VALUE IN RECORDING LIEN WITHIN EFFECTIVE NOTICE OF COMMENCEMENT

Posted on June 20, 2020June 20, 2020 by Edward Garber

Construction lien priority is no joke! This is why a lienor wants to record its construction lien within an effective notice of commencement. A lien recorded within an effective notice of commencement relates back in time from a priority standpoint to the date the notice of commencement was recorded. A lienor that records a lien wants to ensure its lien is superior, and not inferior, to other encumbrances. An inferior lien or encumbrance may not provide much value if there is not sufficient equity in the property. Plus, an inferior lien or encumbrance can be foreclosed.

An example of the importance of lien priority can be found in the recent decision of Edward Taylor Corp. v. Mortgage Electronic Registration Systems, Inc., 45 Fla.L.Weekly D1447b (Fla. 2d DCA 2020). In this case, a contractor recorded a notice of commencement for an owner. While an owner is required to sign the notice of commencement that the contractor usually records, in this case, the owner did not sign the notice of commencement. Shortly after, the owner’s lender recorded a mortgage and then had the owner sign a notice of commencement and this notice of commencement was also recorded. When there is a construction lender, the lender always wants to make sure its mortgage is recorded first—before any notice of commencement—for purposes of priority and has the responsibility to ensure the notice of commencement is recorded. Here, the lender apparently did not realize the contractor had already recorded a notice of commencement at the time it recorded its mortgage.

An unpaid subcontractor recorded a lien and foreclosed on the lien. Because the lien related back in time to the original notice of commencement, the subcontractor moved to foreclose the mortgage as an inferior interest. (Remember, the mortgage was recorded after the notice of commencement the contractor recorded that was not signed by the owner.) The lender argued that the notice of commencement was a legal nullity because it was not signed by the owner, therefore, its mortgage had priority. The trial court agreed with the lender. The appellate court did not:

[W]e hold that a notice of commencement not signed by the owner, but instead signed by the general contractor with the owner’s authority, is not a nullity, per se, in a lien foreclosure action brought by a subcontractor where the subcontractor has strictly complied with chapter 713 and relies upon the defective notice of commencement, which is otherwise in substantial compliance with section 713.07. In other words, the lender may not use the deficient notice of commencement as a sword against a subcontractor who bears no duty to ensure the validity and accuracy of the notice of commencement.

Edwin Taylor Corp., supra.

This is a good result for a subcontractor that is now in a position to have a lien that is superior to a lender’s mortgage — a situation that rarely occurs and should not occur.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

FORECLOSING JUNIOR LIENHOLDERS AND RECORDING A LIS PENDENS

Posted on May 16, 2020May 16, 2020 by Edward Garber

When you foreclose on a construction lien, there are a couple of pointers to remember.

First, you want to make sure you include junior lienholders or interests you are looking to foreclose (or you want to be in a position to amend the foreclosure lawsuit to identify later). The reason being is you want to foreclose their interests to the property. “[J]unior interest holders are a narrow class of mortgagees whose interest in the underlying property is recorded after the foreclosing contractor’s claim of lien is filed. This class is routinely joined to the construction lien enforcement action under section 713.26 to allow the construction lienor to foreclose out the junior lienholder’s interest in the property encumbered by the construction lien.” See Decks N Sunch Marine, infra.

Second, you want to record a lis pendens with the lien foreclosure lawsuit. Failure to do so could be problematic because Florida Statute s. 713.22(1) provides in part, “A lien that has been continued beyond the 1-year period by the commencement of an action is not enforceable against creditors or subsequent purchasers for a valuable consideration and without notice, unless a notice of lis pendens is recorded.”

A recent case, Decks N Such Marine, Inc. v. Daake, 45 Fla.L.Weekly D1168b (Fla. 1^st DCA 2020), discusses these pointers. In this case, a contractor filed a construction lien foreclosure action in 2006 against residential real property. However, the contractor did not record a lis pendens until 2013. The lis pendens, however, was recorded after the owner had a mortgage recorded on the property. The contractor amended its construction lien foreclosure action to foreclose the mortgagee claiming the mortgagee was a junior lienholder. The mortgagee moved for summary judgment pursuant to Florida Statute s. 713.22 arguing the lien was “not enforceable against creditors or subsequent purchasers for valuable consideration and without notice, unless a notice of lis pendens is recorded.” In other words, the mortgagee was not a lienholder that could be foreclosed in light of the untimely recording of the lis pendens. The mortgagee prevailed on this issue.

