Lien priority becomes critical at the foreclosure of either a mechanic's lien or a mortgage lien. Foreclosure of a senior lien forever eliminates any junior liens on the same parcel of property. Generally, first mortgage lenders will not issue a mortgage loan unless the lender verifies it has priority over mechanic's liens. A mechanic's lien only has priority if the contractor began work or supplied materials to the property before the first mortgage was either signed or recorded.
State Recording Act
States have different laws relative to determining priority in real estate liens. Those laws, called Recording Acts, generally fall into three different categories: race, notice and race-notice acts. A Recording Act determines priority interests in real estate. In some states, called notice states, a mortgage lien is effective when it is signed and has priority as long as the lender did not have notice of any other liens, such as mechanic's liens, on the property at the time of signing. In other states, the mortgage lien only becomes effective when the lender records the mortgage document in the public records at the local county recorder's office or county courthouse.
A mechanic's lien becomes effective and relates back to the date when work was first commenced on, or materials were first supplied to, the project located on the property. Under most states laws, all mechanics on a piece of property have the same work commencement date. Accordingly, a final landscaper on the project will have a mechanic's lien that dates back to the date when the excavation crew first began digging.
A mechanic's lien has priority over a first mortgage lien if, depending on the state's Recording Act, work commenced or materials were supplied either before the mortgage was signed or before the mortgage was recorded. Most mortgage lenders will verify that no work has begun the project, and no materials have been supplied to the property, before the bank either signs or records its mortgage loan. Accordingly, it is rare that a mechanic's lien has priority over a first mortgage loan. Generally, mechanic's liens only have priority if the mortgage lender made a mistake.
Some states, such as Utah, have enacted mechanic's lien notice statutes that are similar to recording statutes. Under a mechanic's lien notice statute, each contractor and subcontractor must file a notice in public records, generally with a state construction registry, that the contractor has commenced work or supplied materials to the project. In those states, the date of providing notice may actually be the date that at a mechanic's lien becomes effective. Contractors working in states using construction registry systems must properly and timely file notices of commencement in order to establish their mechanic's lien priority.