Discharging Old Mortgages

1.1        Overview

At the outset, please note that the term ‘mortgage’ is used also to include the separate creature, a deed of trust, though while different in mechanics, has the same purpose as a mortgage, to create a lien on property pursuant to securing performance of an act. ARS§33-702

But there are real differences between a mortgage and a deed of trust. See Exhibits for the Arizona statutes regulating each. The mortgage requires a civil action, often too lengthy for the taste of lenders, to foreclose the mortgage. After a trustee sale, there is no right of redemption (except as preempted by Federal law, e.g. IRS lien). ARS 33-811(E) Conversely, after a judicial foreclosure, the judgment debtor or his successor in interest has a six-month redemption period per ARS§1282 (B), but only for properties not abandoned and not agricultural land (in which case the redemption period is 30 days) per ARS§1282(A), and each lienor in order of priority has a five-day redemption period thereafter, if the owner does not redeem. And the Arizona anti-deficiency statute ARS§33-729 for mortgages limits its applicability to only purchase money loans for residential properties of 2.5 acres or less, while the parallel statute for trust deeds in the state of Arizona has no such limitation for purchase money loans.

So even though a mortgage or deed of trust typically involves an indebtedness, it may also secure other obligations.

1.2        How to Discharge a Mortgage

A mortgage, which becomes a lien against realty upon its recording, may be disposed of in number of ways. Methods include: discharge by the recording of a satisfaction of the mortgage removing the realty from the lien of the mortgage by recording a release; discharge by court order; and, in some limited cases, discharge by a filing by a third party, such as a title insurer, a court-appointed personal representative, or an affidavit executed by an attorney at law or attorney in fact.

A full repayment of a loan secured by a recorded deed to secure debt will itself operate to cancel the underlying encumbrance. Implicit in ARS§33-707 is that once creditor receives full satisfaction, it will record a sufficient release or satisfaction of mortgage or deed of release and reconveyance of the deed of trust.

An open mortgage or deed of trust of record, however, constitutes an apparent lien or encumbrance against real property. So, to clear marketable title [to be defined below] of the property, the parties to a real estate transaction will demand the actual cancellation and release of the prior mortgage of record.

Therefore, an old mortgage/deed of trust affects both the marketability and insurability of the property’s title. A title insurance company that has actual knowledge that an open-of-record mortgage has been properly paid off will insure title without exception to that mortgage since it can prove that the mortgage does not constitute a lien of the real property and therefore that the mortgage also does not impair the marketability of title of the property.

Although there is a common law distinction between a satisfaction and a release, that is, satisfaction of performance of paying off the debt versus release of the lien encumbering the property, Arizona merges the concepts statutorily. So ARS§33-707 et seq. addresses both satisfactions and releases interchangeably to discharge mortgages and deeds of trust. The requirements essentially are: [1] the property is legally described; [2] the docket and page or recording number of the underlying encumbrance is recited in the recorded document; [3] the document contains language that releases the mortgage or deed of trust and revests in the mortgagor or person who executed the deed of trust, or his legal representatives, all title to the property affected by the mortgage or deed of trust; and [4] the document is duly acknowledged and recorded.

Alternatively, a court order under 33-713 is available to an interested party, so long as the mortgagee meets intrinsic tests of not being a county resident, or is deceased without a state-appointed personal representative for the estate.

2.         Resolving Description Errors, Survey and Boundary Disputes

The intent of the parties in creating the legal description is of prime importance in determining what the words mean. The intent can be determined by the words in the instrument, by words in other instruments from a common grantor, by maps filed by the common grantor, by the actions of the grantor and grantee after the delivery of the deed, by the economic reasonableness of the transaction viewed from both perspectives with all reasonable interpretations of the words in the deed and from current testimony of the parties as to intent, so long as such testimony does not contradict either the actual language used or attempt to give lie to the conduct of the parties after the delivery of the deed.

