The Downside of Construction Liens

William G. Fig

503.243.1656

Published in The Daily Journal of Commerce

Most, if not all, Oregon construction contractors and material suppliers are generally familiar with construction liens and the lien process. However, over the past 17 years, my experience has been that some construction industry professionals do not fully understand the "foreclosure piece" of the lien process and, as a result, rely too heavily on the payment protection they perceive a lien provides.

In short, these folks erroneously believe that, if their lien is properly perfected and recorded, they will, without much further effort, automatically receive payment for their work on, or materials provided to, a project. Unfortunately, especially in the past five to six years, that is usually not the case.

It is true that the recording of a construction lien may sometimes prompt payment from a "stubborn" customer, particularly during "the good times." However, while a construction lien can be an effective collection tool, like most things in life it is not without its downside.

The first potential issue is that, if the lien claim is disputed, the lien must ultimately be foreclosed. This means filing a lawsuit in the circuit court in which the project is located to obtain an order from the court foreclosing the lien and ordering the sheriff to sell the encumbered property to pay the lien claim. The foreclosure lawsuit essentially boils down to a breach of contract claim secured by the property.

As you might suspect, this legal process can be both expensive and time-consuming. Most civil cases in Oregon take 10 months to a year to get to trial. I would be very surprised if a lien foreclosure action could be tried through judgment for less than $50,000 in attorney fees and court costs.

The Oregon lien statutes provide that a prevailing lien claimant may recover its attorney fees (if all of the proper steps are followed); however, because of the significant amount of work involved in prosecuting a lien claim, most attorneys do not take such cases on a contingent fee basis. As a result, the claimant must often pay out tens of thousands of dollars "up front" to foreclose its lien before it has any hope of receiving payment from the lien. This often makes it economically infeasible to foreclose a "small" lien (under $50,000), especially in "one off" situations.

A second, and perhaps less understood, issue is that not all construction liens receive "super priority." In today's real estate market, "super priority" (i.e., having priority over a lender's existing deed of trust) is critical to a lien claim's success.

While some liens recorded against new construction projects have "super priority" potential, generally speaking, a lien for labor and/or materials provided on a repair or remodel project does not. A lien on a repair or remodel project is subordinate to (i.e., does not have priority over) a previously recorded encumbrance (i.e., a deed of trust, mortgage or lien) against the property (except for an encumbrance specifically related to financing the subject construction).

This means that, absent construction financing, regardless of what it does, a lien filed by a material supplier who provides shingles for reroofing an existing house will not have priority over the existing encumbrances recorded against the property.

The same is true for the roofing contractor that provides labor for the project. In such a situation, even if the lien claimant properly perfects, records and forecloses its lien, its interest/lien is subordinate to an existing encumbrance recorded against the property before the construction project began (usually a purchase money lender's deed of trust).

As a result, to obtain an order from the court compelling the sale of the property, the lien claimant must first satisfy the obligation owed to the existing lender. Otherwise, the claimant takes the property subject to (or still encumbered by) the lender's deed of trust.

In many instances, the amount owed to the lender is exponentially greater than the amount of the lien claim and there is very little equity (if any) left in the property after the obligation owed to the lender is satisfied. Therefore, many remodel/repair lien claimants are, understandably, not willing to pay off the amount owed to the lender and the recording of the lien and subsequent foreclosure lawsuit are for naught.

A construction lien is, indeed, an important arrow in the construction professional's quiver of account receivable collection remedies. However, the savvy construction professional, particularly in the repair and remodel industry, wisely does not rely solely on a construction lien to receive or guarantee payment.

Recording a lien may occasionally prompt payment; however, the decision whether to foreclose a lien – particularly regarding a remodel or repair project – should be considered carefully. If construction financing is not involved, such a lien claimant may want to seriously consider remedies other than foreclosure of the lien.

Read more: http://djcoregon.com/news/2013/08/07/the-downside-of-construction-liens/#ixzz2cmYTvPRY