Many states allow a mechanics lien to relate back to the beginning of the project for purposes of establishing priority. The hard part is determining what constitutes the beginning of the project. After much litigation, the Minnesota Supreme Court may provide some guidance on how to define “one continuous project”.
Minnesota’s “Relation-Back” Doctrine Regarding Mechanics Liens and One Continuous Project
In Minnesota, the priority of a valid mechanics lien dates back to the date the lien attached to the property, and is superior to all other encumbrances on the property not yet of record at that point. For priority purposes, all mechanics liens relate-back to the start of the project as a whole, and attach to the property at that point – not when the individual lien claimant began work.
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This “relation-back” doctrine can be of vital importance to a mechanics lien claimant whose work was performed towards the end of a project. The fact that priority runs from the project’s start can provide a mechanics lien claimant to jump over years of other potential subsequent encumbrances (like subsequent mortgages granted for construction loans), provided the project was one continuous work or undertaking. As could be expected, the determination of when a project started, and whether a project as a whole is one undertaking or a hodgepodge of unrelated distinct smaller projects can be tricky, but this determination is crucial for two reasons: 1) determining whether work is lien-able, as related to deadlines, and 2) determining the priority of mechanics liens on the project vis-a-vis other encumbrances like mortgages.
Is the Work Within the Time Deadlines Imposed by Statute?
The first question, and one that must always be answered, is: “Have I missed my deadline to file a lien?” I constantly talk about deadlines, and what missing them does to an otherwise strong lien claim, so readers of this blog are well aware that missing a deadline is Bad News. So, how does a determination of whether a job was one continuous improvement relate to the calculation of deadlines?
In a recent posting, I discussed a Nevada case in which a contractor was not allowed to “tack” a mechanics lien claim to subsequent work because it was determined that the later work was not part of the original improvement. Despite dissimilarities in the deadline structure between Nevada and Minnesota, a similar analysis can be applied. In Nevada, the deadline for all parties to file a mechanics lien runs from the completion of the work as a whole, so it makes sense that the date a work was completed is a critical factor in calculating the deadline by which to file. In Minnesota, however, the deadline runs from the claimant’s completion of work, not the end of the project. Despite this, determining whether work was performed as part of one continuous project or multiple unrelated projects can be important to deadline calculation in Minnesota in regard to each individual claimant. To illustrate this, we can look at the following example (with ridiculous dates chosen to make an easy point).
Suppose a plumbing contractor is hired to install a shower. He shows up and installs the shower on Jan. 1. The homeowners were pleased with his work, so he was hired to an additional shower on October 1, which he did. Finally, on December 1, he was called out to the house to replace the master bathtub. If this contractor was unpaid for all projects at the end of December, he would be able to file a mechanics lien for the installation of the master bathtub, and the second shower (work done within 120 days). Since these were all separate jobs, however, and not part of one continuous improvement, he would be unable to recover the amount owed for the original shower installation.
Now suppose that the same contractor was hired under a contract for the renovation of the homeowner’s bathrooms, under which he was required to install two showers and a bathtub at undefined points throughout the year. In this scenario, if the contractor was unpaid for all work, he may be able to claim a mechanics lien for all of the unpaid amounts. The work could potentially be determined to be one continuous project under one contract despite the considerable lapse of time. Note, however, that unlike states like Nevada, where the deadline to file is calculated from the conclusion of the project, even if a project is one continuous project, other parties’ work does not extend the lien deadline past 120 days from the potential claimant’s last furnishing of labor and/or materials.
Priority of Mechanics Liens
The real meat of the relation-back doctrine has to do with the priority of mechanics liens vis-a-vis other encumbrances on the property. As mentioned, for priority purposes, all mechanics liens related back to the beginning of work on the project. Minnesota law states as follows:
All liens, as against the owner of the land, shall attach and take effect from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement, and shall be preferred to any mortgage or other encumbrance not then of record…
The time at which mechanics liens attach to the property for priority “against a bona fide purchaser, mortgagee, or encumbrancer without actual or record notice” is further, and more specifically, defined as: “the actual and visible beginning of the improvement on the ground” subject to some exceptions, specifically that, “visible staking, engineering, land surveying, and soil testing services do not constitute the actual and visible beginning of the improvement on the ground.”
“One Continuous Project” and a Recent Minnesota Mechanics Lien Case
Big Lake Lumber v. Security Property Investments, a recent Minnesota case directly related to the determination of priority between a mechanics lien and a mortgage granted for a construction loan, has a relatively straight-forward (although potentially difficult to determine) legal question obscured by a long and difficult fact pattern.
In 2005, Mark Hilde hired Wruck Excavating to design a residential septic system for a property on which Hilde planned to build a house. In order to obtain a loan, Hilde then hired the plaintiff, Big Lake Lumber, to draft preliminary plans. At this time, Wruck cleared a path to the property. That was the end of work on the property for approximately 1 year.
Hilde’s plans for the property changed dramatically shortly after Wruck cleared the path. Instead of constructing his personal residence, Hilde instead decided to build and sell a “spec home” to Security Property Investments. Some time after Security’s agreement to purchase the spec home, the agreement was changed to a purchase of the property without a spec home, and then in a final reversal, Security hired Hilde to construct a home on the property.
In preparation for the work, Hilde and Security hired another company, Bogart, Pederson & Associates to stake out the property. This work was completed 11 months after Wruck cleared the original path, and against the backdrop of Hilde’s own acknowledgement that the staking “wasn’t performed as part of the project that [Hilde] originally intended…but rather was performed for the ultimate project that was built.” Shortly thereafter, a mortgage was granted to 21st Century Bank to secure a construction loan. The mortgage was recorded in October, 2006. Big Lake recorded a mechanics lien in March 2007 for work first started in November 2006.
Upon foreclosure of the mortgage, Big Lake claimed its mechanics lien had priority over the 21st Century’s mortgage because of Minnesota’s “relation-back” provision. Big Lake’s claim was that its mechanics lien attached to the property all the way back when Wruck cleared the first path in 2005. The trial court agreed, but the appeal court reversed. In an attempt to synthesize many years of cases providing guidance, the appeals court noted several reasons that the original clearing of the path was not part of the same continuous project for the purposes of establishing priority. These reasons included the time lapse, the intent of the parties, financing, and the scope of the contract.
Minnesota Supreme Court
Big Lake again appealed. Oral arguments were held before the Minnesota Supreme Court on April 8, 2013. In my opinion, the arguments against Big Lake are strong. While it is clear that visible improvement to the property occurred in 2005, it was, by admission, conceived to be part of a different project. Just because a house ended up being built, doesn’t mean that it was all one project. It will be interesting to see what the Minnesota Supreme Court decides, and how. When a final decision is issued, we’ll let you know.
In the meantime, Minnesota lien claimants should be aware that, in terms of priority, a mechanics lien does relate back – but only to the beginning of the same project.