Construction Liens Explained

Today, Van White will be presenting at the Building Materials Dealer’s Association (BMDA) Washington and Oregon Lien Law Seminar. The presentation includes information on preliminary notices, perfecting lien claims, bond claims, post lien requirements, and licensing requirements. This begs the question – what are Construction Liens? Van explains.

Construction Liens (also known as Mechanics Liens) are a charge against or interest in privately owned real property to secure payment of a debt obligation. They are granted by statute to persons who have provided labor, materials, or certain services, which are incorporated into, consumed in, or contributing to the improvement of real property. When correctly placed upon real property, the Construction Lien gives the contractor or materials supplier the right to enforce a charge upon the real property they improved or that their materials were added to. The purpose of Construction Lien laws is to ensure that persons are paid for the value they add to someone’s property.

While Construction Liens are an effective collection device for contractors and material suppliers, there are a number of statutory requirements that must be followed in order to secure the right to file and foreclose a Construction Lien in the event of non-payment. Said requirements include: intent to lien notices to the property owner prior to or soon after commencing construction or providing materials; filing the lien in a timely manner; post-lien filing notification letters; and foreclosure of the lien in a timely manner. The requirements regarding intent to lien notices differ depending upon whether the subject property is residential or commercial, as well as the relationship between the lien claimant and the property owner. Construction Lien laws also differ by state.

If you are a contractor or provide materials to construction projects, you should familiarize yourself with the Construction Lien laws in your state. Please feel welcome to contact me if I may be of any assistance with regard to Construction Liens in Oregon or Washington. For over 20 years, I have been helping contractors and material suppliers with Construction Lien issues.

Van M. White is a partner at Samuels Yoelin Kantor. His practice emphasizes construction, real estate, and business litigation. His legal work regularly includes the drafting, review, and negotiation of construction and real estate contracts; construction liens and collections; the prosecution and defense of claims relating to construction projects; business disputes; bond claims; and general counsel to construction contractors, material suppliers, property owners, landlords, and business owners. Please contact Van directly at vmw@samuelslaw.com.

Due Diligence: Just Who Are You Dealing With?

DO YOU KNOW WHO YOU’RE DEALING WITH?

Due Diligence Before You Enter Into An Agreement

I’ve represented a number of clients over the years who failed to perform any due diligence with regard to the party they were contracting with before they entered into the contract. Had they performed some quick and easy due diligence before they signed the contract, they would have saved themselves a lot of headaches, hassles, and money.

Before you enter into a contract and obligate yourself to do something, take some time to learn about the other party. If you are entering into an agreement with a business entity (e.g. corporation, LLC), check the Secretary of State/Corporation Division website to learn about the entity. You’ll be surprised the number of situations I’ve seen where clients entered into contracts with defunct or non-registered entities. Find out who the principals of the entity are. The Oregon Secretary of State website enables you to do a business search by individual– whereby you learn of the businesses (active and inactive) for which an individual has been an owner or corporate officer. Red flags include individuals who started numerous businesses in the past and businesses that fail to file annual reports and pay annual fees.

If the person or entity with whom you’re negotiating provides services which requires a license or registration (i.e. contractor, realtor, medical professional, etc.), you should be able to search on-line records regarding their licensing history and complaints. Red flags include numerous complaints, suspensions, or an inactive license/registration.

If you are contracting to perform work on real property, perform research with regard to the ownership of the real property (after obtaining a good address for the property) to determine who  owns the property and who has authority to allow work to be performed on the property. If you cannot locate on-line information with regard to the subject property, contact a local title company and ask for a trio or list-pack for the property.

In light of the amount of information available on the internet these days, you should also consider doing a Google or Bing search with respect to the potential new client and/or their principals. You might be surprised as to the amount of information available about them on the internet.

Your time is valuable. You don’t need to be dealing with individuals or entities who have bad intentions or who are deceptive. You’re probably better off taking a vacation to the beach or the mountains than you are dealing with unscrupulous people. Take some time to learn about the party with whom you will be dealing before you obligate yourself or your company. You may find out that they aren’t who they claim to be. Such time is time well spent. The time spent performing due diligence before you enter into the contract could be as important as the time spent fulfilling your obligations under the contract. As the old Benjamin Franklin quote goes, “an ounce of prevention is worth a pound of cure.”

