This blog is part nine in a series on Tennessee lien laws where we will give the basics of what the lien law structure looks like in Tennessee, understand it a little bit, understand some of the pitfalls, and some of the things that you need to be aware of.
Part 5: Bonding a Lien in TN
Part 8: Can You Lien for Tenant Work in TN?
Part 9: What about Priority? - The Visible Commencement Standard in TN
Part 11: Other Rights – The TN Prompt Payment Act – Notice and Remedies
At the back end of the Tennessee lien law and understanding some of the aspects of it, in this article we will talk about priority. Priority is a key to the effectiveness of a lien – both of why it works as leverage to get paid and the problems if you do not follow the lien law correctly.
Recap: Tennessee Lien Law Basics
As we start discussing priority, we still have to talk about a summary of liens in Tennessee. The lien law is written in two parts.
a. Who has lien rights?
Remote contractors and prime contractors have lien rights and the requirements are a little different for both.
b. For what work are lien rights valid?
The type of work is an ‘improvement’ the definition of which is considered pretty wide open.
c. On what property are lien right valid?
Lien rights are valid on real property and interest therein, which includes condos and leaseholds.
d. For how much are lien rights valid?
A lien secures the ‘contract price.’ The contract price can include extras and it can include other things like attorney’s fees.
e. Steps for prime contractor and remote contractor to follow to secure lien rights
Prime contractors have to file a lawsuit within a year and remote contractors have to follow the trifecta of the Notice of Nonpayment, recording the Notice of Lien, and perfecting the lien with a lawsuit. The second step for the prime contract is a requirement just for priority.
That is whether or not the general contractor (prime) needs to record the lien within the 90 days of completion or abandonment.
Priority for Laborer, Parity to Other Lienors
Now we will start at the beginning here on priority and the first question is, how does priority work among lienors in a project that goes bad, somebody goes bankrupt, and you have got 10 different folks who have liened the property for their work on the project.
The answer to that is we now have a third category of people. Besides prime contractors and remote contractors, there are individual laborers who are actually doing the work and have a lien for their unpaid services.
So what Tennessee lien law does or what Tennessee statutes do in the lien law is they give that individual laborer a priority interest over all other lienors. Otherwise, everyone that liens, whether they are a prime contractor and remote contractor. Remote again can be a subcontractor, a subcontractor of a subcontractor, or supplier of a subcontractor.
Everyone shares pro rata and there is some case law on this that essentially says it can be the total amount claimed versus total amount available if you sell the residential property from a lien action. Everyone is going to share based on that proportionate value. That is the basis upon what you share with other lienors in Tennessee.
a. Priority over judgment liens
Now, one very useful tool is that liens on the property actually have priority over judgment liens. That means that there is a prior judgment against the owner of the property. The mechanic’s lien is actually going to have priority over it and that is a unique exception.
There are some limitations to that because of the unique aspects of it. But in theory, it makes some sense because the lien again, is for the improvements to the residential property and so you want to make sure that anybody who actually made those improvements and convert a benefit have the priority over an old judgment lienor.
b. Attachment and priority vs. third parties visible commencement
That takes us to third parties. How does priority work in Tennessee with third parties? The answer is it all goes to this concept that Tennessee has a visible commencement. The idea is that upon visible commencement the lien attaches to the property and therefore that is the priority date for all contractors working on project.
So that gets us to the question of what visible commencement is. There is a specific definition further below.
In the section above ‘excluding however, demolition, surveying, excavating... and the delivery of materials therefor.’ It is the exact same language you are going to see when you go to the definition of what visible commencement is.
What you should note is there is a timeframe before visible commencement on which work is being done in which the Texas Deed of Trust can be recorded for a bank to have priority or another third party who takes an interest in the property that would trump a lien.
This is important when you look at where the leverage is with a lien. In a lot of projects, particularly in some periods in the past, there would not be a lot of value in the property that was not encumbered by the Deed of Trust or mortgage from the lender. Therefor you could try to foreclose on your lien.
But if the property is not worth more than the lender’s need to trust that is ahead of you, your lien really is not worth much either, other than triggering a default under the loan and requiring the lender to step in and protect their own interest. It is always a little bit of a catch-22 as to whether you want to proceed to impact the title, lien it, and try to push that lien.
Or you can decide if you want to try to give the owner a little bit more leeway in terms of trying to correct and get to a position where they can pay you. So that is the big picture. That is why this really matters when talking about who has priority, particularly between the lender on the project and the lienors.
The other thing to note here is that visible commencement can be multiple time periods. You will see this concept here about a subsequent visible presumption of operations. This concept is embedded throughout the state of Tennessee’s lien law in the sense of implied abandonment after 90 days if nothing is happening on a project.
It is not all that uncommon for a project to get started and get right on that edge of what is visible commencement or what is not visible commencement, and then get stalled through the financing efforts, or get put on the shelf for 180 days.
In the last year there have been a lot of construction projects that were put on the shelf for a year and a half and are not beginning. Tennessee lien law treat that gap as almost the start of a new project if that gap is longer than 90 days.
You will see that concept embedded in the visible commencement and the visible recommencement if that is applicable. So exactly what is visible commencement?
c. What is visible commencement?
Below is the definition you are going to see in the Tennessee lien law.
The last few lines, ‘excluding, however, demolition, surveying... and the delivery of material therefor,’ is the exact same language found in the priority statute.
But what is it? There is some case law out there that it is not just delivering some pipe to the property, and it is not clearing the property. Some of those are in your express definition or of the exclusion.
