Lien theory

Lien theory
See also

Lien theory is one of the legal theories employed to interpret mortgage, also known as the equitable theory. A mortgage is defined as a pledge of collateral. A lien is a legal claim of the mortgagee to the property of mortgagor, which constitutes security for a debt or obligation [1].

The theory holds that creation of a lien over a property takes place, rather than a conveyance of title. Thus, the mortgagor is entitled to possession and holds legal and equitable title. However, the real estate is not to be used in a way that might reduce its material value. The obligee may foreclose on a lien if the obligor defaults [2].

The lien theory method entails a judicial foreclosure process. Therefore, it is the lender that sues the borrower for foreclosure and a judge decides whether to issue it or not. Once it is issued, the ownership rights are placed for sale in a foreclosure auction [3].

Lien theory vs Title theory

The lien theory and the title theory are common approaches to loans in the real estate property law of the United States. These two theories differ significantly. Mortgage in the lien theory means that a lien is granted to the person who provides the money which is expected to be paid off. On the other hand, the title theory requires a conveyance of the title to the lender to secure a loan [4].

In the title theory states, a unilateral mortgage by one partner entails a severance of the joint tenancy. It is far less likely that a unilateral mortgage would sever a joint tenancy in the lien theory states [5].

What is more, the lender/beneficiary in the title states has some possessory rights during the term of mortgage. For instance, the right to rents generated by the real estate. But, in the lien theory jurisdiction, the mortgagor holds the ownership of the property and thus would be entitled to rents [6].

Key terms

Terms related to the lien theory[7][8]:

  • Hypothecation- the idea and process of pledging a real property as collateral to secure a loan. The borrower hypothecates the property
  • Mortgagor- a borrower/ obligor, a person who borrows money from a bank or a similar organization
  • Mortgagee- a lender/ obligee, a person or an organization that lends money
  • Mortgage- an agreement between mortgagor and mortgagee

Footnotes

  1. Barros B., Hemingway A. (2015)., Property Law, pp. 6 & 7
  2. Barros B., Hemingway A. (2015)., Property Law pp. 6 & 7
  3. Cortesi G. (2003)., Mastering Real Estate Principles, pp. 342-245,
  4. Barros B., Hemingway A. (2015)., Property Law, pp. 515,
  5. Barros B., Hemingway A. (2015)., Property Law, pp. 515,
  6. Barros B., Hemingway A. (2015)., Property Law, pp. 515 & 516,
  7. Haupt K., Rockwell D. (2006).,Principles of California Real Estate, pp. 205
  8. Haupt K., Rockwell D. (2016)., Real Estate Principles, pp. 271, 565 - 567

References

Author: Piotr Łabuz