Don’t Foreclose A Lien Unless You Understand Lien Priority
One good thing about construction related work, is that you have the ability to lien property and foreclose in the event that you are not paid for the work performed. But that doesn’t mean you’ll automatically get paid, even if you did foreclose. That’s because of lien priority.
What is Lien Priority?
You likely know from common sense, that a lot of entities can lien property. Mortgages have liens, as do creditors with judgments, and second mortgages. Governments can lien (or even foreclose) on property when there are taxes owed. So the question is not so much whether you can lien property when you don’t get paid for construction work, but whether your lien will have priority over all the others.
Who Goes First and Why Does it Matter?
As a general rule, liens that are recorded first in time, get priority. This is important, because if someone has priority over you, you may not get paid, even though you foreclosed.
For example, assume that a home has a $100,000 first mortgage, you have a $50,000 construction lien, and the home only has $100,000 in equity or value.
If you foreclose, the property will be sold at foreclosure, and the first mortgage will get paid in full (for the $100,000), but there would be nothing left for you. You’ve basically foreclosed for nothing; all you did was get the first lienor paid (although you could still pursue the property owner personally for damages under your contract).
First in Time
As a general rule, when it comes to construction liens, your lien attaches when you file or record the lien in the public records. That is your “place in line.”
However, sometimes you can “cut the line,” when there is a notice of commencement filed. The notice of commencement holds your place in line, so that later, if the need to lien arises, your lien will “relate back” to the notice of commencement.
As an example, assume you file a notice of commencement in January. In March, the homeowner takes out a second mortgage lien. In May, you aren’t paid for construction work, and you file a lien. Even though your lien was filed after the second mortgage, because it relates back to the notice of commencement originally filed in January, your lien would have priority over the second mortgage’s lien.
Note that some kinds of liens, especially governmental tax liens, almost always “jump the line” and move to first priority, no matter when they were filed.
Construction Lien Priority
Even if you rank above, or have priority over, other kinds of liens, you still need to determine what kind of lien you have, because certain construction liens have priority over others.
Generally, laborer and subcontractor liens will have priority over the general contractor’s liens. That’s the bad news. The good news is that as the general contractor, you likely have a contract that you can enforce against the owner or other side, which other parties, like subcontractors or laborers, don’t have.
Getting paid in construction related matters can be difficult. Get legal help. Call our Fort Lauderdale construction lawyers at Sweeney Law P.A. at 954 440-3993 for help today.