What it is, is a little bit of a flexible concept and one to be determined on the facts of each case, as to the particular date in which something is delivered, or of such manifest and substantial character that someone should have been aware construction was ongoing.
Well arguably, a lot of the things in the last line quoted above that are specifically excluded should do that. So where that leaves you typically is once you get past any express exclusion as above, you have triggered visible commencement. And that triggering visible commencement gives the priority for all the lienors who are going to come subsequently.
So that gives us visible commencement. That is the date at which lienors are going to get that priority in the property.
Below is a timeline so you can see how a project goes from the start to substantial completion.
You have the start of a project. Now start can mean a lot of different things. It can mean staking a property, it can mean clearing it or getting plans to the city. That is pretty irrelevant under Tennessee lien law, but what is relevant is the next one, which is visible commencement. Because that is what triggers the lien priority.
There is a deed of trust in this timeline before visible commencement. That is your typical project structure in which a lender is going to have priority over lienors. That said, there are plenty of construction projects this can be seen.
Less than ideally, in the sense that it is not clear whether visible commencement is before or after the trust, in those situations a lienor has extensive leverage to get paid. So that is one thing that you need to be aware of as you are thinking how valuable your lien is and when visible commencement is versus when you go look at the property records when the deed of trust was filed.
The Lender Exception
As with everything good in the wall, there is always an exception.
There is an exception for the lienors to get back to a priority position over a lender. That requires some notice and a very particular one, as well as a response of acceptance or a lack of response from the lender.
Rarely anyone will try to exercise or try to utilize the lien statutes to gain priority on a lender prior to commencing construction or working. The cases you will usually see are prime contractors who have been in consultation with the owner in their financing efforts and made it a condition of the financing. It is extremely rare to see this. But it is an option under Tennessee lien law.
The last line in the section above, ‘If notice is not served... over the lien under applicable law’ gets you back to what the baseline rule is and what you typically see in the sense that the lender is going to have priority because they are going to file a Deed of Trust before visible commencement.
In fact, it is going to be one of their conditions and express requirements to an owner under the lending documents. So that is the lender, and the lender exception.
The Material Exception
The other thing that you have to think about when you are talking priority is who has priority and who has the ability to get to materials that have been delivered but not paid for.
The answer to that is if the materials have been delivered but not paid for, then those materials are not subject to the lien, and the reason is because you do not want other lienors to be able to be able to get to material that has been delivered but not yet paid for.
Now that also goes for the next part.
The Removal Exception
This is a lienor’s ability to actually go repossess materials prior to their incorporation into the project.
This is a unique exception that allows a lender to go repossess their materials rather than continue with a lien. So they are protected on both sides. They are protected and they expressly have the right to do it when other lienors are not getting an interest in their unincorporated materials.
So this is always an option if you are a material supplier who has not been paid, but materials are sitting on the property and are not incorporated. Sometimes the best bet is going to pick them up.
There are other sections here as to exactly what can be done in those circumstances. But the statute is below for your reference.
The Recording Requirement Priority Against a Purchaser of the Land
We now circle back to where we started. It is the question of a prime contract, and remote contractors are required to record the notice of lien with the recorder of deed, so it is in the chain of title for anyone looking at it.
That is the 90-day requirement after the Notice of Nonpayment for remote contractors. You remember prime contractors arguably do not have to file anything in the chain of title other than convincing the lawsuit to perfect the lien within one year. The problem with the risk for the prime contractor is they will lose priority to a subsequent purchaser.
Recordation is required to be done not later than ninety (90) days after the date the improvement is complete or is abandoned, prior to which time the lien shall be effective as against the purchasers or encumbrances without the recordation.
The owner shall serve thirty (30) days’ notice on prime contractors and on all of those lienors who have served notice in accordance with § 66-11-145 prior to the owner’s transfer of any interest to a subsequent purchaser or encumbrance for a valuable consideration. If the sworn statement is not recorded within that time, the lien’s priority as to subsequent purchasers or encumbrancers shall be determined as if it attached as of the time the sworn statement is recorded.’
This is the statute that Tennessee has on it and there is one part when you are looking at remote contractors. It has been discussed above, but the key for remote contractors is if you filed a Notice of Nonpayment, and the owner plans to sell the property, the owner has to provide notice to the remote contractor.
Same for the prime contractor, but they will argue that if the owner has a duty to notify the prime contractor if they are going to sell the property, then they probably do not have to worry about recording the Notice of Lien within 90 days. But you never know exactly what the facts are going to show or when a notice went out that you just simply did not get even though it was properly sent.
Now let us try big picture priority. Your lien is as good as the interest to which it attaches and the priority over whom you have. If you are a remote contractor, you do not have a lot of leeway, you have to comply and record anyway. So your priority is kind of the same as the requirements for establishing the lien.
If you are a prime contractor on the other hand and going ahead and taking the second step of recording the notice in the chain of title within 90 days of completion of the work or abandonment is recommended. So you are not having a priority fight with a subsequent purchaser. That is what is on the screen in section 112 of the Tennessee lien law.
That is priority in a nutshell as to how lien priority works in Tennessee. Key again is visible commencement with a couple of exceptions that we discussed above. The reason for all this is typically going to deal with a lender, their Deed of Trust, and whether or not it was before or after visible commencement.
On the back end you have the question of priority with respect to a subsequent purchaser and the recommendation is for a prime to go ahead and file that Notice of Lien in the chain of title with the Recorder of Deeds to make sure that there is no issue there. That is priority.