Texas Commercial Law Firm
Construction Law
We practice in the area of real estate relating to construction of improvements. Our practice includes issues relating to mechanics and materialmen’s liens, (both on behalf of lien claimants as well as on behalf of mortgage lenders), faulty construction, breach of contract, warranty, DTPA and title claims. Most of these issue arise in the commercial context and result in commercial litigation but we also frequently deal with such issues with respect to residential construction. We have many years of experience in commercial litigation and in dealing with the kinds of issues which typically arise in construction.
The most commonly occurring issues arising in the construction context relate to unpaid contractors and subcontractors and their resulting lien claims. A discussion regarding lien priorities of mechanics and materialmen as they relate to mortgage lender lien claims follows.
Home Improvement or Construction Loans:
How prior Mortgage Liens may be Defeated by Trade Contractors
Many experienced lenders are aware they need to exercise caution to avoid losing their first lien rights to mechanics and materialmen (mechanics and materialmen liens are sometime referred to as "M& M liens") when lending money for home improvements or construction. But few are aware of how easily their lien rights may be defeated and the legal basis for the loss of such rights. This article briefly discusses Texas mechanic's and materialmen's lien law as it relates to the "lien inception" and "relation back" doctrines and describes how these doctrines may combine to defeat mortgage lien rights.
Texas has historically held tradesmen and laborers in high esteem and sought to protect their right to compensation for their labor and materials. This right to compensation goes back to the earliest days of Texas history and is secured by a constitutional grant of lien rights which provides:
Mechanics, artisans and materialmen of every class, shall have a lien upon the building and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the legislature shall provide by law for the speedy and efficient enforcement of said liens.
Tex. Const. Art XVI, § 37.
In addition to the self-executing constitutional lien, which is rarely relied upon, the legislature has provided mechanics and materialmen with a statutory procedure for securing and fixing liens against real estate improved by the lien claimants. [Tex. Prop. Code Ann. §53.001, et seq. (Vernon 2006)]. The policy behind allowing these liens to be created is that mechanics and materialmen contribute value to the real estate by providing labor and material and therefore should have a preferential claim to payment out of the value contributed by them.
An M & M lien claimant may achieve priority over a previously recorded mortgage lien on real estate via two methods. First, a mechanic's lien is entitled to priority if it has its "inception" before a competing lien or mortgage is recorded. Second, an M & M lien claimant has a "super priority" position as to any other lienholders, regardless of "inception" as to improvements that are "removable." In fact, an M & M lien claimant with a lien on removables has the right to "self-help" and may "repossess" materials provided to the construction site.
An improvement is "removable" if it can be removed without material injury to itself or to the real estate to which it is attached. Therefore, items normally associated with becoming part of the real estate once installed, such as fixtures, remain subject to M & M liens so long as they fit the removable criteria. Texas cases have variously found carpeting, appliances, air conditioning and heating components, smoke detectors, burglar alarms, light fixtures, door locks, doors and door trim, and windows to be removable. Items held not to be removable once installed include brick veneer, roofing tiles, and window frames.
Surprisingly, an M & M lien claimant is not necessarily limited to asserting his rights against removable items he installed. Some cases and commentators, as well as the controlling statute itself, suggest that a claimant may be entitled to"self-help" even as to removables supplied by others.
Inception of M & M Liens
The issue of when an M & M lien has its "inception" is what makes dealing with M & M liens a tedious, if not tricky, proposition. With almost all other liens against real estate, lien priority is determined merely by referring to time of recording. Texas law provides that a mechanic's lien is entitled to priority if it has its "inception" before the recording of a competing lien such as a mortgage. "Inception" of the lien means the point in time when it originates. When the M & M lien "incepts" is fundamentally important in determining who will win in a priority battle between an M & M lien claimant and a mortgage lienholder. If an M & M lien has its inception before the recording of a mortgage, then the M & M lien claimant will have a superior lien even though an M & M lien affidavit may not be recorded until months after the mortgage instrument.
An M & M lien has as its inception the earlier of the (1) commencement of construction of improvements or delivery of materials to the land where the improvements are to be located and on which the materials are to be used; or (2) the recording of a written agreement or affidavit evidencing an agreement between the owner and contractor.
