Lien Priority in Florida Real Estate: Who Gets Paid First?

A property can look perfectly normal from the street while its title tells a much more complicated story.

Mortgages, unpaid property taxes, judgments, construction liens, association liens and other claims can all potentially affect a property’s title. These liens and encumbrances matter whenever real estate changes hands because simply transferring ownership does not necessarily make an existing title problem disappear.

For buyers, sellers and real estate professionals, this raises an important question:

If there are multiple liens against a property, who gets paid first?

The answer involves a concept known as lien priority.

Understanding the basics of lien priority can help explain why title searches, lien searches, payoff statements and proper closing procedures are such important parts of a Florida real estate transaction.

First, What Is a Lien?

A lien is a legal claim or encumbrance associated with property, generally securing payment of a debt or obligation.

Common examples affecting Florida real estate can include:

·      Mortgage liens

·      Property tax liens

·      Construction liens

·      Judgment liens

·      Homeowners’ association (HOA) liens

·      Condominium association liens

·      Governmental liens and assessments

·      Other statutory liens

The existence of a lien does not necessarily prevent a property from being sold. In many transactions, liens are identified during the title examination and arrangements are made to satisfy applicable liens from the seller’s proceeds at closing.

The objective is generally to ensure that the buyer receives the quality of title required by the contract and that liens that must be satisfied are properly addressed.

That’s where title and escrow professionals play an important role.

Why Does Lien Priority Matter?

Imagine that a property is subject to three different liens and later goes through foreclosure.

The property sells for $400,000, but the total amount owed among the various lienholders is $475,000.

There isn’t enough money to pay everyone.

Who gets paid?

The answer isn’t simply that everyone receives a proportional share. Instead, lienholders generally have different positions in a priority hierarchy.

A lien with superior priority is generally paid before a lien with junior priority.

If the foreclosure proceeds run out before reaching the lower-priority liens, those lienholders may receive only part of what they are owed—or potentially nothing from the foreclosure proceeds.

Priority can therefore have enormous financial consequences.

The General Rule: First in Time, First in Right

One of the basic concepts behind lien priority is sometimes summarized as:

“First in time, first in right.”

In simple terms, an interest that was properly recorded earlier will often have priority over interests recorded later.

Suppose a mortgage is recorded against a property in January and a judgment lien affecting the property arises later. Depending upon the type of liens involved and applicable law, the earlier interest may have priority.

But this is only a starting point.

Lien priority is not determined solely by looking at which document has the oldest recording date.

Florida law contains important exceptions and special rules for different kinds of liens.

That is why determining actual lien priority should be part of a proper title examination rather than an assumption made from a list of recording dates.

Florida Property Taxes Are Different

One particularly important exception involves property taxes.

Under Florida law, taxes imposed pursuant to the Florida Constitution and state law are a first lien, superior to other liens, on the property against which the taxes have been assessed.

In other words, an older mortgage doesn’t simply defeat a later property tax obligation because the mortgage was recorded first.

Florida Statutes §197.122 establishes this special priority for property taxes.

For buyers and sellers, the practical lesson is straightforward:

Property taxes cannot be ignored simply because another lien was recorded earlier.

Ensuring that taxes and other applicable governmental charges are properly accounted for is therefore an important part of preparing a property for transfer.

What About Mortgages?

Mortgages are among the most common liens encountered in residential real estate.

If a seller purchased a home using mortgage financing, that mortgage was generally recorded in the county’s public records. When the property is later sold, the outstanding mortgage typically must be paid off as part of the transaction unless another arrangement has been specifically made.

The closing or title company may obtain a payoff statement from the lender showing the amount necessary to satisfy the loan.

At closing, funds can then be disbursed according to the transaction and payoff requirements.

But properties can have more than one mortgage.

For example, an owner might have:

1.        A first mortgage used to purchase the property; and

2.        A second mortgage or home equity loan obtained later.

The order and legal priority of those interests becomes particularly important if the property goes into foreclosure and there isn’t enough value to satisfy every creditor.

Construction Liens Can Complicate the Picture

Construction liens—sometimes casually called mechanic’s liens—illustrate why the “first recorded wins” rule cannot always be applied literally.

Florida’s Construction Lien Law contains specific rules governing when construction liens attach and how their priority is established.

