It goes without saying that a construction project involves a plethora of competing interests. There is a lender, a main contractor, subdivision improvers, architects, and many different subcontractors, all of which are competing for limited funds meant to be exchanged for labor, services, and materials. In an ideal world, there are enough funds to pay the full value of all claims for work, services, and materials furnished. However, this is not always the case and is a main reason why Florida has such an in-depth statutory scheme governing construction liens and other claims to funds. As such, this article intends to address the basic vesting and priorities among competing liens.
A. Relation Back Doctrine
The most basic rule for maximizing your chances of getting compensated for work, services, or material furnished is: first in time, first in right. Simply put, the first to record their lien will take priority over subsequently recorded liens.
Liens under Fla. Stat. § 713.05 and § 713.06 (liens of persons in privity and not in privity) shall attach and take priority as of the time of recordation of the notice of commencement, but in the event a notice of commencement is not filed, then such liens shall attach and take priority as of the time the claim of lien is recorded.1 This rule is known as the “relation back doctrine” and the doctrine acts to protect construction lienors from intervening encumbrances on the Property after the owner records the notice of commencement.
B. Priority Rule Among Construction Lien Claimants
Florida Construction Lien Law provides rules for determining priority amongst these claimants. These rules are codified in Fla. Stat. § 713.06(4)(a) and (b) and provides that first all laborer liens are paid off. Second, liens of all others are paid minus the Contractor. This includes liens for services and materials. Third, the Contractor’s lien is paid. Note that subcontractors and materialmen have superior priority to that held by the builder or contractor.
What the main rule boils down to is that all liens in higher classes should be paid before any amounts are allowed to the lower class. So what happens when the amount of money under the contract cannot pay all the liens within a given class? In this case each lien will be paid based on a pro rata share of the total amount of funds applicable to that class.
C. Notice of Termination
Lastly, note that when an owner files a notice of termination, it acts to terminate the notice of commencement. As a result, any construction lien filed after a Notice of Termination and after a property has been mortgaged will not relate back. In this situation, the construction lien simply will not take priority over mortgages recorded prior to it.2
D. The Super Priority Rule for Construction Mortgages
Construction mortgages are obtained to finance the construction and the mortgagee will hold the proceeds of the mortgage and assume the duty to pay for materials and supplies for the work done.3 Thus, it is an important part of the construction process and public policy supports it receiving first priority. Without these mortgages, development would be substantially hindered.
Note that while construction liens attach and take priority according to the time of recordation of notice of commencement or claim of lien, an encumbrance recorded prior to a construction lien’s attachment will take priority as per Fla. Stat.§ 713.07(3). In almost all cases, the construction mortgage lender will have the first priority simply because it recorded its lien first, before the notice of commencement is filed. Banking regulations require construction mortgages to have a first priority lien. A notice of commencement filed prior to a construction mortgage recording would simply ruin its priority and it goes without saying that few lenders, if any, would be willing to expend large sums of money to finance a project as a second priority lienor.
Further, a mortgagee that decides to completely pay off a preexisting construction mortgage will still be subrogated as to the rights under said construction mortgage. This means that the mortgagee will then take superior priority as to the construction liens coming into effect between the two mortgages.4
E. Lien Cut Off by Bona Fide Purchasers
In Florida, a bona fide (good faith) purchaser of real property will take precedence over an unrecorded interest in said property. This means that a construction lienor, who fails to record a claim of lien, can potentially lose all claim to payment if a third party purchases the property.
It is necessary to file a claim of lien as soon as possible in order to preserve priority. While the relation back doctrine will allow for priority at the time the notice of commencement is filed, we have seen numerous instances where a notice of commencement was not filed or was ruled invalid. It is also not uncommon for a notice of termination to interrupt construction. At that time, those who have yet to file a claim of lien may be at the mercy of potential intervening mortgagors. The bottom line is that filing a claim of lien is one of the few things that a lienor has control of and is the most basic step towards protecting one’s claim to funds owed for work, services, or materials.