Blake Robinson | Davis Wright Remaine
When a construction project goes bad, there will often be more than one party looking for payment. The project owner might fail to pay both the contractor and the lender. If both the contractor and lender have liens, whose lien has priority? The short answer: it depends.
The General Rule in Oregon: Construction Liens Have Priority Over Trust Deeds
The first question to ask is which lien was recorded first. If the contractor recorded its lien before the lender recorded its trust deed or mortgage, the construction lien has priority under Oregon law.[1]
But the reverse is not necessarily true. In fact, the general rule is that a construction lien has priority over an earlier-recorded trust deed.[2] There are several scenarios, however, that can change the general rule and grant priority to the trust deed.
Four Exceptions to the General Rule
First, in order to keep priority for a lien that is for materials or supplies, the contractor must, within eight business days of delivering the materials or supplies, deliver a statutory “right to lien” notice to the lender.[3] The contractor should use the form notice contained in ORS 87.023 and must deliver it by personal delivery or registered or certified mail.[4] Failure to provide this notice will result in loss of priority for the contractor’s lien.
Second, once the lender receives notice that materials or supplies have been delivered, the lender can demand a list of the materials and supplies and the amount owed by the project owner.[5] If the lender makes such a demand, the contractor has 15 business days to deliver the demanded information (as evidenced by a delivery receipt).[6] If the contractor fails to do so, the lender’s trust deed gains priority over the construction lien.[7]
Third, if the lender pays the contractor the amount listed as due in the notice, the contractor is required to execute a lien waiver upon the lender’s demand.[8]
Fourth, if the lien relates to alteration and repair work (rather than new construction), the trust deed has priority unless the trust deed secures a loan made to finance the alteration or repair.[9] In other words, if the trust deed was given to secure a loan to buy a building, and then a year later the owner hired a contractor to repair the building, the trust deed will have priority. On the other hand, if the trust deed was given to secure a loan used for the repair work, the construction lien will have priority.
Conclusion
Both contractors and lenders should be aware of the deadlines and requirements described above so that they do not inadvertently fail to take a required action and lose lien priority. Please contact DWT’s construction and government contracts team with questions or comments.
[1] ORS 87.025(1).
[2] ORS 87.025(2).
[3] ORS 87.025(3).
[4] ORS 87.018(1).
[5] ORS 97.025(4).
[6] Id.
[7] Id.
[8] ORS 87.025(5).
[9] ORS 87.025(6).
When one of your cases is in need of a construction expert, estimates, insurance appraisal or umpire services in defect or insurance disputes – please call Advise & Consult, Inc. at 888.684.8305, or email experts@adviseandconsult.net.