Quick Answer
Lien priority determines the relative order of competing claims against property. Priority affects which lienholder gets paid first from sale proceeds and whether certain liens survive foreclosure or other legal proceedings.
When multiple parties have claims against a property, the question of priority becomes critical. Understanding lien priority helps you understand how proceeds will be distributed and which creditors have the strongest positions.
Example
A property is worth $400,000. Total claims against the property amount to $500,000. The property is sold for $400,000. Who gets paid, and how much? The answer depends entirely on lien priority. The highest-priority liens are paid first, and lower-priority liens may receive nothing.
Potential Priority Factors
Many factors can affect priority:
- Recording date: The traditional "first in time, first in right" rule, subject to many exceptions
- Lien type: Certain liens (property taxes, some HOA assessments) have statutory priority
- Perfection: Whether the lien has been properly perfected under applicable law
- State statutes: State laws may give certain liens priority regardless of recording date
- Federal law: Federal tax liens follow federal priority rules
- Subordination: A senior lienholder may agree to lower priority through a subordination agreement
- Purchase-money status: Purchase-money security interests may have special priority
- Foreclosure: Judicial or non-judicial foreclosure can affect the priority of remaining liens
- Bankruptcy: Bankruptcy can alter priority and may affect enforcement of certain liens
CAN THIS STOP CLOSING?
Lien priority itself does not stop a closing, but the consequences of priority can. If a low-priority lienholder discovers they will not be paid because higher-priority liens consume all proceeds, they may object to the sale or refuse to release their lien.
FAQs
Can lien priority be changed?
Yes, through subordination agreements. If a senior lienholder agrees to become junior to a later lien, priority can be changed. This is common in refinancing situations.
Does foreclosure extinguish all lower-priority liens?
Generally yes, a properly conducted foreclosure can extinguish junior liens that are properly noticed and included in the foreclosure action. However, certain liens (such as property taxes) may survive foreclosure depending on applicable law.
How do I know what priority my lien has?
The title commitment shows the liens and encumbrances affecting the property and generally reflects their priority order. For specific questions about lien priority in your transaction, discuss with your title company and consult legal counsel. Contact 1st Option Title for assistance.