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How Lenders Can Protect the Priority of Deeds of Trust with Subordination Agreements – Glass & Goldberg | Financing, Property & Bankruptcy Law
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How Lenders Can Protect the Priority of Deeds of Trust with Subordination Agreements

How Lenders Can Protect the Priority of Deeds of Trust with Subordination AgreementsA California appellate court has ruled that subordination agreements made between a lender and a general contractor are enforceable.

In Moorefield Construction, Inc. v. Intervest-Mortgage Investment Company et al, general contractor Moorefield started work on a medical office complex before the owner had obtained a construction loan from Intervest and the lender had recorded the deed of trust. As part of the loan agreement, the owner assigned all rights and remedies under the construction contract to Intervest. Moorefield’s consent to this assignment included clauses that subordinated any mechanic’s liens to the deed of trust and payment obligations under the contract to payment obligations under the loan.

When the owner defaulted on construction payments, Moorefield recorded a mechanic’s lien and filed a claim for foreclosure. Intervest said that the deed of trust had priority over the mechanic’s lien because of the subordination clauses in the assignment. A trial court found for Moorefield, ruling that the subordination clauses were an unenforceable waiver of mechanic’s lien rights.

The California Court of Appeals reversed the trial court, ruling that state law, which prohibits the waiver of mechanic’s lien rights, applies only to subcontractors and materials suppliers, not to waivers executed between a general contractor and an owner.

In light of this ruling, lenders looking to add another layer of priority protection for deeds of trust may want to consider requiring borrowers to execute a contractor’s consent to the assignment of a construction contract. To be effective, the subordination agreement must comply with the waiver requirements of California mechanic’s lien statutes.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

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