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.

QUICK NOTE: WEBINAR ON MAXIMIZING PAYMENT DURING COVID-19

Posted on May 18, 2020May 18, 2020 by Edward Garber

How do you maximize payment, particularly during an uncertain COVID-19 economy? Check out the webinar I did for LevelSet where you can watch the webinar or read the transcript. I don’t want to give any spoilers, but it discusses preserving and enforcing lien and payment bond rights, tidbits to ensure you are maximizing payment, charting contractual notice provisions relating to force majeure, and those contractual provisions to note moving forward in this new climate. All good-to-know information to ensure you are preserving rights and appreciating risks with a topic that did not cross your mind a few months ago!

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.

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.

CIRCUMSTANCES IN WHICH DESIGN PROFESSIONAL HAS CONSTRUCTION LIEN RIGHTS

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

If you are a design professional (architect, landscape architect, interior designer, engineer, surveyor, or mapper) you have construction lien rights in the event you are not paid. This does not mean your lien rights are absolute so it is important to understand the circumstances which allow you to record a construction lien on a project. These circumstances are contained in Florida Statute s. 713.03:

(1) Any person who performs services as architect, landscape architect, interior designer, engineer, or surveyor and mapper, subject to compliance with and the limitations imposed by this part, has a lien on the real property improved for any money that is owing to him or her for his or her services used in connection with improving the real property or for his or her services in supervising any portion of the work of improving the real property, rendered in accordance with his or her contract and with the direct contract.

(2) Any architect, landscape architect, interior designer, engineer, or surveyor and mapper who has a direct contract and who in the practice of his or her profession shall perform services, by himself or herself or others, in connection with a specific parcel of real property and subject to said compliances and limitations, shall have a lien upon such real property for the money owing to him or her for his or her professional services, regardless of whether such real property is actually improved.

The first circumstance pertains to design professionals that do NOT have a direct contract with the owner of the property. In this circumstance, you have lien rights for your services “used in connection with improving the real property” or your services “in supervising any portion of the work of improving the real property” that you perform under your contract and with the direct contract, presumably between the owner and your client. The important, operative word in this circumstance involves improving the real property.

The second circumstance pertains to design professionals hired directly by the owner. In this circumstance, you have broader lien rights as you have lien rights for your services “regardless of whether such real property is actually improved.” Hence, improving the real property is of no moment.

A design professional does not need to serve any preliminary notice (such as a notice to owner) in order to preserve their lien rights. However, a design professional still needs to record a construction lien within 90 days from their final furnishing date.

A construction lien from a design professional is less common than a lien from a contractor, subcontractor, or supplier. Nonetheless, design professionals do have construction lien rights that an owner should be cognizant of and a design professional should understand in furtherance of best ensuring payment.

FILLING OUT THE CONTRACTOR’S FINAL PAYMENT AFFIDAVIT

Posted on November 9, 2019November 9, 2019 by Edward Garber

When preparing a contractor’s final payment affidavit, I always suggest for a contractor (or anyone in privity of contract with the owner) to identify the undisputed amounts their accounting reflects is owed to ALL subcontractors, etc., regardless of whether that entity preserved their lien rights. If the contractor provided a payment bond, I footnote this simply to support that none of the lower-tiered subcontractors have lien rights or are the traditional “lienor.” (Thus, there is no prejudice to the owner if an entity is inadvertently omitted from the affidavit.)

There are times, however, where a contractor does not identify a subcontractor that did not serve a notice to owner and, therefore, has no valid lien rights. Or, a contractor omits a lienor that actually did serve a notice to owner and preserve its lien rights; this happens.

There was an older First District Court of Appeals case that harshly (and, quite, unfairly) held that the contractor must identify everyone in the final payment affidavit regardless of whether that entity timely served a notice to owner or their lien is invalid. This case, however, predated, a 1998 statutory change to Florida’s Lien Law.

Today, the statute (in Florida Statute s. 713.06) currently provides:

(d) When the final payment under a direct contract becomes due the contractor:

1. The contractor shall give to the owner a final payment affidavit stating, if that be the fact, that all lienors under his or her direct contract who have timely served a notice to owner on the owner and the contractor have been paid in full or, if the fact be otherwise, showing the name of each such lienor who has not been paid in full and the amount due or to become due each for labor, services, or materials furnished….

The contractor shall have no lien or right of action against the owner for labor, services, or materials furnished under the direct contract while in default for not giving the owner the affidavit; however, the negligent inclusion or omission of any information in the affidavit which has not prejudiced the owner does not constitute a default that operates to defeat an otherwise valid lien. The contractor shall execute the affidavit and deliver it to the owner at least 5 days before instituting an action as a prerequisite to the institution of any action to enforce his or her lien under this chapter, even if the final payment has not become due because the contract is terminated for a reason other than completion and regardless of whether the contractor has any lienors working under him or her or not.

Fla. Stat. s. 713.06(d)(1).

The Fourth District Court of Appeals in Fetta v. All-Rite Paving Contractors, Inc., 50 So.3d 1216 (Fla. 4^th DCA 2010), claimed that the purpose of the statute is for the contractor to identify all lienors who have timely served a notice to owner that has not been paid in full. (Hence, you do not need to identify those that did not timely serve a notice to owner even though, from a practical standpoint, identifying all makes sense as a just-in-case.). Further, even if there was an omission, that would not render a lien invalid unless the owner can prove prejudice and prejudice is not so easy to prove.

When in doubt, consult counsel when finalizing or filling out a contractor’s final payment affidavit. Rights can be preserved and items footnoted as appropriate for clarification purposes, such as the fact that the amount in the affidavit may not include amounts that are not available under the lien law (i.e., delay damages).

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.