Outstanding Judgments – Their Effect on Real Estate Transactions

lock-300x300In the course of an ordinary real estate transaction, our firm orders a title report on the property being sold.  Contained in the title report is a judgment and lien search, which shows any outstanding judgments against the seller and liens against the property.  Why is this important?  In New York State, a money judgment, when filed in the Supreme Court of a county in which a debtor owns real property, become a lien on property for a period of ten (10) years.  Furthermore, a judgment creditor may file a motion at the end of the ten year period to extend the lien for an additional ten years.  After twenty years, the judgment is no longer a lien on the property.

Therefore, when a seller of real property has a recorded judgment less than ten years old, it becomes an issue which must be cleared prior to closing.  The reason for this is that the contract most likely provides that the property will be conveyed free of judgments and liens, and, in addition, a mortgage lender will not approve a loan to close without resolution of an outstanding judgment or lien.  If the judgment remains as a lien on the property, the new owner may find himself subject to a foreclosure proceeding against his newly-purchased property, even though the judgment was not incurred by him.

Since most standard Contracts of Sale in New York contain a clause that the property must be conveyed free of all outstanding liens and judgments, it is the seller’s responsibility to ensure that there are no judgments against the property.  Failure to do so would give the potential buyer grounds to have the contract cancelled and receive a refund of their downpayment.  Obviously a seller does not want that to happen.  What does a seller do when there are outstanding judgments of record?

The first step an experienced attorney would take in this situation is to ensure that the judgment is actually against the seller.  As judgments are entered by name, it is possible that a seller with a fairly common name may have a judgment appear on a lien search, when it is not against him.  Some research is required to determine the true judgment debtor.  One way is to check the underlying action from which the judgment came.  If it is for a different judgment debtor with the same (or similar) name as the seller, the seller can give an affidavit stating that she is not the judgment debtor for that lien.

Another possibility is when the seller filed bankruptcy after the judgment was entered, but prior to the proposed sale.  In general, a discharge in bankruptcy would remove the lien, as the judgment is expunged in the bankruptcy proceeding.  Bankruptcy counsel may have to be consulted to determine whether the judgment was discharged and is no longer a lien on the property.

Finally, if the judgment is confirmed as against the seller, and the seller never filed bankruptcy, the seller’s counsel may have to negotiate with the attorneys for the judgment holder to satisfy the judgment in exchange for payment at closing.  As the seller is usually receiving a large sum at the closing, a small judgment may be paid from the proceeds, in exchange for a release of lien given by the judgment creditor.  In many situations, the judgment creditor may accept less than the full amount owned, especially if the debt has been unpaid for many years.  The judgment creditor may view this as “found money” and settle for a percentage of the judgment.

Our firm handles all real estate transactions, and is experienced in ensuring that any issues with judgments and liens are professionally handled, so as not to hinder the transaction.