Under Florida Statutes §713.07, certain construction liens can take priority based upon the recording of a Notice of Commencement, rather than simply the date an individual contractor or subcontractor later records a Claim of Lien.

For qualifying liens, the priority may relate back to the time the Notice of Commencement was recorded.

That can produce a very different result than someone might expect from simply looking at the date appearing on a Claim of Lien.

This is one reason construction activity deserves special attention during a real estate transaction.

If substantial improvements have recently been made to a property, the title and closing process may need to consider contractors, subcontractors, suppliers, Notices of Commencement, lien releases and other documentation associated with that work.

What About HOA and Condominium Association Liens?

Association liens create another area where general rules can become misleading.

Florida law provides specific rules governing homeowners’ association and condominium association assessments and liens.

For example, Florida’s HOA statute provides that, subject to statutory qualifications, an association lien can relate back to the recording of the original declaration. However, the statute contains a different rule regarding first mortgages of record: as to those mortgages, the association lien is generally effective from the recording of the association’s Claim of Lien.

The law also contains special provisions concerning responsibility for unpaid assessments when ownership changes, including certain situations involving foreclosure.

The important point for buyers and real estate professionals is that an association balance should not be dismissed merely because the association’s lien appears to have been recorded after a mortgage.

Association obligations can involve their own statutory rules and should be properly investigated and addressed as part of the transaction.

Does Florida Have “Super Liens”?

You may encounter the term “super lien” when researching lien priority online.

The term generally refers to a lien that receives special statutory priority over another lien that might otherwise have been superior.

Some states give certain condominium or homeowners’ association assessments a limited form of super-priority over first mortgages.

However, real estate professionals should be cautious about applying generalized articles about “super lien states” to Florida transactions.

Florida has its own detailed statutes governing HOA and condominium liens, first mortgages, assessment liability and foreclosure. Those statutes—not a generalized list of so-called super lien states—should control the analysis of a Florida property.

This is a good example of why title questions should be evaluated under the law of the state where the property is located.

What Happens to Junior Liens in Foreclosure?

Suppose a foreclosure sale produces $500,000.

For illustration only, imagine the claims against the property include:

·      Foreclosure-related costs and amounts entitled to priority

·      $350,000 owed on a senior mortgage

·      $75,000 owed on a junior mortgage

·      Another $125,000 in subordinate claims

There isn’t enough money to satisfy everything.

The foreclosure process determines which interests are entitled to payment and in what order. Once the available proceeds have been exhausted, lower-priority lienholders may not receive full payment from the sale.

Foreclosure can also affect junior liens themselves, depending upon the type of lien, parties joined in the foreclosure and applicable law.

But eliminating a lien against the property does not necessarily mean the underlying debt simply disappears.

That distinction is important.

Can the Former Owner Still Owe Money After Foreclosure?

Potentially.

A foreclosure sale may produce less money than is owed on the underlying debt. The difference is commonly referred to as a deficiency.

Florida law permits deficiency relief in certain mortgage foreclosure situations, although it is subject to statutory requirements and judicial discretion. Florida Statutes §702.06 also contains specific protections affecting the calculation of deficiencies involving owner-occupied residential property.

So losing a property through foreclosure does not automatically guarantee that every financial obligation associated with the property has disappeared.

The particular circumstances, type of debt and applicable law matter.

What Happens If Money Is Left Over?

The opposite situation can also occur.

A foreclosure sale might generate more money than is required to satisfy the foreclosure judgment and other amounts legally entitled to payment.

Those additional funds are generally referred to as surplus funds.

The existence of surplus proceeds does not mean the former owner automatically receives all of the excess immediately. Other parties may have valid claims to the surplus, and Florida law establishes procedures for determining entitlement.

Only after superior claims and applicable expenses are addressed may remaining surplus ultimately be available to the person legally entitled to it.

Again, priority matters.

Can Lienholders Change Their Priority?

Sometimes.

A lienholder may agree to move its interest behind another lien. This is generally accomplished through a subordination agreement.

For example, assume Lender A holds a mortgage with first priority. The owner later wants financing from Lender B.

Ordinarily, the new mortgage might fall behind Lender A’s existing mortgage.

But Lender A could agree to subordinate its interest, allowing Lender B’s mortgage to move ahead of it in priority.

Subordination agreements are particularly important in financing and refinancing transactions because lenders generally care greatly about their position relative to other claims against the property.

