The $445k Lien That They Knew Nothing About

Rod Herman Real Estate , Tales from the Trenches Leave a Comment

Many years ago, a past client’s parent built a commercial property but there wasn’t room on the parcel to build a parking lot. The city’s building requirements called for on-site parking. The actual number of parking places was determined by the size of the building. Since it wasn’t feasible to provide on-site parking, the city worked out an arrangement with the property owner to pay an in-lieu fee of $2,000 for each required parking space. It came to $28,000 and was to be paid before building could commence.

The building was completed about two years later, the owner passed away many years after that and several years ago the owners’ sons asked us to represent them in the sale of that property.

So the first order of business was to obtain a title report. And that’s when we saw the $28,000 lien. Our client’s son, who had taken over management of the property when his dad passed away, had no knowledge of anything that transpired when the building was constructed. He said he was pretty certain his dad would have paid the $28,000 up front, since it was supposed to have been paid prior to receiving a building permit.

We checked with the city but they had no record of it ever being paid. In fact, until we called, they didn’t really seem to even be aware of that outstanding lien. In any event, since it was on the title report, it would have to be cleared. So unless our client could provide proof that his dad had indeed paid the $28,000 in-lieu fee, the city would require the lien to be paid off through escrow.

But that’s when things went sideways.

The title company requested the city to send them a loan payoff showing the amount due to retire that lien and the city sent over a payoff statement calling for $445,000. You read that right…that little $28,000 in-lieu fee, with interest, had grown to a whopping $445,000!

To say everyone was shocked is a huge understatement. The city maintained that the written agreement between our client’s dad and the city called for compound interest, which would continue to accrue until the lien was paid off.

The city wouldn’t budge off that number and the seller was ready to hire an attorney to contest it. But before he proceeded in that regard, we asked the city to provide us with a copy of the original agreement for the in-lieu fee.

I read the agreement carefully and did not see any provisions calling for compound interest. So I re-read it several more times and still could not find any such provision. What’s more, I had an inkling that the amount the city was calling might even exceed California’s Usury Law limits.

My conclusion was that the city had interpreted one of the words in the agreement incorrectly and thought it meant compound interest, when in fact it meant something else. But that was understandable, since the city isn’t in the business of drafting loan documents. It was easy to see how they might have misinterpreted the meaning of that term.

I contacted the city and explained what that term really meant and requested that they revise their payoff statement. The in-lieu agreement clearly called for interest to be paid on the unpaid balance, but it should have been Simple not Compound interest.

A few days later the city sent our title company an updated payoff statement. And lo and behold the amount due had dropped from $445,000 to a little over $100,000. Now, $100k is still a big jolt compared to the $28,000 that was originally owed 30 years earlier. But since it was never paid as agreed, there was no getting around the accrued interest. But $100,000 is certainly a heck of a lot better than $445,000!

Fortunately, we were able to resolve all of this up-front before putting our client’s property on the market. Otherwise, our client would have been in for the shock of his life had the original $445,000 payoff showed up when he was signing his closing papers.

This is yet another reason why we always preach about the importance of looking for title problems up-front and waiting to put a property on the market until any outstanding title issues have been resolved.

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Rod Herman