Lenders Beware: Be Sure to Foreclose Subordinate Liens and Encumbrances
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Lenders must pay particular attention to subordinate liens and encumbrances prior to initiating any foreclosure action. Lenders can discover whether subordinate liens and encumbrances exist on a property by performing a title examination prior to initiating foreclosure. Failure to discover subordinate liens and encumbrances will cause lenders to mistakenly exclude indispensable parties to the foreclosure proceeding, which can cause headaches for the lender after foreclosure.
When bringing a foreclosure action, perhaps the most important part of the case is ensuring the appropriate parties are joined in the lawsuit. Florida law is clear that the foreclosure of a senior mortgage extinguishes the liens of any subordinate liens listed in the final judgment. Pinellas County v. Clearwater Fed. Sav. & Loan Ass’n, 214 So.2d 525, 527 (Fla. 2d DCA 1968).
Conversely, the Florida Supreme Court has determined, where a senior mortgage has been foreclosed, and a junior lienholder was not made a party, the decree is binding as to those who were joined as parties, but does not affect the rights of the junior mortgagee who was omitted. Quinn Plumbing Co. v. New Miami Shores Corp., 129 So. 690 (Fla. 1930). Thus, when a party holding a subordinate lien is omitted as a party to the foreclosure of a senior mortgage, the junior lienholder is unaffected by the judgment. Abdoney v. York, 903 So. 2d 981, 983 (Fla. 2d DCA 2005).
Lenders who fail to join junior lienholders during their foreclosure proceeding will acquire the property subject to the junior lien. Any junior lienholders not joined as a party to the senior lienholder’s foreclosure proceeding will have their rights unaffected by the foreclosure, including the right to initiate their own foreclosure if the junior lien falls into default. The lender will be responsible for making payments required by the junior lien and will be unable to convey clean title until the junior lien is extinguished. The presence of a junior lien on property acquired through foreclosure will not only make the property harder to convey, but also require the lender to comply with the terms of the junior lean until the property is sold.
Lenders must also ensure that they join any person who holds inferior encumbrances over the property as a party in a foreclosure proceeding, or they’ll risk having that person’s rights over the property remain unaffected. Florida law requires joinder of any person who holds an after-acquired easement or encumbrance over the property as a party in a foreclosure proceeding in order to extinguish their interest. In Consol. Util. Services, Inc. v. Indian Lake Properties, Inc., the court ruled that an easement, which was granted after the mortgage was recorded, was not extinguished because the easement holder was not named a party to the original foreclosure proceeding. Consol. Util. Services, Inc. v. Indian Lake Properties, Inc., 217 So. 2d 137, 138-141 (Fla. 2d DCA 1968).
If lenders want to ensure a clean foreclosure proceeding and marketable title, they must join junior lien holders and persons holding encumbrances over the collateral as parties to the litigation. A proper title search before commencing foreclosure should uncover the presence of these necessary parties and help lenders avoid headaches after the foreclosure proceeding is completed.