2.1        Resolving Description Errors.

Description errors arise from a multitude of sources, typically bad deed descriptions; inconsistent deed descriptions; conflicting surveys; corners marked inconsistently or misidentified; etc.

2.1.1     Resolving Repeated Typographical and ClericalErrors. Either the attorney or title company, upon general agreement as to the correct and incorrect legal description property line in question, may correct the clerical error in the legal description and attach the corrected version to the new conveyance deed or loan documents. As a matter of good practice, the attorney should notate the corrected call(s) in the newly prepared legal description so as to provide future title examiners with an explanation for the corrected legal description. If a party conveying the property objects to this approach (particularly for a seller providing a warranty of title), then the grantor should execute two conveyance deeds to the grantee: a warranty deed using the historic legal description and a quitclaim deed using the corrected legal description with an explanation of the correction as suggested above. The attorney for the grantee also should advise their client to obtain title insurance based upon the corrected legal description.

2.1.2     Resolving Discrepancies between Prior Deed and New Survey. It is not uncommon for a newly prepared survey to conflict with the historical legal description of the subject property. The tendency is to rely on the current surveyor’s opinion—and the adequacy of his/her professional liability insurance—but prudence dictates that the real estate attorney understands the discrepancy, hopefully a minor one. Examination of the legal description of the chain of title dating back to the first subdivision of the original parcel, as well as the legal descriptions of abutting properties, should help ascertain the correct legal description. Again, the grantor should execute two conveyance deeds to the grantee: a warranty deed using the historic legal description and a quitclaim deed using the survey legal description. Additionally, the grantee should obtain a title insurance policy that includes a “Same as Survey Endorsement.” Further, a more conclusive remedy would be for the parties and the affected neighboring owner(s) to execute a boundary line agreement based upon the survey legal description. 

2.1.3     Resolving Discovered Gaps. Strips and Gores.Discovering gaps, strips and gores in contiguous parcels requires careful evaluation by the attorneys involved in the transaction to ascertain the intent of the parties in the past and to consider the time that has elapsed since the gaps, strips and gores were first created in the chain of title. In a perfect world, one would ask the parties whose interests remain outstanding in the chain of title (including their heirs and devisees) to simply quitclaim to the new grantee these affected areas. In the author’s experience, rarely are such parties identifiable and, even if located, cooperative. Moreover, the parties to the transaction, including the attorney’s own client, may be leery to engage in such conversations with parties from the past. Generally, the more time that has elapsed since the creation of the gap, strip or gore, and the more remote that possible claimants to the disputed area will come forward, the greater likelihood that marketable title can be obtained through the opinion of the attorney certifying title and the recommended use of a Contiguity Endorsement to be issued with the underlying title insurance policy. As with the above examples, and even with the availability of a Contiguity Endorsement, the grantor should expect to provide two conveyance deeds to the grantee: a warranty deed using the historic legal descriptions of the parcels and a quitclaim deed using a contiguous legal description of the intended tract of land without such gaps, strips and gores (often from a survey).

2.2        Resolving Survey Disputes

Many of the legal description and boundary disputes of property, described above and below, emanate from or may be resolved by a correct survey. The real estate attorney should understand both the components that a survey should include, as well as the parcel of real estate that it is legally describing. The issues include the purpose of the survey, to whom the survey is certified, which parcel[s] are being described, reliability of monuments, etc. That said, a lawyer should never attempt to be his own expert, the risk of conflict is too great and the lawyer is by definition incompetent to give an expert opinion in any matter in which he represents a party.

2.3        Resolving Boundary Disputes

A lawyer is engaged to protect and enforce a client’s rights in a boundary line dispute. Responsibilities include:

  • making a thorough and diligent search of the public records made for all matters that affect the boundary line(s) in question.
  • locating any existing surveys of the premises in question and all adjoining parcels of land, and upon consultation with his client obtaining a current survey correctly depicting the boundary lines of his client’s property from a surveyor capable of giving expert testimony in any litigation over the boundary line.
  • obtaining an expert determination of the respective rights of the parties in dispute from a reliable independent expert witness.

