This short memorandum will send any competent real estate lawyer into fits of hysteria. Lien law is some of the most complex real estate law one can encounter. But ordinary people bang into these kinds of problems every day and especially so when parties are separated from one another.
There are three ways to own property with another individual in Pennsylvania. Be careful at the outset, because you can also own property as a limited liability company (LLC) a partnership (either general or limited) or as a shareholder in a corporation. But where individuals hold property with others they usually do so in three ways:
Tenancy in common
Joint Tenancy with right of survivorship
Tenancy by the entireties
A tenancy in common means that our interests are completely divisible. If you and I own a bank account or a piece of real estate as tenants in common and one of my creditors gets a judgment against me, that creditor can seize my interest in the asset through proceedings to enforce the judgment. If we have a bank account with $1000 in it and we own it as tenants in common 80% me and 20% you, a judgment for taxes, child support, or any other kind of debt allows the creditor to seize my 80% interest to satisfy the judgment against me. He cannot get at your 20% interest but if we have a house together or we own a race car, the creditor can seize the asset, sell it to satisfy his lien and turn over to you 20% of the proceeds. Goodbye race car.
A joint tenancy is an estate planning device. We own the property together but if either one of us dies, the survivor gets the whole of the asset. We own the $100,000 race car we share. I die. You get it even though I put up $80,000 and you $20,000. Most tenants in common and joint tenants hold equal shares but they can make the percentages whatever they want. It is also not a device limited to two owners. A hundred people can own a joint interest in property if they want. Usually, that does not occur.
Now suppose the two of us own a race car and my ex-wife gets a judgment against me for failing to pay child support. She can take her judgment and use it so sever the joint tenancy just as she would with a tenancy in common. It just requires the extra step of breaking apart the joint tenancy. In the end, our race car is sold and she will get her judgment from the 80% of the proceeds that are mine.
Tenancy by the entireties is a joint tenancy between a husband and wife. No one else can qualify for this status. Unlike joint tenancy, the only person or entity that can break apart a tenancy by the entireties and sell the asset it owns is someone who has a judgment again both my wife and me. Let us say my current wife and I own the race car. I don’t pay my child support or my taxes. My ex-wife can’t get a judgment against my current wife. She does not owe child support. I do. So she might have a judgment for a million dollars. The law says she can’t get to our race car (new wife and me).
But suppose my current wife and I don’t pay our taxes. We file jointly but we just don’t send the money in. Now the tax authority has a claim against both of us because it is a joint obligation we both owe. They can get a judgment for what is owed and execute on the race car, because the debt, like the car is held as tenant by the entireties. If we filed our taxes separately, the answer is quite different. We don’t owe the taxes joint then, we owe them separately.
Husband and wife own a house. Usually they will have title as tenant by the entireties. Husband leaves wife and runs off to Las Vegas. He signs $100,000 worth of gambling markers and promptly loses all the money. Can the casino come after the house? No. That’s husband’s debt; Not joint debt even though the parties are not legally separated. Suppose wife get s angry at Mr. Gambler and buys a $25,000 ring on her American Express card. Can Amex get to the house? Again, no, unless the credit card is a joint card. Suppose the Amex card is a privilege card; meaning that Husband is the card holder and Wife is an authorized user. Curiously, no. Wife is not legally obligated to American Express unless she signed the agreement with American Express as well. So husband and wife could be back in the house; he with a gambling hangover and she with a beautiful new ring. But neither the casino nor the card issuer can force the sale of the home to get the debt paid.
A question we commonly are asked is whether one party can put the house in jeopardy by taking out a mortgage. The short answer is that where a home is owned as tenants by the entireties, it takes two to make the tango. No bank will issue a mortgage (which is to say lend money) on an entireties house unless BOTH parties sign the mortgage. So what if one party fraudulently signs the other parties name without his or her permission (known in the industry as a windshield signature). That’s not a valid mortgage and the risk ordinarily is taken by the lender. The lender has the duty to take precautions to insure that the signatures are legitimate.
Having fun yet? Here are a couple other wrinkles we see where clients have made trouble they failed to recognize. Many young couples these days like to buy their homes before tying the knot. If they close on the property before the wedding day, they CANNOT take title as tenants by the entireties. Reason: they are not married. And a subsequent marriage does not change the status of the ownership. So, when wife defaults on her student debt or her car loan, the creditor may be able to get to the house and force it to be sold.
A second extra credit problem we are seeing more of. Husband and wife are married. They want a house at the shore. Husband has bad credit. Wife has good credit. The lender does not want anything to do with husband. What they will do is make the loan to wife only. She will sign the promissory note for $500,000. But they will make both husband and wife sign the mortgage if they want the property to be tenancy by the entireties. Husband and wife own the property together. But only she is on the note and can be sued for it. Should she default, the lender will have the right to take a judgment against her in accordance with the note, but the mortgage says that it is collateral for the note even though husband is not on the note. Husband does not owe the $500,000 but he pledges whatever interest he had in the shore home to the mortgage company. What we call mortgages are actually two separate transactions done at the same time. Lenders who give you money make you sign a promissory note to pay it back. That is itself an “unsecured transaction” because there is nothing to “secure” your promise to pay. But if the lender demands collateral (such as a house, boat, car, aircraft) the mortgage is a document by which you pledge the asset in what is now a secured transaction (the object is the security). You don’t need to be on the debt itself to pledge an asset. If your no good brother in law borrows $50,000 from a bank, they may tell him he must get a guarantor who will pledge assets to secure the debt. When your bride comes crying to you that her nieces and nephews will be on the street unless the two of you are willing to help, just remember it could be your house that gets sold when brother in law defaults.
Now wasn’t that fascinating. Even we don’t think so. But this is important stuff to know.