LEGAL NEWS
Mechanics’ Liens: When You’re Better Than the Bank
By Craig S. Nevin, Youngman Ericsson Scott, LLP
lien are set forth in California Civil Code §8000, et seq. Tere are many issues that come up that relate to the various time-period requirements. Tis article, however, concerns cases where mechanics’ lien claimants not only perfect their liens, but later find that they are in a position senior and superior to a construction loan.
T
Priority in General Generally, construction loans
are recorded prior to the project and mechanics’ liens are recorded at or near the end of the project. As a result, if a construction lender forecloses, most mechanics’ lien claimants will be literally foreclosed out of their lien remedy. Although a contractor, subcontractor or supplier could, in theory, avoid the effect of the termi- nation of its lien rights by purchasing the construction lender’s lien at the foreclosure sale, the economics and funds involved in such a scenario usually make this impossible. Tere are situations, however,
where mechanics’ liens can be senior to the lien of the construction loan – and therefore unaffected by a foreclosure.
If Work Starts Before the Loan Records
If the construction loan deed
of trust is recorded after the commencement of the work of improvement, the claimant’s lien, “has priority over a lien, mortgage, deed of trust, or other encumbrance on the work of improvement or the real property on which the work of improvement is situated, that (a) attaches after commencement of the work of improvement or (2) was unrecorded at the commencement of
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he requirements and strict time- periods that must be followed in order to obtain a mechanics’
the work of improvement and of which the claimant had no notice.” California Civil Code §8450. Te mechanics’ lien statutes only
provide a construction lender with a position senior to later-recorded mechanics’ liens if the construction lender records its deed of trust before work commences. Cases on appeal have clarified that “work” in this regard means “any visible work” commenced on the property. Te term, “visible work” has been further clarified by the courts to mean any work that is “apparent and visible”. (See, National Charity League, Inc. v. Los Angeles County (1958) 164 Cal.App.2d 241, and, Lambert Steel Co. v. Heller Financial Inc. (1993) 16 Cal.App.4th 1034, 1043.) For this reason, a construction
lender will frequently have its own or a title insurance company representative inspect the site to ensure no work has commenced before the construction loan deed of trust is recorded. Once visible work is commenced on a property or project, all mechanics’ liens recorded on that project relate back to the date on which the visible work was commenced. See, Kodiak v. Ellis (1986) 185 Cal.App.3d 75, 82; Westfour Corp. v. California First Bank (1992) 3 Cal. App.4th 1554, 1562-1563; Santa Clara Land Title Co. v. Nowack & Associates, Inc. (1991) 226 Cal.App.3d 1558, 1565. A lender that records its
construction loan deed of trust after visible work has commenced will not be senior to later-recorded mechanics’ liens. In that situation, a foreclosure by the construction lender arguably does not affect later-recorded mechanics’ liens. Te loss of the construction lender’s seniority comes up most often in economic settings like we are in currently.
The Impact of Work Commencing Before the Loan Records
Tis situation occurred during the
fast-moving construction and lending environment leading up to the technology “bubble.” A general contractor client was in direct contract with the owner of an office-building. Te building was undergoing a significant amount of work, including installation of state- of-art switching equipment, to become a technology and telephony hub. At the same time, and in order to access the increasing equity in the building and use those funds for the upgrades, the owner went through a refinance and the loan was secured against the building. When the owner was unable to
maintain the expansion, the general contractor recorded a mechanics’ lien, and within the required 90-day period, filed suit to foreclose the lien. Soon thereafter, the lender foreclosed. During the suit, it became clear
that the refinance loan deed of trust had been recorded after the work of improvement had commenced. Based on these facts, we successfully argued that the mechanics’ lien related back to the commencement of the project, was senior to the bank’s lien and therefore remained as the only encumbrance on the property after the lender’s foreclosure. Payment in full was received. Tis situation also arose during
the last economic “bubble.” Once again, during the last boom, some construction lenders recorded loans after work commenced. In just such a case, the construction lender’s loan file was subpoenaed. In that file, two documents caught the eye: an appraisal and an environmental assessment – both of which pre-dated the construction loan. Te appraiser’s field inspection and
the environmental assessment both before the loan, both confirmed that visible permanent work, including
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