In any boundary line dispute, there is a problem of conflicting claims of title to a portion of the client’s real property. These claims can range from a dispute over a three-inch strip on the outside of a historic fence line, to improvements built over the property line (new construction), to improvements built beyond the property line (seventy-year old building), to the absence of frontage on a public right of way. The dispute may involve negligible monetary impact to the value on the property, but then the discrepancy may not be “minor” in nature, e.g., it materially affects the existing or intended use of the property by the grantee. If a negotiated solution is not possible, be prepared to litigate the boundary line in question in a quiet title action. Without agreement of the adjoining parcel owners, a title insurance company may not be willing to insure over the discrepancy, for example, where the neighboring owner may have installed a fence, landscaping or other improvements in the disputed area based upon their title to the property (as opposed to a blatant act of trespass or encroachment), all of which would be taken by the title insurer as an exception to the title insurance policy.

The preferred approach to efficiently, timely and effectively resolve the cloud on title, therefore, would be for the neighboring owners to execute a mutually agreeable and recorded boundary line agreement.

3.         Clearing Judgment Liens, Tax Liens, Mechanics’ Liens and Other Liens

A very common problem in land transactions, whether with conveyances or in real estate lending, is the discovery of tax liens, mechanic’s liens, judgment liens and other types of liens. Liens are claims against a specific real property. In each instance, the attorney for the party relying on providing or receiving marketable title must ascertain first whether or not the specific lien secures an obligation which remains unpaid. Then, once confirming that payment previously or concurrently has been made or, by operation of state law the lien has expired, the attorney will work with the parties to remove the lien of record or otherwise obtain title insurance that insures the property interest without exception for the subject lien.

Provided below are the most common liens that a real estate transaction attorney will encounter in their daily practice — judgment liens, tax liens, mechanics’ liens,  and property owner association liens. ARS Title 33 contains a list of liens recognized by Arizona.

3.1.        Clearing Judgment Liens.

Generally, when a party prevails in a civil matter and a monetary award is granted by the court, the court issues an abstract of judgment for recording a judgment lien on the losing party’s property. A judgment lien in Arizona will remain attached to the debtor’s property (even if the property changes hands), except for homestead property if it is the debtor’s primary residence, for five years. ARS§33-964. The lien is automatic upon judgment, except for a judgment from small claims court.  A simple affidavit of renewal can be completed and docketed the county recorder’s office to extend the judgment lien for another 5 years. ARS§12-1613. Except for judgment liens for child support and spousal support, a judgment lien becomes dormant after five years. Under ARS§25-516, however, a lien for child support trumped by previously filed security agreements [deed of trust, mortgages, etc.] created by the property owner and previously recorded or filed. The holder of a debt secured by real property may record a release of the lien on the real property which secures the debt, but immediately on the payment or satisfaction of the judgment, shall be discharged of record by the judgment creditor or the judgment creditor’s attorney by recording a satisfaction of judgment with the county recorder of the county in which the judgment is recorded. The judgment creditor or the judgment creditor’s attorney shall enter a notation of satisfaction on the docket of the clerk of the superior court of each county in which the judgment has been entered or docketed, and in a like manner enter a notation of satisfaction on the docket of the clerk of the United States district court. ARS§33-964(c)

A demand for the payoff amount is obtained from the creditor, which has 14 days to respond or else incur liability for damages caused by delay to the person or agent making the demand, plus $500 whether or not actual damages are sustained. ARS§33-715

Moreover, care should be taken to ensure that a bona fide purchaser or lender for a particular parcel of property has received no notice of the judgment prior to the conveyance of title and prior to the recording of the judgment lien. In such an event, the bona fide purchaser and lender may become subject to the judgment lien even though the lien was not first in priority.

