What Qualifies as Commencement of Construction In Nevada?

The Nevada Supreme Court has recently examined quite a few questions regarding the interpretation of mechanics lien laws in that state. Not only has that court clarified the circumstances giving rise to a material supplier’s mechanics lien, and provided insight into the lien waiver process, it has also responded to direct questions from a bankruptcy court regarding the determination of when a construction project actually starts for the purposes of mechanics lien priority. Generally speaking, absent any specific rules to the contrary, mechanics liens are given priority over other encumbrances to property based on one of two factors: 1) The date the mechanics lien attached; or 2) The beginning of work on the project as a whole. Even with these relatively simple sounding choices, the actual determination of the priority date can be difficult and confusing. The date the lien attaches to the property, for example, may not be the date it was filed/recorded. In many states, the mechanics lien attaches when the claimant first performs work, and the subsequently filed lien stretches back to that sate for priority purposes. Likewise, determining the beginning of the project as a whole can be complicated. Is the project’s beginning marked by obtaining permits, hiring a GC, actual construction, or something else?

The Case and Questions

The fact that determinations of the type noted above can be difficult is what prompted the United States Bankruptcy Court for the District of Nevada (“bankruptcy court”) to request the assistance of the Nevada Supreme Court (“supreme court”). In order to figure out the date from which a mechanics lien has priority over other encumbrances on a property, the bankruptcy court certified three questions to Nevada’s supreme court.

The supreme court answered two of those questions and in doing so, provided an interesting look at what constitutes the beginning of a construction project for the purposes of mechanics lien priority. In Nevada, “a mechanics lien takes priority over other encumbrances on a property that are recorded after construction of a work of improvement visibly commences.” Because there is often disputes about what actually constitutes the visible commencement of construction, the supreme court offered some clarification and guidance about that aspect of the mechanics lien law. The questions answered by the court were as follows:

1. Can grading (site prep) work constitute visible commencement of construction under NRS 108.22112?, and

2. Can placing dirt/material on a future project site before building permits are issued, and before the GC is even hired, constitute commencement of construction?

The Answers

The answers to both of the above questions turns out to be yes, but it’s worth taking a look at the process, and at the facts of the underlying case, to provide a foundation for those answers.

Nevada mechanics liens are granted priority over any encumbrance that attaches after the commencement of the work of improvement giving rise to the mechanics liens

The facts of the case giving rise to the mechanics liens at issue set forth the background for the questions certified to the supreme court. An unimproved piece of property in Las Vegas was to be the site of a yet-to-be-constructed strip mall. In the spring and summer of 2006, two parties placed and spread between 200 and 300 truckloads of dirt/material on the subject property. On November 2 of that year, Byrd Underground, LLC (“Byrd”) dug several holes on the property to determine how much dirt/material had been brought to the property for the purposes of submitting a revised bid to perform subcontracting grading work, and on November 8, the owner finally contracted with Atlas Construction Ltd. (“Atlas”) to serve as the GC for the construction of a strip mall on the subject property. The owners secured financing from PFF Bank and Trust (“PFF”) and a deed of trust for the construction loan was recorded with the Clark County recorder on November 29. Permits for the construction were issued after that date, and Byrd performed work under three separate subcontract agreements. Both Byrd and another subcontractor remained unpaid for their work, and filed mechanics lien against the property. After the construction was completed, the owners filed for bankruptcy protection. The lien claimants then requested that the bankruptcy court certify questions to the Nevada Supreme Court to facilitate the determination of the priority of the liens.

In this case, there was no issue as to whether the mechanics liens were valid, but rather whether the liens were entitled to priority over other encumbrances based on the November 2 date when dirt/material was delivered and spread n the property. Because Nevada mechanics liens are granted priority over any encumbrance that attaches after the commencement of the work of improvement giving rise to the mechanics liens (without regard to the specific date on which the liens were recorded), it had to be determined whether the delivery and spreading of dirt/materials constituted the visible commencement of work.

visibility alone determines priority

Commencement of construction, for these purposes in Nevada, occurs when it is “visible from a reasonable inspection of the site”. This determination protects against contractors being granted priority for non-visible work, and results in the mandate that “visibility alone determines priority”. Despite the fact that many states, and Nevada previously, had determined that clearing or grading was non-visible preparatory work insufficient to establish construction commencement, this was determined to go against the purpose of the visibility requirement of the statute itself. By declaring certain types of work to be per se insufficient, it would deprive the trier of fact the opportunity to evaluate whether the work was visible or not. A close reading of the statute at issue made clear that pre-construction activities were not specifically excluded from the definition of work of improvement, and in fact, are expressly recognized elsewhere in the statute. Because of this, the visibility of the work is a question of fact, and the delivery of dirt/materials to the site could be found to constitute visible commencement of the work of improvement.

The second question examined by the court, then, was whether priority can be claimed for work performed prior to the the issuance of the relevant permits, and the hiring of the GC. The lien claimants argued, and the court agreed, that the plain language of the state merely requires visibility of the commencement of the work, such that the issuance of permits or timing of contracts is irrelevant. However, despite that “irrelevant” language, and the fact that the court noted the timing of permitting and contracts is not dispositive, it went on to state that such dates may have some bearing on the issue, “because the fact-finder must define the work of improvement before it can determine when the work of improvement visibly commenced”., and in this regard, contracts and permits may assist in determining the structure or scheme of the work of improvement as a whole.

In Nevada, therefore, pre-construction work (even if months before the permits were issued or the GC hired) can signify the commencement of a work or improvement for priority purposes, as long as it is both visible, and part of the same work of improvement that later gave rise to the mechanics liens at issue.