For contractors and architects, having priority over recorded trust deeds or other encumbrances is often the difference between getting paid and getting stiffed. If you have priority you get paid first.
The general rule for establishing priority is "first in time is first in right." Pretty straightforward. However, in some cases the laws rearrange who is first in time. A recent Oregon case explains how our construction lien laws affect this general rule.
SERA Architects v. Klahowya
In this case, Klahowya purchased property to build a development. Klahowya then hired SERA to be the architect and BooCo to be the contractor. Klahowya later opened a line of credit with Shorebank and used some of that money to pay off the first loan on the property. Klahowya eventually stopped paying SERA for its work, so SERA sued Klahowya. SERA also sued Shorebank to determine the priority between its lien and Shorebank's trust deed.
Even though Shorebank recorded its trust deed before SERA recorded its lien, the court ruled that SERA had priority. That seems to conflict with the general rule of "first in time is first in right." But, the court said that under Oregon's construction lien laws, the effectivedate for SERA's lien was the date when "commencement of the improvement" began (that phrase has a special meaning in the lien laws). The court ruled that the improvement commenced in July 2006 when BooCo demolished some structures and cleared some trees. That gave SERA's lien an effective date of July 2006, which was before Shorebank recorded its deed.
This decision does not change the "first in time" rule. Instead, it highlights that rule's importance and reminds us that the effective date for construction liens is when the "commencement of the improvement" began, which could mean:
• constructing a building, wharf, bridge, fence, sidewalk, tunnel, or other structure
• altering or repairing a building, wharf, bridge, fence, sidewalk, tunnel, or other structure
• excavating, surveying, or landscaping
• demolishing or detaching existing structures
• leveling, filling in, or otherwise making land ready for construction
And remember that for priority purposes, it is the date on which any of the above work begins, not when the work is finished. See ORS 87.005(1), (2), (5), and (9) for more detail about the meaning of "commencement of the improvement."
Shorebank next argued that it should have priority because Klahowya's initial lender had priority over SERA and Shorebank's line of credit was used to pay off that bank. In some cases, that argument works and a later lender is "subrogated" to the position of the earlier lender. However, that argument does not work if the second lender knows that a construction lien was created before the second loan was made. In SERA, before Shorebank gave the line of credit, it knew that SERA was performing work and knew that BooCo had commenced the improvement. The court said that was enough. Shorebank knew of facts that showed SERA had a lien and it had priority over Shorebank's trust deed. That knowledge prevented Shorebank from taking the place of the first bank.
SERA teaches us several lessons. First, the "first in time is first in right" is still the general rule in Oregon. Second, a construction lien's effective date is when improvement commences, not when the lien is recorded. The third is that architects and other contractors that perform work early in the development must be alert to any activity that could be "commencement of the improvement" because that activity will be important in any later dispute over priority. Fourth, and this cannot be repeated enough, SERA had a valid lien. SERA recorded the lien on time and sent the required notices. Priority does not matter if the lien was not recorded properly or the required notices were not sent.
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