3.2         Clearing Tax Liens 

3.2.1      Clearing Federal Tax Liens. Generally, federal tax liens must be placed on the property within ten (10) years or else it becomes unenforceable by operation of law. I.R.C at 26 USC §6502.  The period runs from when the tax is assessed and ends either 1) when the tax is fully paid, or 2) “becomes unenforceable by operation of law”, otherwise known as the “Tax Lien Statute of Limitations.” Internal Revenue Code (I.R.C) at 26 USC §6322. Most federal tax liens are addressed in the Federal Tax Lien Act of 1966 as well as 26 U.S.C.A. § 6321 et. seq. Such liens may arise for unpaid income taxes, estate taxes, gift taxes or any other tax due and payable to the United States government. In general, federal tax liens that encumber real property will be found by the attorney or title examiner in the county recorder’s office.

As a general proposition, a federal tax lien is governed by the common law concept of “first in time is first of right”. See United States v. New Britain, 347 U.S. (1954). In other words, federal tax liens do not magically gain priority over all prior liens. Moreover, lender security deeds will be afforded priority over the federal tax lien provided that the loan was made at least 46 days prior to the date of recording of the federal tax lien and the lender had no knowledge of the federal tax lien, which rule is particularly helpful in jurisdictions with a long gap period in the property records. See 26 U.S.C.A. § 6323(b)(2). The same general rule applies to subsequent lender advances made under a construction loan. See 26 U.S.C.A. § 6323(b)(3).

With the exception of estate tax liens (addressed below), most all other federal tax liens will become dormant 10 years after the tax assessment becomes due unless the federal government forecloses upon its lien. See 26 U.S.C.A. § 6323, and 26 U.S.C.A. § 6502 (which provides a ten year statute of limitations to enforce the tax assessment). As above, the grantee to a real property interest should ensure that the federal tax lien has been paid or bonded prior to closing. Typically, the Internal Revenue Service will issue a “Release of the Notice of Federal Tax Lien” within 30 days of receiving payment for the full amount of the unpaid tax, interest, penalties and the costs to file the release in the general execution docket. 26 U.S.C. §§ 6325(a). The process to repay the federal tax lien is standardized and one simply follows instructions found at as needed to obtain a payoff amount and instructions on where to send payment.

3.2.2      Clearing Arizona Tax Liens.  
A The statute of limitations to file a tax lien is within 6 years after the amount of the tax determined to be due becomes final. Once filed, the lien stays until the debt is paid. ARS§42-17153(2). Is not satisfied or removed until one of the following occurs:

(a) The taxes, penalties, charges and interest are paid.

(b) Title to the property has finally vested in a purchaser under a tax sale.

(c) A certificate of removal and abatement has been issued pursuant to section 42-18353.

Further, per ARS§42-17153(3), a tax lien is prior and superior to all other liens and encumbrances on the property, except (a) state liens or encumbrances, and (b) other tax liens.

Under ARS§42-1153, the Arizona Department of Revenue may on its own accord release or subordinate a lien. Under ARS§42-1153(E), a certificate by the department to the effect that any property has been released from the lien or that the lien has been subordinated to other liens is conclusive evidence that the property has been released or that the lien has been subordinated as provided in the certificate.

3.2.3      Clearing Arizona County Tax Liens

ARS§42-15001 et seq. regulates county ad valorem property taxes in Arizona. Under ARS§42-18055, the county treasurer must record the date of payment and credit the payment to the person or property that is liable for the tax.

A real estate attorney may determine that the property under examination may be entitled to a tax exemption, and therefore is not subject to a tax lien. Arizona Revised Statutes 42-11111 provides in part, “the property of widows, widowers and disabled persons who are residents of this state is exempt from taxation to the extent allowed by article IX, sections 2, 2.1, 2.2 and 2.3, Constitution of Arizona, and subject to the conditions and limitations prescribed by this section.” Also, the state’s Senior Homeownership Protection program is designed to freeze the full cash value of a primary residence owned by seniors based on income and age. More information is available from the County Assessor websites.

