RECENT DEVELOPMENTS IN IDAHO S MECHANIC LIEN LAWS

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1 RECENT DEVELOPMENTS IN IDAHO S MECHANIC LIEN LAWS C. Clayton Gill March 3, 2011 Idaho Land Title Association Education Seminar Moffatt Thomas

2 OVERVIEW 1. Protecting Deeds of Trusts and Mortgages from Priority Attacks 2. Special Issues Pertaining to Retainage 3. Issues pertaining to Enforceability of Lien Waivers (Third-Party Beneficiaries, Separate Consideration) 4. Special Issues Pertaining to General Contractors 5. Special Issues Pertaining to Professionals Who Can File Mechanic s Liens 6. Rulings Regarding the Lien Bond Statute 7. Purchase Money Mortgages

3 The Custom and Practice in the Idaho Title Industry owner and contractor break ground before closing on construction financing lender will loan on project only if title company issues extended title coverage title company must protect mortgage from priority attack general rule contractor s priority date for mechanic s lien relates back to first date that they made improvements or delivered materials to the job-site priority date for mortgage is established by date mortgage is recorded against the property title company would protect mortgage from priority attack by getting contractor s bills paid current and execution of lien waiver

4 A Commonly Used Conditional Lien Waiver CONDITIONAL RELEASE The undersigned does hereby acknowledge that upon receipt by the undersigned of a check from in the sum of $ payable to and when the check has been properly endorsed and has been paid by the bank upon which it was drawn, this document shall become effective to release protanto any mechanic s lien, stop notice or bond right the undersigned has on the above-referenced job to the following extent. This release covers a progress payment for labor, services, equipment and materials through only and does not cover any retention or items furnished after said date. Before any recipient of this document relies on it, said party should verify evidence of payment to the undersigned.

5 Recent Legal Decisions Impacting the Prior Custom and Practice Standard lien waivers are not sufficient to subordinate mechanic s liens to mortgages. Contractor must agree to subordinate its priority date to mortgage. Must contractor be paid additional consideration (beyond what is owing under the contract) to make the subordination agreement enforceable? Must the lien waiver expressly reference subordination to the mortgage in question?

6 Key Language from Court Decisions Tamarack Case District Judge Patrick Owen, Valley County (May 1, 2009) The Court does not find that there is any language in these documents evidencing an intent to waive, alter or subordinate the effective priority date of the statutory lien. There is no mention of lien priority in the language of these documents. There is no mention of subordination. There is no mention of the [bank] mortgages or of any other lien claimant. The waivers apply specifically, and only, to lien rights for labor and material provided through a certain date, and not to future or subsequent work. Based upon its review of the language of these waivers, the Court finds that, in executing these periodic waivers, [contractor] only released its rights to enforce its statutory lien for the labor and material supplied to [property owner] through the dates referenced in the waivers. By executing these waivers [contractor] did not waive, alter or subordinate the effective date of its statutory lien priority for labor or services provided after the dates for which it had been paid.

7 Key Language from Court Decisions (Cont d) Rx Elite Case District Judge Juneal Kerrick, Canyon County (January 22, 2010) Based upon the evidence before it, the court finds that [bank] has failed to establish sufficient evidence for the ultimate trier of fact to conclude that [subcontractor] intended to waive its statutory lien priority by executing the releases and accepting progress payments from [general contractor]. First, as noted above, neither the Subcontract nor the conditional release makes any reference to a waiver of lien priority, much less waiver of priority as against [bank s] deed of trust. Furthermore, [bank] cannot claim that it was misled by the conduct of [subcontractor], since [bank] was not a party to the claimed lien waivers. Second, Sections 2.0 and 2.1 of the Subcontract provide for a retainage on each progress payment, which retainage is not payable until completion and acceptance of the project. The conditional releases executed by [subcontractor], by their express terms, do not cover such retainages. By necessity, then, the amounts retained from the progress payments relate back to the time when [subcontractor] first commenced work on the project. If the court were to apply [bank s] proposed construction of the releases, it would have to conclude that, despite the express language in the releases, [subcontractor] waived its statutory priority, as against [bank s] deed of trust, on claims for work it performed and materials it supplied to the project prior to [bank s] filing of its deed of trust. [Bank] has not identified any facts in the record that would support such a conclusion.... On a related note, an express waiver of a mechanic's lien must be supported by consideration in order to be effective and binding. Pierson v. Sewell, 97 Idaho 38, 42, 539 P.2d 590, 595 (1975). It is evident, from the language of the Subcontract and the conditional releases executed by [subcontractor], that the consideration supporting [subcontractor s] conditional partial lien releases in favor of [general contractor] was the receipt of progress payments for the period covered by the releases. However, there is no evidence in the record of any additional consideration running to [subcontractor], from [bank], [general contractor], or any other party, for the claimed waiver of its statutory lien priority in executing the February and April 2008 releases.

