Hopkins & Carley | November 25, 2014
Construction lenders often go to great lengths to ensure their deeds of trust have priority over mechanic’s liens. Typically, as part of the construction loan process, general contractors are asked to sign documents consenting to the owner’s assignment of the construction contract to the lender. According to a recent decision by the California Court of Appeal, these assignment agreements may contain provisions that subordinates mechanic’s liens to the lender’s deed of trust, even if the loan follows the start of construction.
The case is Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company et al., and involved the construction of a medical office complex in San Jacinto, CA. The general contractor had already constructed a fence and started preparing the land for construction when the owner obtained its construction loan and the construction lender recorded its deed of trust. The loan required the owner to assign its rights and remedies under the construction contract to the lender. The general contractor signed a written consent to the assignment that included language subordinating both (i) payment obligations under the construction contract to the payment obligations under the loan, and (ii) any mechanic’s liens to the lender’s deed of trust.
When the owner later failed to make payments for the construction work, the general contractor recorded a mechanic’s lien for $2.2 million and then filed suit for foreclosure. Since mechanic’s liens relate back to commencement of the work, the general contractor believed its lien had priority over the lender’s deed of trust. The lender responded by asserting that its deed of trust was superior in priority to the mechanic’s lien based upon the subordination language in the assignment. The trial court determined that the subordination clause was an unenforceable waiver of mechanic’s lien rights and gave the mechanic’s lien priority. The appellate court reversed the trial court’s judgment, however, and held that the statutory prohibition against the waiver of mechanic’s lien rights does not apply to waivers executed by general contractors who contract directly with the owner, and gave the lender’s deed of trust priority.
Although California’s mechanic’s lien statutes are designed to provide strong protection to those who provide labor, services, and materials to a construction project, the Moorefield case demonstrates that general contractors (the waiver does not affect subcontractors and material suppliers) need to be wary of consenting to the assignment of their contracts to construction lenders. The language in those documents can result in the subordination of mechanic’s lien rights to the lender’s deed of trust. When presented with a consent agreement, consult your legal counsel to understand the impacts and potential alternatives.
via A Cautionary Tale for General Contractors | Hopkins & Carley.