The mortgagee then sought its attorney’s fees against the contractor as the “prevailing party” under Florida Statute s. 713.29 (in Florida’s Lien Law). The trial court agreed. The appellate court did not. The appellate court held that a junior lienholder is not entitled to attorney’s fees under Florida Statute s. 713.29 when prevailing in a construction lien enforcement action. The contractor is not enforcing its lien against the junior lienholder but “joining it to the underlying action to ensue determination of superiority of liens or security interests upon a foreclosure sale.” Decks N Sunch Marine, supra.

QUICK NOTE: THE NOTICE OF CONTEST OF LIEN IS A POWERFUL TOOL

Posted on April 27, 2020April 27, 2020 by Edward Garber

If you receive a Notice of Contest of Lien, do NOT ignore it. The Notice of Contest of Lien is a powerful tool that shortens the limitations period for a linear to foreclose on a construction lien to 60 days or else the lien is discharged by operation of law. Conversely, if you receive a construction lien, consider recording a Notice of Contest of Lien based on its utility.

As an example of the usefulness of the Notice of Contest of Lien, in Rabil v. Seaside Builders, LLC, 226 So.3d 935 (Fla. 4th DCA 2017), a contractor filed a construction lien foreclosure lawsuit on a residential project. The homeowners then transferred the lien to a lien transfer bond and recorded a Notice of Contest of Lien. The contractor did not amend the lawsuit to sue the lien transfer bond surety within the 60-day window. Consequently, the homeowners moved to dismiss the lien foreclosure lawsuit, release the lien transfer bond, and discharge the corresponding lis pendens. The trial court denied the motion. On appeal, the Fourth District reversed holding that “[b]ecause the contractor did not file suit against the surety within sixty days [in response to the Notice of Contest of Lien], the lien was automatically extinguished by operation of law, and the clerk was obligated to release the bond.” Rabil, 226 So.3d at 937.

This case exemplifies the utility of recording a Notice of Contest of Lien and how it benefitted the homeowner upon filing the Notice of Contest of Lien after recording the lien to a lien transfer bond post-initiation of the lawsuit. The is exactly why a Notice of Contest of Lien should not be ignored. If you receive one, the smart play is to immediately consult with counsel, just like the smart play if you receive a construction lien is to consult with counsel.

QUICK NOTE: MAKE SURE TO TIMELY PERFECT YOUR CONSTRUCTION LIEN AND PAYMENT BOND RIGHTS!

Posted on April 23, 2020April 23, 2020 by Edward Garber

In today’s current climate, you do not want to wait until the last minute to record your construction lien or serve your notice of nonpayment to preserve your payment bond rights. Operate conservatively and preserve these rights now, not later. Whether preserving construction lien or payment bond rights, the key date is 90-days from your final furnishing date. A construction lien must be recorded within 90 days from your final furnishing date. Likewise, a notice of nonpayment (to preserve payment bond rights on a private project) needs to be served within 90 days from your final furnishing date.

It is important to remember that performing punchlist, warranty, and corrective work does NOT extend your final furnishing date. In other words, do not think you can record a lien or serve your notice of nonpayment within 90 days from completing punchlist or warranty work. That would be a bad idea. See, e.g., Delta Fire Sprinklers, Inc. v. Onebeacon Ins. Co., 937 So.2d 695 (Fla. 5th DCA 2006) (performing punchlist items insufficient for extending final furnishing date in order for subcontractor to timely serve its notice of nonpayment).

MAKE SURE TO TIMELY PERFECT YOUR CONSTRUCTION LIEN AND PAYMENT BOND RIGHTS!

CONSTRUCTION LIEN FORECLOSURE ACTION MUST BE BROUGHT IN COUNTY WHERE PROPERTY LOCATED

Posted on January 26, 2020January 26, 2020 by Edward Garber

A construction lien foreclosure action is an action against the real property and MUST be brought in the county where the property is located. It is an action concerning subject matter jurisdiction (the jurisdiction of the court to hear the matter) and, thus, can be raised at any time in a proceeding. If you are looking to foreclose a construction lien, please make sure 1) the lien is recorded in the right jurisdiction and 2) the lien is foreclosed on in the right jurisdiction.

