The usual rule in California is that the first to file documents of record with the County Recorder impacting on title to property have priority over later filed documents. This general rule allows, among other things, lenders to view the title to property before granting a loan on the property. The lender can then see if there are existing encumbrances on the property in question. Unfortunately for lenders, this practice does not always work in the case of mechanics’ liens.
As to mechanics’ liens, when the work on which the mechanics lien is based commenced before the lender’s deed of trust was recorded, the mechanics’ lien “relates back” to when the work first commenced. This puts lenders at a disadvantage because at the time the lender views title to the property the right to a mechanics’ lien may exist but no lien may in fact yet be recorded. Thus, the lender will have no notice that it may already be taking a second position on its security. If a contractor has begun working on the project slightly before the deed of trust is recorded and many months later records a mechanics’ lien on the property for work performed, the mechanics’ lien will have priority over the deed of trust and will be paid in full in a foreclosure sale before the deed of trust is paid anything. The rule in such a case is set forth in Civil Code section 8450(a), which states:
“8450 (a) A lien under this chapter, other than a lien provided for in Section 8402, has priority over a lien, mortgage, deed of trust, or other encumbrance on the work of improvement or the real property on which the work of improvement is situated, that (1) attaches after commencement of the work of improvement or (2) was unrecorded at the commencement of the work of improvement and of which the claimant had no notice.”
The lender is often quite disappointed to learn in any particular case that the mechanics’ lien is superior to its recorded deed of trust because work on the project began before the deed of trust was recorded. It is therefore important for the lender to determine whether there is, has been, or will be any construction work taking place on the property at any time near when the loan will be considered. For the contractor, subcontractor or supplier it is important that the claimant have sufficient documentation to prove the exact date the claimant commenced its work on the project. Time cards, payroll records, delivery tickets, invoices and other written indicators of when work was performed at the particular project are helpful. The claimants will be called upon to prove that they commenced work before the deed of trust recorded and that they have otherwise properly followed all the rules necessary for a successful mechanics’ lien foreclosure action.
Note: “Circuitry of Priority” Issue: One problem which arises from time to time occurs when the seller’s purchase money deed of trust is recorded before the commencement of work (thereby giving the deed of trust priority over any later mechanics’ lien), but the deed of trust is then later subordinated by agreement to the construction lender’s deed of trust. If the construction lender’s deed of trust was recorded after work commenced, then under the rule of Civil Code section 8450, the mechanics’ lien has priority over the construction loan deed of trust. The question arises as to whether by subordinating to the construction loan deed of trust the purchase money lender traded their prized first place priority with a significantly inferior third place position after the mechanics’ lien and the construction loan deed of trust.
This “Circuitry of Priority” issue is subject to considerable commentary by practitioners and legal treatises but little interpretation from our courts, at least in terms of reported cases. Most unreported cases and commentators seem to agree that the first priority will go to the mechanics’ lien claimants, with the construction loan deed of trust in second place and the purchase money deed of trust in third place. The result seems logical since the statutes regarding mechanics liens are to be liberally construed toward enforcing mechanics’ lien rights and as between the competing lenders, they are equally aware of the terms of the contract, the law and the intended use of the property. See CAL. MECHANICS LIEN LAW 6th ed. 4.163, 9.4.
Note: “Partial Priority” Issue: As stated above, if the work commences before the deed of trust records then the work and subsequent mechanics lien take priority over the deed of trust. If the work commences after the deed of trust records, then the deed of trust has priority over any subsequently recorded mechanics’ lien flowing from the work. However, the rule is slightly different when the payment by the lender is not an obligatory payment which must be made under the terms of the loan but is instead an optional payment. Optional payments generally do not have priority over mechanics’ liens which have been recorded before the optional payment is made. See, CAL. MECHANICS LIEN LAW 6th Ed. 9.4 through 9.10.
Article written by William L. Porter, Esq. and revised in 2014 Mr. Porter is a principal in The Porter Law Group, Inc. in Sacramento, California. He can be reached by phone at (916) 381-7868.