ARS§42-18101 et seq. regulates the vibrant investment business of tax lien certificates, whereby investors buy county tax lien certificates. Arizona rate of return is 16% on Tax Lien Certificates.  Property owners have a three-year period to repay the delinquent taxes and penalties for a certificate bought at a tax lien sale, which occurs annually in February. Any time after the redemption period, but not exceeding 10 years, the investor may initiate foreclosure with the superior court in the county in which the property is located.

3.3         Clearing Mechanic’s and Materialman’s Liens

Mechanic’s and materialman’s liens are creatures of  state law, per ARS Title 33, Article 6, and there exists a large body of case law for which the uninitiated should be wary. In summary, contractors, subcontractors, suppliers, and even professionals such as engineers, architects, surveyors and others who provide labor and materials towards the improvement of real property will be entitled under state law to file a statutory lien against the real property for non-payment of their services. While there are many technical elements to the statute and as set forth in the substantial body of case law that has followed, for the real estate transactional attorney in a pending conveyance or loan financing matter, there are several restrictions on a contractor’s ability to place a lien on the property.

To start the process of obtaining a lien against a project or even to obtain a claim to a bond, the subcontractor or supplier must issue a Preliminary Twenty-Day Notice (sometimes referred to as a “pre-lien”). ARS§33-992  The Preliminary Twenty-Day Notice must be sent to the owner, the lender (if any), the general contractor, and if the issuer is a supplier, to the subcontractor.  The Preliminary Twenty-Day Notice lists the amount that the subcontractor or supplier anticipates the work or supplies will cost for a particular job.The Preliminary Twenty-Day Notice is effective to protect payment of any labor or materials that were used within twenty day prior to the date of the Preliminary Twenty-Day Notice.  A Preliminary Twenty-Day Notice is not a lien.  It is not recorded with the recorder’s office where the project is located and is not subject to any liability for its issuance.

The contractor must have been duly licensed when providing services. Material suppliers and equipment rental companies, however, do not need a contractor’s license.

If suit is filed in the name of an entity, such as an LLC or corporation, the contractor’s or materialman’s legal entity must be in good standing with the Arizona Corporation Commission in order to file suit.

If the subcontractor and supplier have been paid on a job, there is no reason to perfect a lien as the lien amount has already been paid.  If the subcontractor and supplier have not been paid, they must file a “Notice and Claim of Lien” with the appropriate county recorder’s office within 120 days after completion of the project or if a Notice of Completion of the project has been recorded, the supplier or subcontractor only has 60 days after recordation of the Notice of Completion to record a Notice and Claim of Lien.  ARS§33-997 Once a Notice and Claim of Lien has been properly recorded and served, the lienholder has only six months in which to enforce his, her or its lien rights through foreclosure.  ARS§33-998 There are many definitions of “completion” for a project so at the time an account becomes past due and there are potentially lien or bond rights, it is prudent to contact an attorney to determine when a lien or bond claim must be asserted so that those rights are not lost. If the contractor misses this deadline, the lien automatically expires and should not appear as an encumbrance against title. All mechanics’ liens have equal priority with one another, regardless of the date they are recorded, so foreclosing on the lien is time-sensitive.

3.4         Clearing Other Liens

Lawyering skills are essential in removing liens as clouds on title, for, contrary to the typical expectations of the lay public, the junior liens are not removed once the senior lien is paid off. Liens remain until they are released. And liens on real estate can be released, assuming the judgment creditor or taxing authority agree, without payment in full. More time and effort than ever before is spent negotiating with junior lien holders because the property is not worth enough money to pay off lien holders in full.

In any event, the attorney should contact the lienholder shown in the public lien records, confirm the applicable payment amount (including interest), and make the applicable payment (and retain evidence of such payment). Thereafter, the lienholder is required by law to cancel the lien and recording the release of the cancelled lien with the clerk of the superior court with whom the lien was originally filed. See, e.g., ARS§42-18152. As a practical matter, the attorney should coordinate the lien release as between the two parties and not rely upon the lienor to do so.

