waiving lien priority

Whether or not the right to file a mechanics lien can be prospectively waived by a potential lien claimant is treated differently from state to state. The general disfavor of allowing parties to prospectively waive lien rights is usually approached from the position of waiving all right to lien, but what happens if the agreement at issue purports to only waive the lien’s priority? In that situation, more questions are raised – and GCs in California might not like the answers.

California Lien Waivers

In general, California does not allow a party’s right to file a mechanics lien to be waived prior to the work being performed. In fact, California is one of the 12 states that has statutorily mandated forms for lien waivers, and if one of the four statutory forms is not used (depending on waiver-type), the waiver is not valid. Further, even if one of the statutorily prescribed forms is used, California law provides that lien rights may not be waived for work performed, or materials furnished, after the date provided in the lien waiver.

Another protection mandated by California law is that a party’s lien rights may not be waived by other claimants. This means that the lien rights of subcontractors and suppliers may not be waived by the GC, or other party up-the-chain. The language of this prohibition comes into play in a recent case regarding waiving lien priority, and the results are not fantastic for GCs.

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Recent Case and Waiving Priority

In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company, a California court examined a situation at the intersection of lien waivers and waiving lien priority. Moorefield, a general contractor, was hired by a property owner to construct a medical office. After Moorefield had been working on the project for a month, the property owner secured a construction loan from Intervest-Mortgage Investment Company (“Intervest”). As consideration for the loan, Moorefield executed a consent agreement with Intervest, one aspect of which was the agreement to subordinate any liens for services provided by Moorefield to the lien of Intervest’s deed of trust. Thereafter, the property owner defaulted on the construction loan with an outstanding balance of $2.2 million in payment applications due to Moorefield, who subsequently filed a timely mechanics lien.

The trial court upheld the mechanics lien and ordered the foreclosure sale of the property, holding that the agreement to subordinate the mechanics lien was unenforceable for two reasons: 1) it would deprive the lien claimant of the state constitutional right of mechanics lien priority, and 2) the ‘waiver’ did not meet the statutory requirements (of California Civil Code Section 3262(d)). These determinations, however, were overturned by the appeals court.

The appeals court determined that California Civil Code Section 3262(d) did not apply to GCs waiving their own rights. The language of the statute (and the legislative history of the statute), was found to only apply to subcontractors and suppliers, not GCs. Section 3262(d) states that

neither the owner nor original contractor by any term of a contract, or otherwise, shall waive, affect, or impair the claims and liens of other persons . . . except by their written consent

Even provided the written consent follows the statutory forms, however, the appeals court noted that Section 3626(d) relates to the ability of owners and GCs to affect the lien rights of “other persons”, those “other persons” being parties who are not the owner or GC. In reaching this conclusion the court provided a history of the statute, noting that the protection was originally created to resolve a conflict of whether the mechanics lien rights of subcontractors and suppliers could be waived solely by virtue of a provision in the contract between the owner and GC.

This decision was problematic for Moorefield, as the foreclosure sale of the property to pay off the lien of Intervest’s deed of trust (now with priority over Moorefield’s mechanics lien) left no funds available to pay Moorefield any of the $2.2 million owed. In light of this decision, GCs in California should be very wary of subordinating lien rights.

Waiving Mechanics Lien Priority - General Contractors in CA Should Be Wary.
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Waiving Mechanics Lien Priority - General Contractors in CA Should Be Wary.
A recent case in California ruled prospectively waiving lien priority is allowed for general contractors and subordinate their claims to lenders.
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