Summary on Community Liens

This article will cover community liens on real estate and how those liens are calculated in divorce.

Update: this article also now includes the recent Court of Appeals decision in Femiano v. Maust, which drastically enhances the value of a community lien under specific circumstances.

If you and your spouse are getting divorced and one of you signed a disclaimer deed to real property owned by the other, then the issue of a community lien is likely going to come up in your divorce. Before getting into this, if you haven’t read my article on Arizona Disclaimer Deeds, then you should read it first here.

In addition, a community lien can arise if you or your spouse own separate property, which can also be property owned prior to marriage, or received during the marriage as a gift or inheritance. See ARS 25-212.

A community lien is an equitable interest in a spouse’s separate property. It arises where community funds are expended on a spouse’s separate property, so the non-owner spouse can recoup some of the value added to the spouse’s separate property from the expended community funds.

The issue of a community lien is perhaps most prevalent in the context of real estate, typically dealing with a couple’s primary residence.

The amount of the community lien on real estate is calculated using a specific formula, which was adopted by the courts in Drahos v. Rens. The formula has also been updated over the years in subsequent cases to address scenarios where the property has gone down in value, as well as when the property has negative equity.

Most recently, and somewhat surprisingly, a new court case came out that adds a new wrinkle to what used to be a fairly straightforward approach to determining the value of a community lien.

This article will cover how a community lien on real estate works, how it is calculated under different circumstances, and address a very recent case that has the legal community buzzing.

Quick Refresher on Community Liens

Although Arizona is a community property state, it is still possible for spouses to own separate property. If you’re unsure of the differences between community property or separate property you can listen to this podcast episode.

A spouse may own separate property by either owning it prior to marriage, or receiving it through a gift or inheritance. Or, in the case where a house is purchased during the marriage and one spouse signs a disclaimer deed, the legal effect of the disclaimer deed is to make the house the other spouse’s separate property (through the act of disclaiming any interest–e.g. a community property interest–in that house).

Even though a spouse may own separate property, in most marriages (absent specific provisions in a prenuptial agreement) wages earned during the marriage should be community property. Very often, those wages or incomes earned by the spouses are used to maintain and/or pay for loans/mortgages on a spouse’s separate property. In addition, sometimes community funds are used to enhance the value of a spouse’s separate property, such as through major repairs, add-ons, etc.

This in turn can create a community lien, which is a recognized equitable lien on a spouse’s separate property. In the context of a divorce, the non-owner spouse should receive some form of reimbursement since his/her share of community wages or income were used to enhance the value or benefit the equity of the property owner spouse.

The community lien is not a simple dollar for dollar reimbursement. Rather, there is a specific formula used when determining the amount of a community lien on real estate.

How to Calculate a Community Lien

Typical Formula

Simply put, there is a recognized formula implemented by the courts in Arizona to calculate a community lien on real estate.

That formula is C + [(C/B) x A] where:

  • A = appreciation
  • B = purchase price (if purchased during the marriage, or value at time of marriage)
  • C = community contributions to principal

Decreases in Value

Up until COVID-19 hit in 2020, it might have been hard to remember that property values can actually go down. When property values do go down the formula shifts.

When equity remains, the community lien equals the community contribution to equity (to the extent of equity).

When equity is negative then C – [(C/B) x D] where:

  • D = depreciation of the property during the marriage
  • C = community contributions to principal
  • B = value on the date of marriage

A Monumental Shift

If you’ve run through the calculations above, you’ll readily see that (at least where real estate has increased in value) the value or amount of a community lien is not the total value of the equity in the property. In fact, the non-owner spouse’s share of the community lien is only 50%, and so their respective share (through the community lien) of the equity in the property is a good deal less than 50% of the equity in the property.

To many, this is an unfortunate reality of the law and the legal effect of either signing a disclaimer deed, or otherwise, contributing community funds to another’s separate property. Regardless, these formulas are the current law.

Having said that, a recent Court of Appeals decision in Femiano v. Maust has drastically changed the landscape in circumstances where a spouse signs a disclaimer deed and ONLY community funds were used toward the property. Prior to this case, the courts would simply apply the above formulas to any situation (absent a showing of fraud or mistake) where a married couple purchased a house during marriage and one spouse signed a disclaimer deed. The result, as explained at above, is the non-owner spouse would get significantly less than 50% of the equity in the property. This was an unfortunate result for the non-owner spouse, but was the legal effect of their action of signing the disclaimer deed.

The Femiano v. Maust case changes the law by holding that the Drahos formula should not be applied where a married couple purchases a house and ONLY community funds were used on the property, even though one spouse signed a disclaimer deed. According to Femiano, the result of those circumstances would be the house belongs to the owner spouse (since the other did disclaim any interest); however, instead of applying the Drahos formula–which would net the non-owner spouse much less than 50% of the equity–the courts are to simply divide all increases in value and all contributions to principal (i.e., all equity in the property) equally.

This result is a huge boon for the non-owner spouse. In fact, it may have the practical effect of overly rewarding the non-owner spouse. I’ve put out a new podcast episode on my thoughts and a greater breakdown of the Femiano case, which you can listen to here.

As significant as the Femiano case is, it’s important to recognize that it only applies in situations where property is acquired during the marriage AND only community funds were used on the property. The community lien formulas above would still apply where both separate and community property were used toward property acquired during the marriage (which property was disclaimed by one spouse) OR where community funds were used toward a spouse’s pre-marital (or gifted/inherited) separate property.

Concluding Thoughts

If you or your spouse owns separate property, either from prior to marriage, or through inheritance or a disclaimer deed, then chances are high that the issue of a community lien will arise in your divorce.

A community lien is simply an equitable lien designed to equitably reimburse or compensate a non-owner spouse whose share of community funds have been used to enhance the value/equity of the other spouse’s separate property.

In the case of real estate, the courts have established formulas that are to be used, including when the value of the property has decreased or even has negative equity, to determine the amount of a community lien.

If only community funds have been used toward a property that was acquired (and disclaimed by one spouse) during the marriage, then the recent decision in Femiano will impact the equitable division of that property, effectively treating the property as community property for equitable division purposes even though the property can only be allocated to the property owner spouse.

If you own separate property or your spouse owns separate property, and/or either of you ever signed a disclaimer deed during the marriage, it’s probably a good idea to consult with an attorney to get specific advice to see where you stand and how these legal principles apply to you.