Reviving Construction Projects — How to Avoid Creating a Frankenstein Monster

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Reviving dead or moth-balled projects presents risks and rewards. The rewards include a shorter ramp-up period. The risks include the revival of claims akin to the unintended creation of a Frankenstein monster. But those risks may be eliminated, reduced or monetized early in the process. Below are some tips for avoiding traps that jeopardize the recorded priority of construction loans.

1. The Relation Back of Priority for Professional Service Liens. Beware that actual notice of professional services may cause the professional services’ lien to relate back for the purpose of priority over a recorded mortgage — at least, that is what the Washington Court of Appeals has recently ruled. Normally, a recorded mortgage takes priority over unrecorded interests. Washington’s construction lien statute creates some exceptions. A design professional must normally record a Notice of Professional Services to create priority for work being performed prior to construction. But a lender’s recorded mortgage may still lose priority even when a design professional fails to record the Notice of Professional Services. This occurs if the lender had actual notice of the design professional’s services. Lenders can avoid this kind of priority dispute through due diligence and by having all design professionals for the project sign a subordination agreement.

Originally published in Washington Bankers Association’s Issues and Answers magazine on March 4, 2014.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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