Lien theory

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 .

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 .

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 .

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 .

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 .

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 .

Key terms

Terms related to the lien theory:

• 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

Examples of Lien theory

• A common example of lien theory is when a bank holds a mortgage on a home as collateral for a loan. In this case, the bank has a claim on the property and if the borrower defaults on the loan, the bank can foreclose on the home and take ownership of it.
• Another example of lien theory is when an auto repair shop holds a lien on a car. This is often the case when a customer pays for the repairs over time. The repair shop will hold a lien on the car until the customer has paid off the debt.
• In some cases, the government may also use lien theory. For example, if a taxpayer does not pay their taxes, the government may place a lien on their property. This gives the government the right to collect the unpaid taxes through the sale of the property.
• In some cases, a creditor may also use lien theory. For example, if a debtor defaults on a loan, the creditor may place a lien on their property. This gives the creditor the right to collect the unpaid debt through the sale of the property.

Advantages of Lien theory

A lien theory of mortgage provides several advantages, including:

• Security: It creates security for the creditor in case the borrower defaults on the loan. It gives the creditor the right to seize the mortgaged property to recoup the debt.
• Flexibility: It allows the mortgagor to remain in possession of the property while the creditor has the right to the proceeds of any sale of the property.
• Leverage: It allows the creditor to use the property as leverage to encourage the borrower to comply with the terms of the loan agreement.
• Protection: It provides protection to the borrower in the event of a dispute with the creditor, as it allows the borrower to retain ownership of the property until the debt is paid in full.

Limitations of Lien theory

The lien theory has several limitations when interpreting a mortgage, including:

• The lien theory does not provide a comprehensive and consistent framework for dealing with mortgages. It is limited in its ability to address issues such as foreclosure and bankruptcy.
• The lien theory does not allow for the creation of a security interest in movable property.
• The lien theory does not provide a clear and consistent definition of what constitutes a valid mortgage.
• The lien theory does not provide a clear and consistent framework for dealing with priority disputes.
• The lien theory does not provide a clear and consistent framework for dealing with modification and assignments of mortgages.
• The lien theory does not provide a clear and consistent framework for dealing with the enforcement of mortgages.
• The lien theory does not provide a clear and consistent framework for dealing with disputes between lenders and borrowers.

Other approaches related to Lien theory

• A lien theory is also related to the common law theory of mortgages. This legal theory states that a mortgage is a conveyance of an interest in land to a lender as security for a loan. The lender holds a lien on the property until the loan is repaid.
• The title theory is another approach related to lien theory. This theory regards the mortgage as a conveyance of title to the lender, who holds the title as security until the loan is repaid.
• The deed of trust theory is a third approach related to lien theory. This theory states that the mortgagee holds legal title to the property, but the mortgagor retains equitable title to the property. The deed of trust is the instrument that transfers legal title from the mortgagor to the mortgagee.

In summary, the lien theory is related to the common law theory, title theory, and deed of trust theory. All of these theories are used to interpret the nature of a mortgage and the rights of the mortgagor and mortgagee.

Footnotes

Lien theory — recommended articles

Mortgage deed — Bankers lien — Absolute assignment — Absolute title — Clear title — Vesting order — Equitable lien — Fixed and floating charge — Assignment of insurance

References

• Barros B., Hemingway A.(2015)., Property Law Wolters Kluwer
• Cortesi G.(2003)., Mastering Real Estate Principles Dearborn Real Estate
• Haupt K., Rockwell D.(2016)., Real Estate Principles Rockwell Publishing Company
• Haupt K., Rockwell D.(2006)., Principles of California Real Estate Rockwell Publishing Company
• Schmudde D., (2004)., A Practical Guide to Mortgages and Lien Ali-aba

Author: Piotr Łabuz