Contractors Beware: Your Mechanic’s Lien Rights May Soon Be Changing

If you are a contractor or materials supplier involved in construction, when and how you get paid is a primary concern. The same can be said for banks and other institutions that lend money for construction projects, including protection from liens. In most instances, work is performed and paid in a timely manner. However, there are times when the owner does not pay the contractor. In these cases, the contractor files a mechanic’s lien to ensure payment.The primary purpose of Arizona’s mechanic’s lien laws are to protect the contractor and material men whose work or materials improve the value of another’s property. A properly recorded and valid mechanic’s lien has priority over all liens that attach to the property including those liens recorded before the mechanic’s lien was recorded. A case currently before the Arizona Supreme Court may have an impact on a contractor’s lien rights.In Weitz Co., LLC v. Heth, 233 Ariz. 442, 314 P.3d 569 (App. 2013) the general contractor successfully defeated a challenge to the priority status of a mechanic’s lien. The defendants in that action were the home buyers and their lenders. However, the defendants appealed the court’s ruling, arguing that Arizona’s statutory framework governing the priority of mechanic’s liens does not permit a mechanic’s lien to take priority over an earlier recorded lienholder.

The facts in Weitz were that sometime in 2005, Summit at Copper Square, LLC, a Phoenix real estate developer, obtained a $44 million construction loan to build a 165-unit mixed use commercial and residential condominium project located in downtown Phoenix, Arizona. Weitz Construction Co. served as the general contractor on the project. Construction started in January 2006 and Weitz timely served its 20-day preliminary notice. As construction progressed, Summit sold off some of the completed units. Most of the units that were sold were financed by the individual buyer’s mortgage lender. Summit used the proceeds from the unit sales to pay off the $44 million construction loan.

As the project neared completion, Weitz was still owed $4 million, which Summit was unable to pay. Weitz then recorded a mechanic’s lien against the individual condominium units. Weitz eventually filed suit against the individual condo owners and their lenders seeking to foreclose on its mechanic’s lien. The homeowners and lenders objected claiming that their lien had priority over Weitz’s lien based on the theory of equitable subrogation. Equitable subrogation allows a later filed lienholder to take priority, or “leap-frog” over a superior lienholder. Weitz countered that its mechanic’s lien had priority over the lender’s lien based on the mechanic’s lien statutes and A.R.S. § 33-992(A) which specifies the priority mechanic’s liens have over other liens. The trial court agreed with Weitz and permitted Weitz to continue with foreclosure of the condo units.

The homeowners and lenders appealed to the Arizona Court of Appeals. The Court of Appeals agreed with the trial court which resulted in the case being appealed to the Arizona Supreme Court. At this point, the Arizona Supreme Court has not ruled yet. If you’re in the business of building commercial or residential condo projects, the final decision in this case may affect your lien rights. The Arizona Supreme Court’s ruling is expected later this year.

Buntrock Law Group in Mesa ArizonaPublished By:

Buntrock Law Group, PLLC

2158 N. Gilbert Road, Suite 119
Mesa, AZ 85203

Phone: (480) 664-7728