Tuesday, March 20, 2012

Nevada Supreme Court Decides Mechanics Lien Priority Issues

Priority issues relating to mechanics liens can be confusing, to say the least. While statutes generally address these issues, and courts attempt to clear up any ambiguities, new uncontemplated circumstances arise on a daily basis, resulting in in ever more confusion.

In 2011, the Nevada Supreme Court tackled yet another of these novel issues, hearing a case that questioned what constituted the "commencement of construction" for priority purposes. By way of explanation, in Nevada, a mechanics' lien takes priority over any lien, mortgage or encumbrance that attaches after the "commencement of construction".  It does not matter when the lien notice is recorded, as long as it is recorded after construction begins. Commencement of construction is  defined as the date on which work performed or materials and equipment furnished are visible from a reasonable inspection.


In the Nevada case, J.E. Dunn Northwest, Inc. v. Corus Construction Ventures, LLC, 249 P.3d 501 (Nev. 2011), a contractor performed various tasks on a property valued at about $1 million, including reviewing drawings, performing site work (such as clearing, grading, soil testing and survey work), and developing schedules, etc. 

The property owner thereafter began negotiations with a bank to obtain financing. Prior to issuing  a loan, the bank performed its due diligence, hiring an inspector to view the property for evidence of construction work. The inspector reported that nothing indicated that work was being performed on the project. The bank was aware that work was going to be performed, and at the time the loan was issued it approved the contractor, negotiated its own agreement with the contractor, and acknowledged that the contractor provided construction services. An attempt to get the contractor to waive its lien rights and subordinate its lien to the bank's mortgage was unsuccessful.

When a dispute arose, the contractor asked the court to establish its lien rights as having priority over the bank's loan. In holding that the loan had priority, the Nevada Supreme Court upheld the lower court's decision that because no "visible" work had occurred on the property, the bank's loan had priority over the lien. The court's decision indicated that public policy supports maintaining the "visible" rule because no construction lender would be able to ascertain, for priority purposes, whether construction was, in fact taking place on the property,  potentially causing a freezing effect on construction lending. The "purpose of the visibility requirement is 'to inform prospective lenders inspecting the premises that liens had attached.'" The court also rejected the contractor's argument that the bank's actual knowledge of the work was sufficient, stating that the statute was clear in requiring the construction to be visible.



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