{"id":265946,"date":"2014-12-12T06:21:54","date_gmt":"2014-12-12T13:21:54","guid":{"rendered":"https:\/\/www.myconstructionexpert.com\/blog\/?p=265946"},"modified":"2014-12-10T10:22:22","modified_gmt":"2014-12-10T17:22:22","slug":"a-cautionary-tale-for-general-contractors","status":"publish","type":"post","link":"https:\/\/www.myconstructionexpert.com\/blog\/a-cautionary-tale-for-general-contractors\/","title":{"rendered":"A Cautionary Tale for General Contractors"},"content":{"rendered":"

Hopkins & Carley | November 25, 2014<\/p>\n

Construction lenders often go to great lengths to ensure their deeds of trust have priority over mechanic\u2019s liens.\u00a0 Typically, as part of the construction loan process, general contractors are asked to sign documents consenting to the owner\u2019s assignment of the construction contract to the lender.\u00a0 According to a recent decision by the California Court of Appeal, these assignment agreements may contain provisions that subordinates mechanic\u2019s liens to the lender\u2019s deed of trust, even if the loan follows the start of construction.<\/p>\n

The case is Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company et al., and involved the construction of a medical office complex in San Jacinto, CA.\u00a0 The general contractor had already constructed a fence and started preparing the land for construction when the owner obtained its construction loan and the construction lender recorded its deed of trust.\u00a0 The loan required the owner to assign its rights and remedies under the construction contract to the lender.\u00a0 The general contractor signed a written consent to the assignment that included language subordinating both (i) payment obligations under the construction contract to the payment obligations under the loan, and (ii) any mechanic\u2019s liens to the lender\u2019s deed of trust.<\/p>\n

When the owner later failed to make payments for the construction work, the general contractor recorded a mechanic\u2019s lien for $2.2 million and then filed suit for foreclosure.\u00a0 Since mechanic\u2019s liens relate back to commencement of the work, the general contractor believed its lien had priority over the lender\u2019s deed of trust.\u00a0 The lender responded by asserting that its deed of trust was superior in priority to the mechanic\u2019s lien based upon the subordination language in the assignment.\u00a0 The trial court determined that the subordination clause was an unenforceable waiver of mechanic\u2019s lien rights and gave the mechanic\u2019s lien priority.\u00a0 The appellate court reversed the trial court\u2019s judgment, however, and held that the statutory prohibition against the waiver of mechanic\u2019s lien rights does not apply to waivers executed by general contractors who contract directly with the owner, and gave the lender\u2019s deed of trust priority.<\/p>\n

Although California\u2019s mechanic\u2019s lien statutes are designed to provide strong protection to those who provide labor, services, and materials to a construction project, the Moorefield case demonstrates that general contractors (the waiver does not affect subcontractors and material suppliers) need to be wary of consenting to the assignment of their contracts to construction lenders.\u00a0 The language in those documents can result in the subordination of mechanic\u2019s lien rights to the lender\u2019s deed of trust.\u00a0 When presented with a consent agreement, consult your legal counsel to understand the impacts and potential alternatives.<\/p>\n

via A Cautionary Tale for General Contractors | Hopkins & Carley<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

Hopkins & Carley | November 25, 2014 Construction lenders often go to great lengths to ensure their deeds of trust have priority over mechanic\u2019s liens.\u00a0 Typically, as part of the construction loan process, general contractors are asked to sign documents consenting to the owner\u2019s assignment of the construction contract to the lender.\u00a0 According to a… Continue reading A Cautionary Tale for General Contractors<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","enabled":false},"version":2}},"categories":[14,9,8],"tags":[12,224,184],"class_list":["post-265946","post","type-post","status-publish","format-standard","hentry","category-construction-2","category-construction-contracts","category-mechanics-lien-rights","tag-construction","tag-construction-contract","tag-mechanics-lien-law","entry"],"jetpack_publicize_connections":[],"yoast_head":"\nA Cautionary Tale for General Contractors - 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