A mechanics lien claimant filed a lien after a mortgage was placed against the jobsite, but the lien related to work performed prior to the mortgage. These facts were stipulated to in a case rencently before the Minnesota Appeals Court, but they were still required to decide who had priority: the lender or the claimant?
The issue at controversy in Big Lake Lumber Inc. v. Sec. Prop. Invs. Inc. was whether the pre-mortgage work was part of a “continuous” project that involved post-mortgage work.
General Lien Priority Rule in Minnesota
The court starts its legal discussion of the case by laying out the general rule for mechanics lien priority in Minnesota:
A mechanic’s lien claimant that contributes to the improvement of real property by performing labor or furnishing material obtains a lien on the improvement and on the land where the improvement is located, which attaches and becomes effective “from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement.” Minn. Stat. §§ 514.01..But “no lien shall attach” against “a bona fide . . . mortgagee . . . without actual or record notice” prior to “the actual and visible beginning of the improvement on the ground.” Minn. Stat. § 514.05
What does this mean?
First, a claimant’s mechanics lien in Minnesota is effective from the time the claimant begins to furnish any labor or material to the project. This can be days, weeks, months or even years before the mechanics lien is eventually filed. When you record a Minnesota mechanics lien, in other words, it relates back and is effective from the time you first began furnishing to the project.
As a result of this, a mechanics lien will have priority over a mortgage if the work was furnished before the mortgage was filed…generally. There is a small exception, which is the second point to make about this quote.
Second, the small exception is that regardless of the mechanic lien’s general effective date, it will not be considered to have priority over any mortgage unless there is “actual and visable” evidence that work has begun on the project.
Your Work Must Be Related To A Single Continuous Project To Relate Back
This is where the rule gets tricky and the situation the court confronted in the Big Lake Lumber case. As the court went on to explain in their opinion:
To obtain priority over a bank’s mortgage, a mechanic’s lien claimant can only relate a lien back to the actual and visible beginning of a project of improvement on the ground if the lien claimant satisfies its burden to show that the work underlying the lien “bears directly” on the project of improvement and not merely on “the overall project involved.” … A mechanic’s lien therefore does not bear directly on the project of improvement unless the project to which the lien’s underlying work contributed is “one continuous work constituting one undertaking” with the project of improvement.
In the Big Lake Lumber case, work was performed in 2006 to prepare for a building project. The building project did not go forward immediately, and more than a year later, went forward in a slightly different form. Big Lake Lumber wanted its lien claim to relate back all the way back to the original work in 2006, and thus have priority over the mortgage recorded between the initial work and the subsequent work.
Even though they acknowledge that this is a question of fact and district courts should be given some deference in making the determination, the Minnesota Court of Appeals nevertheless reversed the trial courts decision to hold that Big Lake Lumber’s 2006 work was not part of a single continuous project.
In making this decision, the court began by acknowledging that the case law on the subject is lacking in clarity:
We begin our analysis by acknowledging that this court has developed two different but overlapping methods of analysis to determine whether a project of improvement is part of one continuous project to which a lien claimant’s contribution relates or is a separate project.
In this decision, however, they “integrate these analyses into a single framework for application in all disputes over the priority of mechanic’s liens and mortgages under section 514.05,” which involves the consideration of four factors to determine if a project is or is not a single continuous improvement: ”the parties’ intent, the contracts’ scopes, financing, and time lapse.”
The court found against Big Lake in this case, holding that it was not a single continuous improvement based on the new integrated analysis. While the facts here are unique, it will be interesting to see how this new analysis spreads throughout the Minnesota courts as similar situations arise.