When owners file bankruptcy or projects otherwise go south, lien priority often comes to the forefront. The idea is relatively simple. Priority is how courts determine which creditors get paid first. This often pits lenders against M&M lien claimants. For lenders, their liens typically arise when they record their deeds of trust. However, for M&M lien claimants, the Texas Property Code has very specific rules that must be followed.
The Code provides that a “mechanic’s lien does not affect any lien, encumbrance, or mortgage on the land or improvement at the time of the inception of the mechanic’s lien ….” Inception is the key word. The code goes on to state “the time of inception of a mechanic’s lien is the commencement of construction of improvements or delivery of materials.”
Going back to the 1895 Oriental Hotel v. Griffiths opinion, the Texas Supreme Court and numerous other courts have held that it is the date of the initial commencement of anyone’s construction under the original construction contract, rather than the date that the lien claimant commences its work or first delivers materials. In other words, the time of inception of all M&M liens arising for the purpose of fulfilling the original construction contract will relate back to the date that the first subcontractor began its work or the first materialman delivered its materials under such original construction contract. This rule enables the general contractor’s lien and all of the general contractor’s subcontractors’ and suppliers’ liens to relate back to this commencement date for purposes of inception.
This, however, is not the end of the analysis. The Property Code requires that, for purposes of commencement, the initial construction work performed or materials delivered must be “visible” at the project site. For construction to be visible, the Texas Supreme Court has held that this means the construction must: (1) be conducted on the land itself; (2) be visible on the land; and (3) be an activity that is an improvement under the Code or excavation work. For materials delivered, the Texas Supreme Court has held that the goods must: (1) be delivered to the land; (2) be visible on the land; and (3) be consumed by, or incorporated into, the construction of the project. The visibility test is often litigated. Texas courts have held that preparatory activities, such as setting stakes and batterboards, do not satisfy this test. On the other hand, excavation work has been found to satisfy this test. This is a highly fact intensive issue.
The Property Code also provides for two important exceptions:
First, the inception date of liens for architects, engineers, surveyors, landscapers, and persons providing demolition services, is the date that the lien affidavit is recorded by such person.
Second, an owner and original contractor may jointly sign and record an “affidavit of commencement” within 30 days of actual commencement of construction or delivery of materials.
The affidavit must contain:
(1) the name and address of the owner;
(2) the name and address of each original contractor, known at the time to the owner, that is furnishing labor, service, or materials for the construction of the improvements;
(3) a description, legally sufficient for identification, of the property being improved;
(4) the date the work actually commenced; and
(5) a general description of the improvement.
This affidavit is not dispositive of the issue, but it is “prima facie evidence of the date of the commencement of the improvement described in the affidavit.” Thus, it creates a rebuttable presumption.
The importance of priority, especially during these difficult and strange times, cannot be overstated. The stakes in a priority dispute can be high. For the M&M lien claimant, these rules could mean the difference between recovering everything and recovering nothing.