8 Special Issues Pertaining to Retainage typically, a retainage of 5% is held back from each progress payment to ensure completion of work prior practice was to pay prior bills current, but not pay retainage unresolved issue if retainage is not paid as part of process of bringing contractor's invoices current, how may that impact priority?

9 Do Lenders/Title Insurers Have Standing To Enforce Lien Waivers/Subordination Agreements lien waivers are often required as part of payment application by sub to general contractor AIA (American Institute of Architects) form contracts between general and sub typically call for execution of progress releases AIA form contracts do not identify lenders as third-party beneficiaries, nor can they if construction process begins before loan funds are secured subs are arguing that lenders/title insurers cannot enforce or rely on subrogation language in lien waivers because they were not parties to contract between sub and general subs are arguing that lenders/title insurers cannot enforce or rely on subrogation language because they did not provide anything in return for the subrogation agreement best way to counter those arguments: (a) detrimental reliance on contractors agreement to subordinate; (b) getting subs and general paid current and something extra in exchange for express subrogation to mortgage; (c) terminating prior contract and forcing contractors to begin work under a separate and new contract

10 Special Issues Pertaining to General Contractors A general contractor can lien for the work of its subcontractors. A general contractor s priority date is established by the first date it started to improve the property. Unresolved issue If a general contractor can lien for the work of its subs, is general contractor s lien subject to one or more priority dates? Should you rely on general contractor to round up necessary subordination agreements from subcontractors?

11 Special Issues Pertaining to Professionals Idaho appellate courts have not yet clarified what triggers priority date for contractor or material supplier lower courts typically require an improvement to the property or materials delivered to job-site so lender on notice to protect priority Idaho appellate courts have not clarified who is professional, but statute indicates professional is limited to engineers and surveyors Idaho appellate courts have not clarified start date for priority for professional lower courts are split on priority date for professionals with some holding that priority is determined by first date of improvements to property by any contractor and others holding that priority is determined by the first day they render professional services to the project

12 Lien Bond Statute Idaho Constitution requires the legislature to provide a lien law for laborers and materialmen lien bond statute enacted in 1993 no case law in Idaho interpreting lien bond statute issues relating to bonding around junior liens

13 Purchase Money Mortgages Purchase Money Mortgage funds used to purchase real property do they have special priority rights allowing them to trump other liens? Idaho Code Section states: A mortgage given for the price of real property, at the time of its conveyance, has priority over all other liens created against the purchaser, subject to the operation of the recording laws. Idaho appellate courts have not yet weighed in on this issue District Judge Tom Ryan in Canyon County action held on July 31, 2010, that purchase money mortgage had priority over engineer s mechanic's lien case may be limited to its facts because the party who contracted with the engineer did not come into ownership of the property until the date mortgage was recorded Idaho Code Section provides that a mechanic s lien only attaches to land if at the commencement of furnishing of professional services, the party who contracted for the services owned the land

14 For Further Information or Questions, Please Contact: C. Clayton Gill Moffatt, Thomas, Barrett, Rock & Fields, Chartered 101 S. Capitol Blvd., 10 th Floor Post Office Box 829 Boise, Idaho