Georgia State Senator Lindsey Tippins has proposed Senate Bill 269 in Georgia to amend the “priorities between liens of mechanics/materialmen.” The proposed amendment is short and easy to understand, essentially resolving the priority battle between lenders and lien claimants by giving priority over the land’s value to lenders and priority on the improvement’s value to contractors, suppliers, and others who contribute to the improvement.

The amendment, while short and simple, will certainly create lively debate between the contracting and lending lobbies.

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Proposed Lien Priority Will Give Mechanics Lien Claimants Priority Over Lenders For The Value of Buildings, Structures, or Improvements

The proposed changes to Georgia’s mechanics lien law relates entirely to lien priority, which is a legal principle applicable in all states to guide courts in distributing foreclosure proceeds between competing lien claimants.

In a typical construction scenario, a property gets foreclosed upon where construction work was on-going, and the proceeds are set for distribution. The mechanics lien claimants and the construction lender / mortgage holder both position themselves to get their cut of the money first. Currently, the law prioritizing the distribution of these foreclosure funds varies state-by-state.

The current priority rule in Georgia is a bit nuanced. As we explain on our Georgia Mechanics Lien Law Resources and FAQs page, “general and special liens of laborers..[and] general liens when actual notice of the lien was communicated prior to the furnishing of labor and materials” have priority in Georgia. Mechanics liens in general have priority only according to the “first-in-time rule,” which is a common lien priority rule across the country that affords priority of encumbrances based on the time when they are filed. The first to file has the highest priority.

SB 269 proposes a contractor-friendly change to the priority of liens in Georgia. The statute proposes the addition of O.C.G. § 44-14-370, the second paragraph of which would provide:

(b) A lien, deed to secure debt, or encumbrance upon any real estate created before any labor or services were commenced or materials furnished by any person having a right to file a special lien specified in subsection (a) of Code Section 44-14-361 shall have priority in the distribution of proceeds of any sale by foreclosures or otherwise only to the extent of the value of the land, exclusive of subsequently erected buildings, structures, or improvements, as determined at the time of such sale, and the residue of the proceeds of such sale shall be applied to the satisfaction of the special lien specified in subsection (a) of Code Section 44-14-361 if such lien has been perfected pursuant tot his part.

Read the full text of the bill here: Georgia Senate Bill 269 (2013-14 Regular Session), Mortgages, Liens, & Security; priorities between liens of mechanics / materialmen.

What does this mean?

When a property is foreclosure upon, the property will be valued separate from the improvements (which is done already in nearly every property appraisal). The lenders will have priority and first grab at the proceeds distributed through a foreclosure, but only up to the amount of the land’s value.  Once the land’s value amount is collected and distributed, the distribution will go to mechanics lien claimants first until the value of the property’s improvements are exhausted.

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The Proposed Distribution Framework Is Fair To Financial Risk Allocation For Both Sides

The proposed distribution framework in SB 269 seems fair to me and I really like this bill. In fact, I think the bill should serve as a model for the rest of the country.

The legislator’s job in creating lien priority in mechanics lien situations is very tough. Construction lenders have a great argument in their favor to acquire some priority, as they are putting real cash into a property to develop it. Contractors and suppliers, on the other hand, have great arguments as well, as they are putting “cash” into the property to develop it, too.  When multiple parties are coming together and investing in a property — nearly simultaneously — to develop it, who should get priority when the project goes belly up and is foreclosed upon?

This is not a simple question to answer, but to understand my perspective and why I think SB 269 is a great compromise, it is important to understand the concept of financial risk in the construction industry.

Construction is expensive, and a lot can go wrong. When something does go wrong, the law must set the parameters of who takes the loss. Who, in other words, bears the burden of the project’s financial risk?

Legislators have a lot to think about when answering this question:

  • Who is in the better position to control the risk?
  • What is fair?
  • What is in line with America’s public policy interests?
  • What effect will the legislative choice have on the construction economy? The availability of lending funds? Etc.

There is an enormous financial risk shifting battle in the construction industry. Those at the top of the contracting chain, which includes lenders and developers, are constantly devising ways to shift a project’s financial risk down the contracting chain. Pay if paid and pay when paid provisions, among tons of other devices, are common examples of such efforts. Lien priority is the final stop for the parties in the risk shifting battle. If rubber meets the road and a project’s financial risk is completely exposed, the parties are confronted with a state’s lien priority policies to dictate who must bear the ultimate burden.

Traditionally, America has taken the position that the financial risk of a project should stay at the top of the contracting chain.  Consider the following:

Since those at the top have control over the money and are organizing the project as a whole, those at the bottom of the contracting chain should not be punished for their mistakes in handling the financing, scheduling, or other logistics of the project.  Those things are in the top of the chain’s control, not the bottom’s.

Construction is expensive, and a lot can go wrong. When something does go wrong, the law must set the parameters of who takes the loss. Who, in other words, bears the burden of the project’s financial risk? Accordingly, why would a state’s lien priority rules do anything other than protect the bottom of the chain parties?

The answer to this is probably two-fold.  First, the lending lobbies are strong and well organized. Second, the lenders have a legitimate argument — they need to protect themselves from a messy mechanics lien landscape, that is almost invisible, and unpredictability with their security will undercut their lending parameters.

SB 269 will create spicy dispute between the lenders and the contractors. Nevertheless, it is a fair compromise that aims to protect both of the state’s interests. Time will reveal the fate of the bill, which we will, of course, monitor here on the Lien & Credit Journal.  You can track the bill at the Georgia General Assembly website.

Who Is Senator Lindsey Tippins?

Understanding the interests behind a bill is often times more important than the bill itself. It’s scary how often legislation is guided by the interests of those proposing it…but of course, why wouldn’t it be? It isn’t like politicians are going to introduce legislation against their interests.

Senator Tippins is not stranger to the construction industry. According to his Personal Financial Disclosure Report, he is a partner in Oglesby Road Group and the President/Owner of Tippins Contracting Co, Inc., a pipeline contracting company.  He is also no stranger to the top of the contracting chain (i.e. owners), as he owns over 20 parcels of property throughout Georgia and North Carolina.

Certainly, his interests are likely more aligned with contractors and subcontractors than they are of lenders. Nevertheless, his bill is not unprecedented in its treatment of the lien priority issue, and is a compromise to an alternative priority scenario, whereby lien claimants will have full priority over the lenders under any circumstances.

Despite lender lobbyist arguments that such priority frameworks stifle lending in the state, I have never seen any evidence that lending is less productive in states that give lien claimants priority verses those states that preserve priority for the lenders.

Thanks to Mark Cobb, of Cobb Law Group (@cobblawgroup) for drawing our attention to this bill through their guest post on Christopher Hill’s Construction Law Musings: Pending Georgia Lien Law Amendment Based on Virginia Statute.