Broken Lien Priority: Just Say No!

Broken lien priority is defined as the commencement of construction prior to recordation of the Deed of Trust. Commencement of construction can be defined by any one of the following:

1. Building materials or equipment deposited on the property, or if intended for use on the property, deposited on adjoining land, street or alley. This includes a construction trailer and/or construction
2. Foundation
3. Surveying
4. Grading, excavating, test hole digging or depositing of fill.
5. Removal or destruction of buildings, trees, shrubs, weeds or similar evidence of the clearing of the building
6. Tract improvements, street work, installation of public utilities in progress.
7. Installation of pipes from a water meter into the
8. Erection of power poles, meter for electrical service, the presence of a workman’s toilet or portable sanitation
9. Any evidence of repairs, remodeling, redecorating, additions to, or alterations of any kind to existing
10. Entering into a construction agreement.

The priority of a mechanic’s lien relates back to the date of “the commencement of the work of improvement”. As a result, if a Deed of Trust records after the commencement of the work or improvement, then a subsequently recorded mechanic’s lien will be entitled to priority over the earlier recorded Deed of Trust. The mechanic’s lien claimant will be in a position to foreclose and establish the priority of the mechanic’s lien against the lender’s Deed of Trust. According to Arizona Revised Statutes, the lien period runs 120 days after completion of construction. Therefore, if the Deed of Trust is recorded March 1 and construction is completed June 1, the lien period runs through October 1. For title insurance purposes, Completion of Construction is defined as thirty (30) days after issuance of the Certificate of Occupancy.  A mechanic may record a lien within 120 days after completion of construction.   If a mechanic’s lien is recorded, a mechanic can initiate a lawsuit to enforce the lien within six months after recordation of the lien. As this will cause increased liability for the title company, the title company through its underwriters must approve every construction loan thereby causing time delays and the necessity to provide additional documentation. A sample of the additional documentation required by the title company is as follows:

• Signed Indemnity Agreement by the Borrower and General Contractor
• Cost breakdown of the construction project
• Current Appraisal
• Current financial statements  from the borrower and any guarantors
• Lien Waivers, if available
• Loan Agreement

In addition, the title company will require information concerning the construction and construction loan such as the name of the general contractor, estimated completion date, loan terms, who will control the disbursement of funds, how will funds be disbursed and to whom, etc. Since each construction project is different, the requirements of the title company may change.  If the borrower does not have sufficient financial strength to secure the indemnity, other parties may be asked to join in the signing of the indemnity agreement, such as individual guarantors. Their financial statements will need to be submitted to the title company as well for review and approval. In summary ….. In order to maintain a smooth loan process, avoid broken lien priority like you would any other plague! Stress to your borrower what a difficult loan process it will be if they begin work prior to close of escrow.  Your sanity and their sanity might just depend on it. For questions of additional information, please contact your escrow officer! Written by: Gloria Burnett Pioneer Title Agency Sr. Commercial Escrow Officer Gloria.Burnett@ptaaz.com This document is furnished as a courtesy and does not render legal advice.