What is a Lien and Encumbrance Search?

By Linda Gilbert

When considering purchasing a dental practice, it is important to determining whether or not you want to conduct a lien and encumbrance search. The first step in making this determination is understanding what a lien and encumbrance search is and how it may impact the purchase of a dental practice. Liens and encumbrances commonly impact a dental practice purchase if the selling doctor fails to satisfy a debt, a creditor, or a taxing authority, all of which may attach a lien or encumbrance to the dental practice assets. This can prevent the transfer of the assets and greatly affect your ability to operate a dental practice if you purchase those assets subject to those liens and encumbrances. While liens and encumbrances are closely related, it is imperative to understand the difference between the two.

Definition of Lien. A lien gives a creditor the right to seize or take your personal property if you are unable to keep up with payments or pay off debts. Liens often occur after a creditor, such as a credit card company or a taxing authority, files a law suit and wins a credit judgment. They also include mortgages or car loans. To acquire funds due, the creditor may request additional action and receive a court order lien. Liens take many forms, and creditors may take possession of your bank account or obtain a legal hold on your home to satisfy the debt.

Definition of Encumbrance. An encumbrance refers to any charge or claim against the property. This legal term is commonly used in regards to real estate, but encumbrances can affect personal property, such as dental equipment. The person or entity that issues the encumbrances acquires a legal right to the property. This encumbrance remains in effect until the actual owner satisfies the debt or resolves the issue with the other party. Because encumbrances create an unclear title, issues can arise upon selling or transferring ownership of the property.

Thus, failure to identify a lien or encumbrance, or the failure of the seller to disclose a lien or encumbrance, creates a financial burden for any buyer because that buyer inherits the lien or encumbrance upon acquiring the property.

We strongly encourage all of our clients purchasing a dental practice, whether that practice is being purchased for $250,000 or $1,250,000, to conduct a lien and encumbrance search. If you want a lien and encumbrance search done on the dental practice you are considering purchasing, we would order it through a third party lien and encumbrance search firm that we engage. A full lien and encumbrance search would include a search for the following:

1. UCC (state level);

2. Federal Litigation;

3. Local Litigation;

4. Bankruptcy;

5. Fixture Filings;

6. Federal Tax Liens;

7. State Tax Liens; and

8. Judgment Liens.

The cost of the lien and encumbrance search would depend on: (i) the number of individuals and/or entities searched; and (ii) the number of Ohio county records that are searched. As an example, the approximate cost for a search on one individual (or one entity) in one Ohio county would be $512.00. Thus, each additional name and county searched would be an additional cost.

If you are considering purchasing a dental practice, it is best to fully understand what it is that you are purchasing. Thus, a lien an encumbrance search would be a valuable tool in determining whether you should purchase a particular dental practice.