Most of the time, lien priority doesn’t even matter. A contractor or supplier files their mechanics lien, and they are paid before legal proceedings and foreclosure are required. Or, if legal proceedings are necessary, the property has enough equity in it to pay off the lenders and the claimants.
Every now and then, though, lien priority becomes very, very important. And us construction lawyers and mechanic lien gurus rely on these fairly rare situations to occur so that the courts have the chance to interpret the laws and give us all some guidance on what happens to a mechanic lien claim when its fighting against the lender for money.
So, what exactly is lien priority? I’ve got a “Lien Priority” Tag here on the Construction Lien Blog, and you can learn a good deal on the topic there. In short, lien priority refers to the ranking of claims against a property. If you file a mechanics lien against a property with 4 other liens and a lender’s mortgage, the property is foreclosed upon, and a pile of money (but not enough money to pay all claims) is recovered by the sheriff…who gets paid, and who doesn’t?
In dispersing the funds between mechanic lien claimants, most states employ a “first to file” rule. Those who file first get paid first. If you’re not in a first to file state, you may be in a pro-rata state, which separates the money available between all the claimants.
The tougher question arises when there’s claims to the money by mechanic lien claimants and a lender. In some states, the lender’s mortgage is inferior to the mechanic lien claimant, even if it was filed first. Also, in some states figuring out who “filed first” can be complicated because of the concept that the mechanic lien attaches at the very start of construction, not upon formal filing.
If a mechanics lien doesn’t get you paid immediately, however, and you actually proceed to foreclose upon the project’s property, the obscure concept of lien priority can become critical. How the project’s state handles priority will dictate if you get full or partial payment, or just go home empty-handed.