In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Co., 230 Cal. App. 4th 146 (4th Dist. 2014), a California appellate court upheld an agreement executed by a general contractor which subordinated its mechanic’s lien to a construction lender’s deed of trust.
In 2006, developer DBN Parkside LLC (“DBN”) purchased land in San Jacinto, California (the “property”) to build a medical complex (the “project”). DBN hired Moorefield Construction, Inc. (“Moorefield”) to act as general contractor and sought funding for the project from Intervest-Mortgage Investment Company (“Intervest”). Prior to the recordation of the construction loan, and unbeknownst to Intervest, Moorefield cleared and grubbed the project site. Pursuant to the construction loan agreement, Intervest required DBN to assign its rights and remedies under the construction contract to Intervest. Under its construction contract, Moorefield agreed to subordinate its lien rights to the construction loan.
After DBN paid all but the last two of Moorefield’s invoices, DBN defaulted on its construction loan agreement with Intervest. After completing its punch list work, Moorefield filed a mechanic’s lien against the property for the two unpaid invoices.
Moorefield filed an action to foreclose upon its lien on the property. Intervest filed a cross-complaint seeking, among other things, a declaration that its rights under the deed of trust were superior to Moorefield’s mechanic’s lien. While the litigation was pending, Intervest foreclosed on the construction loan deed of trust and took title to the property. In a bench trial, the trial judge found Moorefield’s mechanic’s lien was valid, timely recorded, and had priority over Intervest’s deed of trust. The court then ordered the foreclosure and sale of the property to satisfy Moorefield’s mechanic’s lien. Intervest appealed.
At issue on appeal was whether the subordination clause contained in Moorefield’s contract, later assigned to Intervest, was enforceable. Relying on the decision in Santa Clara Land Title Co. v. Nowack & Associates, Inc. (1991) 226 Cal.App.3d 1558, the appellate court held that while California Civil Code section 3262 prohibits a project owner or original contractor from waiving or impairing another’s mechanic’s lien rights, section 3262 does not prevent the prime contractor—here, Moorefield—from waiving or impairing its own mechanics lien rights. The appellate court then reversed the trial court’s judgment, holding that the subordination agreement effectively gave Intervest’s deed of trust priority over Moorefield’s mechanics lien.
By the time work begins on a project, a construction loan is generally already in place. This case was unusual in that Moorefield had commenced work before the construction loan was recorded. The right to a mechanic’s lien is granted by the California Constitution and lien rights are vested at the time work is performed or materials are provided on the property. Here, Moorefield performed work on the project before Intervest’s deed of trust was recorded, thus giving its mechanics lien priority. In Moorefield Construction, Inc., the Fourth District affirmed that general contractors are free to subordinate their mechanic’s lien rights by contract, and that such agreement is not contrary to the California Constitution or to public policy. It is therefore important for general contractors performing early work on a project to carefully read their construction contracts to ensure a subordination clause will not later encumber a mechanic’s lien.
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