Mechanic’s Lien Priority Over Construction Lender
One of the questions that frequently arises is the priority between a mechanic’s lien claimant and a lender. Assume the contractor is working on a project that has either a traditional mortgage or a recorded construction loan. After performing services, the project runs out of money and eventually there is a foreclosure sale. The proceeds are not enough to satisfy all claimants. The question then is who has priority over those cherished foreclosure proceeds. This is called the law of priority.
States differ as to their solution. They can be grouped into the following:
- First in time. The priority would be based upon who records first. In other words, if the lender recorded their mortgage before the contractor recorded the mechanics lien, they would get preference. And vice versa.
- Commencement of construction theory. This states if construction begins by anyone, before recording the mortgage, all persons performing construction services get priority. This literally means that if excavation services are performed and this is before the recordation of the mortgage, that all persons working on the project thereafter, all the way up to finish subcontractors, would get priority.
- Hybrid theory. Under this theory, the lender would receive priority as to the land value and the contractors would receive priority as to the value of the improved building. The theory is contractors should be protected for their time and effort in improving the property through a mechanic’s lien. But they had nothing to do with the land itself and this was one of the primary aspects of security used by the lender in making the loan.
There is an unanswered question as to this option. Assume the building before construction had a value of $500,000. $100,000 worth of labor and materials is furnished. After construction, the building is now worth $700,000. Do the contractors get the total enhanced value of the building or simply the increase in value due to construction? This is not entirely certain, however the better argument would be the entire value because the contractors were responsible for its enhancement.