There are significant penalties for recording an invalid claim or lien against property in Arizona. ARS§33-420. For ascertaining certain penalties, the test is subjective, but in other the more relaxed objective test of the reasonable man is applied. A document purporting to create an interest in, or a lien or encumbrance against, real property not authorized by statute, judgment or other specific legal authority is presumed to be groundless and invalid. ARS§33-420 (D)

4. Foreclosure Considerations

Title 33 of Arizona Revised Statutes, Chapter 6, Article 2 contains statutes regulating foreclosures, including several alternative methods of satisfying mortgages of record.

The real estate attorney cannot assume that a foreclosure is going to eliminate all the title problems that exist on a property. Years ago, there was a general assumption that a “foreclosed title” was a pretty clean title; that is no longer the case. Prior unreleased deeds of trust, unpaid taxes, sewer liens, subdivision liens, IRS liens, and other problems, crop up frequently.

It is likely that many lawyers in these times will consult with a client who wants to buy a property at foreclosure or a foreclosed property from a bank or servicing company. There are a few important concerns of which to make certain the client is aware. First, a title should be run on the property to determine if any liens or matters exist that would not be extinguished by the sale. Sewer lines, IRS liens, (although technically, a junior IRS lien would be extinguished assuming proper notice was given, 26 USC 7425, the IRS nonetheless has 120 days from the date of sale to redeem the property from sale.) c. With regard to purchasing a previously foreclosed property, keep in mind that the bank/seller will want to convey title by a special warranty deed or, even more commonly, by quitclaim deed. Check with the title insurer if there is less title policy coverage.

Arizona has a mishmash of statutes which generally affirm the common law theory concerning liens which commonly is known as “first in time is first of right.” But there are exceptions, such as child support, HOA assessments, etc. Accordingly, with respect to a foreclosure of a secured real estate interest, such as a deed to secure debt, the party pursuing foreclosure should examine title and evaluate which property interests may be superior to their own and which are subordinate. In most instances, both federal and state ad valorem tax liens will provide priority issues for the real estate attorney regardless of the date each was recorded.

5. Other Potential Title Defects

5.1          What Constitutes a Title Defect?

Reasonable minds can differ. Title insurers may have a less exacting definition for purposes of insuring title than the real estate attorney. The legal test is ‘marketable title.’

5.2        Due Diligence Beforehand to Avoid Curing Title Defects Later

As counsel for the property owner or tenant during acquisition, you may offer to assist working with the seller’s/landlord’s counsel or the title company to cure title. Moreover, while counsel to the buyer/tenant, you are in the best position then to avoid having to cure title defects which later become apparent but which earlier arose. In addition, having advised the client to obtaining proper title insurance, while not averting title defects, balm the resulting damages resulting from those title defects.

While the title insurance commitment and title insurance policy forms are “standardized” by the ALTA, there are still significant differences in how title commitment forms are formatted and how discovered title defects are presented.

The real estate attorney is well-advised to review with the title office of the grantee’s title insurer what title endorsements should and may be obtained

5.3        Quiet Title Actions

When there are conflicting claims to real property or to an interest in real property (such as an easement) a lawsuit can be brought to obtain a judicial declaration of the ownership and interests in the property. In Arizona, this is known as a quiet title action. A quiet tile action is a lawsuit. Attorney’s fees can be awarded to the person seeking to quiet title, pursuant to an Arizona statute, if the defendant is given a proper opportunity to acknowledge that the defendant has no interest in the property and if the defendant fails to do so within a specific time period.

The contents of this website are intended to convey general information only and not to provide legal, tax or financial advice or opinions. Information contained on this website should not be relied upon and we disclaim all liability in respect to actions taken or not taken based on any or all of the contents of this site to the fullest extent permitted by law.  An attorney should be contacted for advice on specific legal issues.