In most states, the general rule is that liens and other encumbrances have priority in the order that they are filed in the county records office. This is known as the first in time, first in right rule. Based on this principle, a recorded interest has priority over later recorded interests (read more).
For a mechanics lien claimant, lien priority will really only become a hot-button topic when bankruptcy is in play. But, for construction lenders, mortgagees, and property owners — lien priority is crucial since these parties will be very interested to see if a potential mechanics lien claimant may be able to jump ahead of them in the “lien line.” Read on for a brief discussion of lien priority, superpriority, and what happens to the other liens on a property when and if a mechanics lien is filed.
All Liens Are Not Created the Same
With construction loans and mortgages, the money loaned is secured by the underlying property, just like a mechanics lien. If a property owner falls behind on their mortgage or construction loan payments, the lender will eventually have the right to enforce their interest in the property via foreclosure.
However, when this foreclosure occurs, priority will come into play. Think of it as a waiting line. Those at the front of the line (the parties with the highest priority) will be paid first. If there’s money left over, then the next in line will be paid, and so on.
But, this is not necessarily a single file line.
Often, state law will treat similarly situated creditors similarly — in those situations, the amount to be paid first or second in line might be divided up among creditors. However, generally speaking, there are very specific rules as to how this “line” of creditors is formed. As a general matter, the vast majority of states follow the “first to file” (or “first in line”) rule. This means that regardless of the type of filing (at least for the most part), whichever document is filed first will have priority.
Of course, mechanics liens throw a wrench in the process. In most states, they “relate back” to the time when work begins. Meaning, the time for a mechanics lien recording, for priority purposes, is actually counted as the first day that work begins on the project. Sometimes, though, certain filings will be granted “super-priority,” or, to extend the line analogy, certain creditors get to cut the line.
Read More about Lien Priority
Where some degree of elevated priority is present, lien claimants might have a little extra umph to get their payment claims resolved. Sending any preliminary notice or notice of intent to lien to a construction lender or mortgage provider could certainly put extra pressure on the owner or GC to make payment.
On the other hand, this creates obvious headaches for lenders. Luckily for them, relatively few states provide mechanics lien priority that is superior to an encumbrance that was filed prior to the outset of work. When this ability to leapfrog other creditors is present, there may be options available to restore the more traditional order such as a contract featuring a no lien clause or a lien subrogation clause. But I wouldn’t say that using a clause like these is promising. Most states either disfavor such clauses or disallow them altogether.
Free Resources from Levelset
As evidenced by the article above, understanding lien law can be quite a challenge. For those of you that want to do their best to avoid getting tangled up in complicated legal issues, we might be able to help. Did you know that we have comprehensive construction payment resources available on the Levelset website for free? Everything from forms and templates to how-to guides and ebooks.