Posted by & filed under Business Credit Journal, Credit.

Mar 9, 2017

Written by: William (Bill) G. Fig, Sussman Shank LLP

Published by the Section on Construction Law of the Oregon State Bar – November 2016

The priority of a construction lien plays a significant role in determining whether a lien claimant gets paid as a result of its construction lien.  In short, the greater priority a lien has in relation to other encumbrances recorded against the subject real property, the greater chance the lien claimant will get paid.

The priority analysis starts with the basic real property rule followed in both Oregon and Washington – first-in- time equals first in right. In other words, absent a statutory exception, an earlier-recorded encumbrance, e.g. a Deed of Trust, has priority over a later-recorded encumbrance.  A construction lien is an example of a legislatively created exception to that rule. Thus, in some states, if the statutes are properly followed, a later-recorded construction lien may have priority over an earlier-recorded encumbrance. In other states, a construction lien does not have special priority status; however, it does still give the lien claimant a right of action against the real property where, absent the lien statutes, none would exist.

Not all liens are created equally, and Oregon and Washington treat the “same type” of liens differently. These differences can be an unwelcome trap to a lien claimant (or the unwary practitioner) who believes their lien has priority over existing encumbrances when, in fact, it does not. By way of example, an Oregon lien can, under the right circumstances, have “super priority,” which means a later-recorded lien has priority over an earlier-recorded encumbrance, e.g. a Deed of Trust, recorded by a lender to secure a loan. In such an instance, because its encumbrance can be extinguished by the foreclosure of the super priority lien, the lender will usually require the owner to pay the lien, or the lender will pay the lien to protect its secured interests. Thus, a construction lien that has super priority is a powerful collection tool.

However, many people erroneously assume that all liens in Oregon have super priority and that, if they record a lien, they will get paid. In Oregon, super priority does not apply to liens for alteration, modification, or repair of an existing structure. Generally speaking, this means that such a lien follows the “normal” first-in-time rule and falls behind existing recorded encumbrances and, if the lien is foreclosed, the superior (earlier in time) encumbrances remain unaffected. Therefore, absent the existence of construction financing which may be affected by this “type” of lien, there is no pressure on the lender or owner to deal with the lien. As a result, a contractor who does alteration or repair work on existing structures in Oregon should not rely on a construction lien to “guaranty” payment.

Crossing the Columbia into Washington leads to even more traps for the unwary.  In Washington, construction liens do not have super priority and generally follow the first-in-time rule. Thus, a construction lien in Washington is, at best, a mediocre collection tool. The news is worse for subcontractors and material suppliers on single-family, owner-occupied residential “remodel” projects. On such a project, the subcontractor/supplier has no right to record a lien for amounts the owner has paid the general contractor for the work or materials at issue, even if the general contractor has not paid the subcontractor or supplier!

The issue of priority is one of the most misunderstood areas of construction lien law, particularly by contractors and material suppliers. The power of a construction lien is directly tied to its priority vis-a-vis other encumbrances recorded against the same property. As you can see, a lien’s priority can vary significantly. Thus, in order to adequately protect themselves, it is important for a contractor and/or material supplier to assess and understand the priority their lien rights may have on a particular project before starting work on that project.

 

Bill Fig has put together a four-part video series on Oregon Construction Liens: The Nuts & Bolts of Construction Video Series. Learn how to protect your right to get paid for the work and materials you provide to construction projects.
http://djcoregon.com/nuts-bolts/

 

Bill Fig, Partner, Sussman Shank

Bill represents mortgage servicers and lenders in prosecuting and defending mortgage foreclosure actions and defending lenders and servicers in “wrongful foreclosure” lawsuits in state and federal courts in both Oregon and Washington.  Bill also represents general contractors, subcontractors, and material suppliers in all aspects relating to their businesses.  This includes contract review and drafting, preparing construction bond and lien claims, and litigating all types of payment claims in state and federal courts.  He also handles administrative claims against contractors’ surety bonds.

In addition, Bill represents small to mid-size businesses with their legal needs, including contract disputes and collection of their accounts receivable.  Because debtors sometimes attempt to hide assets or do not voluntarily pay the judgment entered against them, Bill also has extensive experience in pre-judgment provisional process and post-judgment collection enforcement.

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