Why This Matters Before a Florida Closing

Most buyers aren’t thinking about lien priority when they find the house they want.

And most sellers aren’t thinking about lien law when they put their property on the market.

That’s understandable.

But someone needs to.

A title examination helps identify recorded matters affecting the property so they can be evaluated before ownership changes hands.

Depending upon the transaction, the title and closing process may involve:

·      Searching the public records

·      Identifying mortgages and other liens

·      Obtaining mortgage payoff statements

·      Reviewing judgments

·      Addressing property taxes

·      Reviewing HOA or condominium association matters

·      Identifying construction liens or Notices of Commencement

·      Obtaining releases or satisfactions

·      Resolving title defects

·      Coordinating payments at closing

·      Recording the new deed and other transaction documents

The goal is not merely to transfer a deed.

The goal is to properly address title matters so the buyer can receive the interest in the property contemplated by the transaction.

A $500,000 Home Is More Than a House—It’s a Title

Think of the difference this way.

A buyer may agree to pay $500,000 for a home.

Physically, they’re buying the land and everything attached to it.

Legally, however, they’re acquiring title to real property.

And title comes with history.

Mortgages may have been recorded against it. Contractors may have performed work.

Judgments may affect an owner. Property taxes may be outstanding. An association may claim unpaid assessments.

A beautiful kitchen renovation doesn’t tell you whether the contractor who installed it was paid.

The swimming pool doesn’t tell you whether a construction lien exists.

And the “For Sale” sign doesn’t tell you whether three different creditors claim an interest in the property.

The public records—and a proper title examination—help tell that story.

The Bottom Line

Lien priority determines which claims against real property take precedence over others.

Although “first in time, first in right” is an important general principle, Florida lien priority contains significant statutory exceptions and special rules.

Property taxes receive special priority. Construction liens can derive priority from a Notice of Commencement. Association liens are governed by specific Florida statutes. Mortgages, judgments and other interests may each require their own analysis.

For buyers, sellers and real estate professionals, the practical takeaway is much simpler:

Don’t assume that a lien will disappear when the property is sold—and don’t assume priority merely by looking at which lien appears oldest.

Identifying, evaluating and properly addressing liens before closing is one of the reasons the title process matters.

At Truvera Title & Escrow, we work to identify and address title issues before they become closing-day problems, helping buyers, sellers, real estate professionals and lenders move toward closing with greater clarity and confidence.

Buying, selling, or representing a client in a Florida real estate transaction? Contact Truvera Title & Escrow to learn how we can help with your next closing.

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This article is provided for general educational and informational purposes only and is not intended as legal advice. Lien rights and priorities depend upon the specific facts, documents and applicable law. Parties with questions regarding their legal rights or a specific lien or foreclosure should consult a qualified Florida attorney.

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Citations

For readers interested in reviewing the applicable Florida law, the following statutes address several of the topics discussed in this article:

·       Florida Statutes § 197.122 — Lien of Taxes; ApplicationEstablishes that taxes imposed pursuant to the Florida Constitution and laws of the state constitute a first lien, superior to other liens, against the property on which the taxes are assessed.

·       Florida Statutes § 713.07 — Priority of Construction LiensEstablishes priority rules for various construction liens, including circumstances in which lien priority relates to the recording of a Notice of Commencement.

·       Florida Statutes § 713.13 — Notice of CommencementGoverns Florida's Notice of Commencement and its use in connection with improvements to real property under Florida's Construction Lien Law.

·       Florida Statutes § 720.3085 — Homeowners' Association Assessments and LiensAddresses HOA assessment liens, their effectiveness and priority, including special provisions concerning first mortgages of record.

·       Florida Statutes § 718.116 — Condominium Assessments; Liability; Lien and PriorityGoverns condominium association assessments, liens, priority and certain obligations associated with unpaid assessments when ownership changes.

·       Florida Statutes § 702.06 — Deficiency DecreesAddresses deficiency decrees following mortgage foreclosure, including limitations applicable to certain owner-occupied residential property.

·       Florida Statutes § 45.031 — Judicial Sales ProcedureEstablishes procedures applicable to judicial foreclosure sales and addresses funds remaining after parties entitled to payment from the sale proceeds have been paid.

Official Source: Florida Legislature, The Florida Statutes, Online Sunshine.

Statutes are subject to amendment. Readers should consult the current version of Florida law and qualified legal counsel regarding specific circumstances.