in property and is different from an equitable lien in that the equitable mortgage grants the additional right to commence a foreclosure action on the property to enforce the lien. In a mortgage scenario, equity refers to the difference between the current market value of one’s home and the remainder of the mortgage loan that needs to be repaid to the lienholder.
When Are Equitable Liens Ordered?
As mentioned above, an equitable lien is a legal lien that is granted by a court of equity in order to maintain the fairness between two parties. Typically an equitable lien is ordered to cover an unpaid debt that one party owes another party.
For example, in the Verity v. Verity case, which was a New York Supreme Court case regarding a husband and wife getting a divorce, the court in that case granted an equitable lien on the property of the husband that he had put in his name, but that his wife had contributed to acquiring.
Specifically, the wife had contributed to the farm work on their homestead property for which the profits were used to obtain new property that the wife paid taxes and insurance on. However, the husband put the property in his name. The Court found that the husband was unjustly enriched by all of the efforts and money that the wife had expended to acquire the new property, and as such placed an equitable lien on the property that was in the husband’s name for an amount that was fair to the money and work the wife put into the property.
As can be seen, equitable liens are most often ordered by a court in order to prevent one party from being unjustly enriched by the actions of another party, or when one party obtains property wrongfully, such as by fraudulent actions. Importantly, all equitable liens must be settled on a piece of property before the owner of that property can sell the property to another. As such, equitable liens are utilized to prevent a wrongdoer from keeping their wrongful gains on a property.
It is important to note that generally before a court will award an equitable lien on a piece of property, the plaintiff (i.e. the person alleging financial harm and unjust enrichment) must be able to provide the court evidence that their money or efforts contributed to that property. This requirement is typically referred to as tracing.
This is because the party that was harmed must trace their efforts or money to the property that they are seeking to obtain an equitable lien on, such as by providing payment receipts or copies of checks utilized to improve or pay for the property. Once the plaintiff is able to successfully trace their efforts or funds to the property, then the court may then grant an equitable lien on the property to prevent the other party from being unjustly enriched.
How Can Equitable Liens Be Released or Removed?
As mentioned above, a piece of property that is subject to an equitable lien may not be sold without first satisfying the equitable lien. However, it is possible to have an equitable lien released or removed. The most common way in which an equitable lien may be released is by satisfying the debt owed to the lienholder, which is the party that was granted the equitable lien by court order.
Thus, equitable liens are only releasable if the court gives a court order that allows the equitable lien to be released or removed. The court may also give the person whose property is subject to the lien other alternatives to having the lien removed from their property, such as by paying a specified amount of money to the lienholder.
What Is the Difference Between a Statutory Lien and an Equitable Lien?
As mentioned above, an equitable lien is not the same as a statutory lien. Once again, an equitable lien is a lien that is created by a court to impose a degree of fairness between two parties. On the contrary, a statutory lien is a lien that is created by statute, i.e. by law.
Statutory liens do not arise as a result of one party suing another party for unjust enrichment, but instead they are created by order of the law. For example, a mechanic’s lien is a statutory lien that is created by law when a contractor performs work on a piece of property and improves the property. Statutes then give that contractor a mechanic’s lien on the improved property for the amount that they are owed as a legal right.
Equitable liens are created when one party sues another party and claims that they were wronged by the other party who was unjustly enriched or defrauded them. As such, equitable liens arise and are created within the court system, whereas statutory liens are created by law.
Do I Need a Lawyer for Help with Real Estate Issues?
As can be seen, real estate and property laws can be very complex, especially when they involve questions regarding the division of debts between two parties. As such, if you believe that you have been harmed or defrauded by another party, and are owed a debt as a result of a piece of property that you contributed to, then you may wish to consult with an experienced foreclosure lawyer.
An experienced foreclosure lawyer will be able to answer your questions regarding the piece of property and question, as well as help you determine if you have any legal right to an equitable lien. Finally, an attorney can also initiate a civil lawsuit on your behalf, and represent your interests in court, as necessary.