Construction Law Attorneys

Beware of Subordination Agreements

The case of Moorefield Construction, Inc. v. Intervest-Morgage Investment Company decided in September 2014, held that despite the priority mechanics' lien rights provided for by statute a general contractor could waive its mechanics' lien rights through signing a subordination agreement with the construction lender. In Moorefield, the construction lender required the general contractor to subordinate its mechanics' lien rights to those of the lender. When the project owner defaulted on the contruction loan the general contractor recorded its mechanics' lien for $2.2 million dollars and foreclosed upon the lien. The trial court held that the subortination was void because the lien rights were guaranteed under the California Constitution. On appeal, the court looked at Civil Code Section 3262(a) (which has been replaced in nearly the exact language by Civil Code Section 8122) and found that while the owner and the general contractor may not waive or release others claims the general contractor could release its own claim.

Thus, if you are acting as a general contractor do not agree to subordinate your mechanics' lien rights to the lender or if you are faced with no alternative be sure that there is adequate construction financing and controls in place so that a stop notice remedy will insure payment. Note that subcontractors cannot be compelled to waive their mechanics' lien rights, therefore if you as a general are, you should make absolutely sure all of your subcontractors and material suppliers take the steps necessary to perfect their mechanics' lien rights in case of a default by the ower.