In a recent case, Prime Investors & Developers, LLC v. Meridien Companies, Inc., 2020 WL 355930 (4th DCA 2020), a dispute arose between a general contractor and subcontractor on a hotel project in Miami-Dade County. The general contractor filed suit against the subcontractor for untimely and defective installation in Broward County. The subcontractor counter-sued the general contractor for breach of contract and asserted a claim against the developer of the hotel to foreclose a construction lien. Remember, the property was located in Miami-Dade County but the lawsuit was in Broward County.

The trial court granted summary judgment in favor of the subcontractor and against the developer and contractor. The trial court entered a money judgment against the contractor and the developer, but did not initiate any foreclosure proceedings.

The appellate court reversed the summary judgment because there were genuine issues of material fact. The subcontractor, in its motion for summary judgment, did not address the general contractor’s affirmative defenses. (“When a party raises affirmative defenses, a summary judgment should not be granted where there are issues of fact raised by the affirmative defenses which have not been effectively factually challenged and refuted. The movant must disprove the affirmative defenses or show they are legally insufficient.”). Prime Investors & Developers, LLC, 2020 WL at *4 (citation omitted).

The appellate court did address the construction lien foreclosure issue by reminding “that “[a] lien against property is in rem, affecting title to the property, and must be brought in the circuit with jurisdiction over the property.” Prime Investors & Developers, LLC, 2020 WL at *4 (citation omitted). In other words, the subcontractor filed the construction lien foreclosure lawsuit in the WRONG jurisdiction. Oops!

However, the appellate court did not seem to challenge the right of the subcontractor to obtain a monetary judgment, absent the foreclosure proceedings, against the developer. While the subcontractor cannot foreclose its construction lien, it may have a basis to obtain a monetary judgment that excludes foreclosure against the developer if it prevails at trial. This is certainly not the same leverage the subcontractor wanted when it recorded the lien and initiated a construction-lien foreclosure.

CONSTRUCTION LIEN DOES NOT INCLUDE LATE FEES SEPARATE FROM INTEREST

Posted on September 28, 2019September 28, 2019 by Edward Garber

Construction liens can include unpaid finance charges. But, what about late fees? You know, the late fees that certain vendors like to include in their contract or purchase order unrelated to finance charges. An added cost for being delinquent with your payment. Can a late fee be tacked onto the lien too?

In a recent case, Fernandez v. Manning Building Supplies, Inc., 2019 WL 4655988 (Fla. 1^st DCA 2019), a residential owner hired a contractor for a renovation job. The contractor entered into a contract with a material supplier. The terms of the supplier’s contract with the contractor provided that there would be a 1.5% delinquency charge for late payments and it seemed apparent that the delinquency charge was separate from finance charges.

Florida Statute s. 713.06(1) provides in relevant portion:

A materialman or laborer, either of whom is not in privity with the owner, or a subcontractor or sub-subcontractor who complies with the provisions of this part and is subject to the limitations thereof, has a lien on the real property improved for any money that is owed to him or her for labor, services, or materials furnished in accordance with his or her contract and with the direct contract and for any unpaid finance charges due under the lienor’s contract.

The supplier in this case recorded a construction lien and filed a lien foreclosure lawsuit. The issue was whether a 1.5% per month “delinquency charge” or late fee, as set forth in the contract, should be factored into the lien amount. The First District Court of Appeal held no:

[A] ate payment fee is not a “finance charge” as that term is generally understood…[T]he difference between a finance charge and delinquency fee is recognized by Black’s Law Dictionary (10th ed. 2014) which defines a “finance charge” as “[a]n additional payment, usu. in the form of interest, paid by a retail buyer for the privilege of purchasing goods or services in installments.” As such, a finance charge is the cost of credit — not the cost of paying late. The 1.5% fee required by the [the supplier’s] contract is to be paid only upon default; it is not a cost of credit per se.

Fernandez, supra

QUICK NOTE: TIMELY RECORDING CONSTRUCTION LIEN

Posted on June 24, 2019April 23, 2020 by Edward Garber

A construction lien needs to be recorded within 90 days from a lienor’s final furnishing date. This date is exclusive of punchlist or warranty-type work (i.e., repairs to lienor’s own work). A lienor’s final furnishing date will be included in the construction lien as the lienor’s last date on the job.

