While there are signs that the economy is recovering, the priority battles stemming from failed construction projects will still be making their way through the court system for some time. One area where there are lessons to be learned is properly documenting subordination of contractor claims.
At the commencement of construction financing, it is typical for the lender to obtain from the Borrower an Assignment of Contracts. The Assignment will also include an acknowledgment from the third party contractors consenting to the assignment and subordinating any liens. As the case law shows, there is a fine line between permissible subordination and unenforceable waiver of mechanic liens.
- Permissible – Include the word “subordination” within the title of the document and include in the text language by which each contractor agrees its liens, claims and remedies of any kind are made expressly subordinate and junior to the liens, claims and rights of the lender. See Dew Corp. v Mathwig Dev. Co., 2010 WL 1541294 (Minn. App. 2010) (unpublished).
- Unenforceable – If the language goes beyond mere subordination to also prohibit the contractor from filing a mechanic’s lien, the restriction may be considered a prospective lien waiver and therefore unenforceable. Kraus-Anderson Constr. Co. v Superior Vista LLC, 2010 WL 2650481 (Minn. App. 2010).