When money gets tight on a construction project, there are usually many different parties scrambling to protect their interest. One of the fundamental disputes on divvying up the money boils down to an argument over which secured party gets their share first. In many cases, mechanics lien claimants find themselves in a priority battle with construction lenders, or mortgagees. One such case was recently heard by the Court of Appeals of Utah, in which the priority of a mechanics lien as related to a deed of trust was examined. In this specific case, this was done by determining what constitutes commencement of work, a completely unnecessary step under the current statute. Despite the fact that Utah mechanics lien law was thoroughly modified in 2011, the case at issue dates back to work performed in 2008, and was therefore analyzed through application of the previous rule.
Mechanics Lien Priority in Utah: Then and Now
As it currently stands, priority for construction liens in Utah is determined by the time of the first preliminary notice filing on a project. U.C.A. § 38-1-5, as currently enacted, notes that:
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A construction service lien relates back to, and takes effect as of, the time of the first preliminary notice filing.
a construction service lien has priority over:
(i) any lien, mortgage, or other encumbrance that attaches after the first preliminary notice filing; and
(ii) any lien, mortgage, or other encumbrance of which the lien holder had no notice and which was unrecorded at the time of the first preliminary notice filing…
This means that construction liens relate back to the date on which the first preliminary notice was filed, and have priority over any encumbrance on the property that attaches after that filing. However, in certain limited circumstances, a construction lender whose trust deed is recorded after the first preliminary notice may still have priority over a construction lien claimant.
This has not always been the case, though. Prior to the 2011 revisions of Utah’s mechanics lien law, priority of a mechanics lien was dependent upon a different factor. The previous version of U.C.A. § 38-1-5 outlined priority as follows:
The liens herein provided for shall relate back to, and take effect as of, the time of the commencement to do work or furnish materials on the ground for the structure or improvement, and shall have priority over any lien, mortgage or other encumbrance which may have attached subsequently to the time when the building, improvement or structure was commenced, work begun, or first material furnished on the ground…
In this version, priority of mechanics liens related back to the first commencement to do work for the improvement, and it is under this standard that the recent case was decided.
Commencement of Work – The Recent Case
In Pentalon Const., Inc. v. Rymark Prop., LLC, the Court of Appeals of Utah was tasked with determining whether the “near-complete” excavation for a building’s foundation constituted commencement of work for the purposes of mechanics lien priority.
Pentalon was unpaid for foundation excavation work performed for the construction of an auto-plaza in 2008. Accordingly, Pentagon timely filed a mechanics lien (pursuant to a properly filed notice of commencement), and later sought to enforce the lien through a foreclosure proceeding. The defendants Rymark and FDIC claimed that the foundation excavation work did not constitute commencement of work for priority purposes, and that FDIC’s trust deed had priority over the Pentalon’s lien claim.
The trial court agreed with FDIC, but the court of appeals did not. The court of appeals highlighted a distinction in the law between site preparation work (which was not deemed by Utah to constitute commencement of the work) and “actual excavation for the foundation of a building” (which was determined to constitute commencement for priority purposes). In doing so, the court noted that a person using reasonable diligence would understand that alienable work had begun, and discarded the notion that the excavation for the foundation must be “complete” in order for the commencement of work to be judged to have begun.
While this version of the Utah statute is no longer in effect, and any new disputes regarding mechanics lien priority will be judged pursuant to anew rule, this case presents an interesting look at the specific and granular nature of mechanics lien priority disputes and highlights how sometimes it can be a complex determination.
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