A lienor’s final furnishing date is a question of fact to be decided by the trier of fact. In other words, if an owner (or party challenging the enforcement of the lien) argues that the lien was untimely recorded, the party will be arguing that the lienor failed to timely record its lien within 90 days of its final furnishing date. The application of this fact-driven issue, as further discussed in this article, is: whether the work was: 1) performed in good faith; 2) performed within a reasonable time; 3) performed in pursuance of the lienor’s contract; and 4) necessary for a completed project. Just remember, a final furnishing date will not include punchlist or warranty work a lienor is performing on the project. If a lien is recorded outside of this 90-day window, the lien will be deemed unenforceable. It is always a good practice to ensure a lien is recorded, at a minimum, weeks before the 90-day period expires to avoid any issue or argument with the lien being untimely recorded.

QUICK NOTE: A CONSTRUCTION LIEN IS NOT INTENDED TO LAST INDEFINITELY

Posted on June 16, 2019April 24, 2020 by Edward Garber

A construction lien is not intended to last forever. A construction lien must be foreclosed within one year from its recording date because a construction lien only lasts for one year by operation of law. You will not be able to foreclose a construction lien after this one-year period expires. This is why it is always good practice to calendar the expiration of this one-year period when a construction lien is recorded. There is never a good reason to engage in a last minute scramble to file a foreclosure lawsuit on the expiration date (or shortly before). While I always believe a lienor should work with counsel to record a construction lien, regardless, I would certainly recommend a lienor to work with counsel to ensure lien rights are properly perfected so that when it becomes necessary to foreclose the lien, the strategy is in place to file the foreclosure lawsuit.

Importantly, an owner can shorten the one-year period for a lienor to foreclose its construction lien by properly recording a Notice of Contest of Lien. A Notice of Contest of Lien will shorten the period for a lienor to foreclose its construction lien to sixty days. It is always beneficial to record the Notice of Contest of Lien sooner than later because it puts the onus on the lienor to either foreclose the construction lien or lose its lien and ability to foreclose its lien by operation of law. That’s right – if the lienor does not foreclose its lien within the sixty-day window, it will have lost its lien rights. There are times where an owner of real property records a Notice of Contest of Lien without the use of counsel. I do not suggest this for a couple of reasons. First, you want to ensure this is done right and, second, there may be other strategic decisions that may be better implemented based on the circumstances of the dispute.

QUICK NOTE: NOT IN CONTRACT WITH THE OWNER? SERVE A NOTICE TO OWNER.

Posted on June 9, 2019April 23, 2020 by Edward Garber

A subcontractor or supplier not in direct contract with an owner must serve a Notice to Owner within 45 days of initial furnishing to preserve construction lien rights. Of course, the notice of commencement should be reviewed to determine whether the subcontractor or supplier has construction lien or payment bond rights so that it knows how to best proceed in the event of nonpayment. Serving a Notice to Owner should be done as a matter of course — a standard business operation; no exceptions.

However, if a supplier specially manufactures or fabricates material for purposes of a construction project, it must serve the Notice to Owner within 45 days from the actual start of fabrication, and not from when the materials are delivered to the site. A reason for this is that a supplier of specially fabricated material can lien for the unpaid material even if the material is NOT incorporated into the construction project. This is different than a supplier liening for other material which does require the material to be incorporated into the project.

QUICK NOTE: DON’T FORGET TO SERVE THE CONTRACTOR FINAL PAYMENT AFFIDAVIT

Posted on June 2, 2019April 24, 2020 by Edward Garber

If you are a contractor in DIRECT CONTRACT with an owner, serve a contractor final payment affidavit on the owner, as a matter of course, and without any undue delay, particularly if you are owed money and have recorded a construction lien. In numerous circumstances, I like to serve the contractor final payment affidavit with the construction lien.

The contractor final payment affidavit is not a meaningless form. It is a statutory form (set forth in Florida Statute s. 713.06) required to be filled out by a lienor in direct privity of contract with an owner and served on the owner at least 5 days prior to the lienor foreclosing its construction lien. The contractor final payment affidavit serves as a condition precedent to foreclosing a construction lien. Failure to timely serve a contractor final payment affidavit should result in a dismissal of the lien foreclosure lawsuit, presumably by the owner moving for a motion for summary judgment. This should not occur.

I always suggest working with a lawyer to finalize a contractor final payment affidavit (as well as the lien in order to utilize the advice of counsel defense) for two reasons. First, you will ideally want the amount in the affidavit to be the same as the lien amount. Second, you may want to include certain clarifications or exceptions in the final payment affidavit for amounts not included in the lien (e.g., delay-type damages or certain disputed change orders that you do not feel comfortable including in the lien).