Contractor Forfeits Right to Construction Lien by Accepting Mortgage Or Trust Deed As Security For Debt

The Oregon Court of Appeals recently issued a ruling which made it clear that a contractor’s acceptance of a mortgage or trust deed as security for the debt owed to them constituted a waiver of their construction lien rights. While the ruling at first glance sounds fairly logical and straight forward, it could have negative unintended consequences for contractors who release their construction lien rights in exchange for a mortgage or trust deed.

In the case of Evergreen Pacific, Inc. v. Cedar Brooke Way, LLC, filed July 11, 2012, Case No. A146478, the owner of several parcels of land being developed hired a contractor to pave parking lots and perform related work. To finance the development, the property owner obtained a line of credit from a bank and provided the bank with a trust deed against the subject property as security.

The owner/developer failed to pay the paving contractor following the substantial completion of the paving contractor’s work. The paving contractor subsequently filed a construction lien against the subject property. A construction lien foreclosure lawsuit resulted from the paving contractor’s construction lien filing and owner’s failure to pay the paving contractor.

The parties settled their differences before the foreclosure lawsuit went to trial. Pursuant to the settlement agreement, in exchange for the owner’s agreement to pay a specified sum to the contractor (including an immediate payment of approximately 40 percent of the settlement amount), the contractor agreed to make some repairs to its original work, perform some additional work, and release its construction lien. In addition, the owner agreed to provide the contractor with a trust deed against the subject property as security for the remaining amounts owed under the settlement agreement.

After the parties entered into the settlement agreement, the owner made the initial payment to the contractor and the contractor released its construction lien. A trust deed in favor of the paving contractor to secure the remainder of settlement payment was subsequently recorded. The contractor then proceeded to complete all the new work contemplated in the settlement agreement, as well as some of the repairs. However, the owner failed to pay the remaining amounts owed to the contractor under the settlement agreement. Such failure caused the paving contractor to file a new construction lien against the property. The contractor’s attempt to foreclose its second construction lien, as well as it’s foreclosure of the trust deed, were the basis of the court’s decision that is the focus of this article.

The owner did not appear in the second foreclosure case and the court issued a default against them. However, there was a trial, which included the bank who had provided a line of credit to the owner, concerning the validity (and priority) of the paving contractor’s lien. The bank took the position at trial that the paving contractor’s lien was not valid because (1) the paving contractor waived its right to a construction lien when it released its first construction lien, thus precluding a second construction lien against the same project; and (2) the paving contractor had forfeited its right a construction lien when it accepted a trust deed to secure the project debt. The trial court ruled that the construction lien was valid, and per Oregon’s super-priority statute for construction liens, also ruled that it was superior in priority to the bank’s line of credit trust deed against the subject property. The bank appealed the trial court ruling and renewed its position that the construction lien was invalid because the paving contractor had forfeited its right to a construction lien by accepting the trust deed from the owner as security for the project debt.

The court of appeals, while citing a case from 1877 which held that a contractor waives its rights to a construction lien when they accept a mortgage or trust deed to secure the underlying debt, ruled that the trial court erred in finding that the second construction lien was valid. Accordingly, the court of appeals reversed the foreclosure judgment in favor of the paving contractor. In making its ruling, the court of appeals held that the 1877 case upon which their decision was based established a bright-line rule, which follows: When a contractor takes a mortgage (or trust deed) to secure construction debt, the contractor forfeits the right to a construction lien.

In light of the fact that the paving contractor received a trust deed against the subject property to secure the remaining project debt in exchange for the release of its first construction lien, the ruling of the court of appeals initially appears to be without negative ramifications. However, contractors could cause themselves some problems if they release a construction lien in exchange for a trust deed against the same property. The potential problems relate to the priority of the construction lien against other encumbrances on the subject property.

Oregon has a super priority statute for construction liens which holds, with exceptions, that a construction lien, once perfected, has priority over “all prior liens, mortgages, or other encumbrances against the property”. Said statute is contrary to the general priority rule of “first in time, first in line”. Thus, an unknowing contractor could lose the priority its construction lien has over other encumbrances by releasing its construction lien and accepting a trust deed in exchange for the released construction lien. As such, it is important that contractors consult with an attorney that is familiar with the intricacies of Oregon’s construction lien laws before they accept alternative security for their construction liens.