There are many types of liens, and most of them are nonconsensual. A contractual lien, though, is a legal claim against property as a result of a voluntary contract, such as a mortgage or car loan. In real estate terms, the party holding the lien — ie, the lender — has a legal right to the other party’s property — the homeowner’s home — if he or she fails to pay what’s owed.

How contractual liens work

Many liens are placed on property by creditors because the property owner owes them money. It’s a common method of debt collection. A contractual lien is one that both parties have agreed to, rather than one sought by a creditor when that debtor owes the creditor money. In this instance, the person already has fallen behind on his or her payments.

A contractual lien can be built into any type of contract. It is not exclusive to mortgages — there can be a contractual lien on an auto loan, for instance. It’s only legal and binding if both parties have agreed to it, and if the courts can enforce it and make changes to it.

Landlords sometimes use contractual liens to help cover any rent owed by a tenant who hasn’t paid. For example, if a tenant vacates without paying the full rent owed, the landlord may seize the tenant’s left-behind property and sell it to cover the cost of the past-due rent. However, the landlord must give notice of the sale to the tenant and must allow the tenant to reclaim the property in exchange for the owed rent. If the landlord sells the property, he or she must provide the tenant with any money left over from the proceeds after covering the rent.

Potential dangers of a contractual lien

If you fall behind on payments when a contractual lien is in place, it’s a very serious situation. For example, if there’s a contractual lien on your car and you don’t make your payments, it could lead to repossession of your vehicle. In the case of a home, it could potentially even lead to foreclosure.

Having a lien against your property can also make it difficult to do things with that property. For example, if you try to sell a home that has a lien against it, you’ll almost certainly run into issues. Title companies look for things like this to determine whether a sale is legally valid. Most buyers won’t want to buy a home without a clear title — and they likely wouldn’t even be able to, as lenders won’t want to issue a mortgage for a home with a lien.

Other types of liens

There are many kinds of liens. Common types include:

  • Statutory liens: A statutory lien is any lien created by law — meaning the law allows a creditor to place a lien on your property.
  • Tax liens: These are put into place as a result of failure to pay required taxes.
  • Mechanic’s liens: Despite the name, a mechanic’s lien isn’t necessarily related to your car. If you hire a contractor to do work and don’t pay them, they can place this type of lien on whatever type of property they worked on, including a home.
  • Judgment liens: These may be placed as a result of court judgments against you. For example, if you lose a lawsuit, the court may place a lien on your property until you pay the amount owed.

Bottom line

Contractual liens are placed against your property as a result of a contract you’ve agreed to. Make sure to follow the terms of the contract to avoid consequences from the lien, which can be dire — including, in the case of real estate, home foreclosure.