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.