Historically, a contractor's "commencement of construction activity" was chosen to serve as the inception point for M & M liens because the activity will serve to notify other claimants of the possibility of prior liens. The same logic applies to the delivery of materials to the construction site.
The requirements for recording of the construction contract between the owner and contractor are straightforward but infrequently used by contractors. This is because if a contractor did file his contract before the lender recorded his lien, the issuing title company would report it on its commitment and the lender presumably would make the loan only on condition that the contractor subordinate his contract to the lender's lien. Problems with inception, rather, arise most frequently as the result of factual issues which may be raised concerning precisely when construction of improvements commenced or when materials were first delivered to the construction site.
A test as to whether construction has commenced has been put forth by the Texas Supreme Court. It states inception of an M & M lien occurs only when the construction activity (1) is conducted on the land itself; (2) is visible upon the land; and (3) constitutes either (a) an activity which is an improvement(as defined under relevant Texas law); or (b) the excavation for or the laying of the foundation of a building or structure.
Although the Texas Supreme Court has promulgated this test, we believe that the test should be used only by lenders finding themselves in the unfortunate position of challenging the validity of an M & M lien. Rather than attempt to determine whether construction constitutes activity which would be defined as an improvement or if material delivered will be used in an improvement, a prudent lender will insist that no construction activity whatsoever will occur nor that any materials whatsoever will be delivered prior to the recording of the lender's lien. Lenders should be cautious in their inspection of a job site immediately prior to closing to determine that no activity which could possibly be construed as construction activity has occurred and that no materials have been delivered. In the event there has been some activity of a questionable nature or some materials have been delivered, then you should not lend without obtaining a payment bond, which insures that any M & M lien claims will be paid.
Relation Back and Common Lien Theory
When attempting to ascertain if an M & M lien has priority over a home mortgage lien, one looks at its time of inception. The time of inception controls for purposes of lien priority for all work performed or materials supplied regardless of whether the work is performed or the materials are delivered over several weeks or months. A deed of trust lien recorded after inception of an M & M lien for excavation, for example, will lose in a priority battle with the excavator even though most of the excavation work may be done after the deed of trust is recorded. This result is a consequence of the doctrine of "relation back."
Relation back simply means that a lien's priority relates back to the point of inception as if the entire debt secured by the M & M lien was incurred and secured on the date of inception of the lien. The relation back doctrine in and of itself would pose little risk to a lender assuming that a lender was certain only minor construction activity, such as grading, could have commenced prior to the recording of the deed of trust. It would seem that all a lender would risk under such circumstances would be loss of lien priority as to a very small percentage of the total construction work to be completed. As a result of what is known as the "common-lien" theory combining with the relation back doctrine, however, a lender actually risks losing lien priority to all tradesmen and suppliers, from the excavator up to the roofers and everybody in between.
The common-lien theory, briefly stated, is that inception of all mechanic's lien claims occurs upon the earliest commencement of work on the project by any of the mechanics or materialmen. Although it is not entirely clear if the common-lien theory will apply in Texas, if it does apply in its purest form, then all mechanic's lien claimants on a construction project, from those who lay the foundation to those who lay the carpet, will have the same priority position: the date when work was commenced or when materials were first delivered to the construction site by any of them. If M & M lien inception occurs at any time prior to recordation of the mortgage, then all unpaid M & M lien claimants will have lien claims arguably superior to those of the mortgage lender.
In order to protect their lien position, therefore, lenders should personally inspect the job site immediately prior to closing to confirm there is no construction activity whatsoever. Lenders must be mindful, however, that even if there has been no construction activity at the time of closing, unpaid suppliers retain a super-priority position and the right to strip the property of removables. The bottom line is that the constitutionally mandated protected status of mechanics and materialmen requires a careful monitoring of contractors throughout the construction process to assure that subcontractors are paid on a timely basis. For payment of mechanics and materialmen is the only certain way to protect collateral from enforceable M & M lien claims.
The lawyers at Balcom Law Firm in Houston, Texas are experienced and successful in construction law. Contact us today for an evaluation of your case.
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