The New Priority Rules

For a long time, priority of a mechanic’s lien was determined by the date first visible onsite improvements were made by someone working on the construction project. If this work commenced prior to other encumbrances on the property, such as a trust deed for a construction loan, all mechanic’s liens would have priority over that later encumbrance. However, the standard for priority of mechanic’s liens in Utah has changed.

For projects commenced after August 1, 2011, priority is now measured by the “first preliminary notice filing.” The “first preliminary notice filing” is the earliest preliminary notice for the project that can be found on the State Construction Registry and that has not been not subsequently canceled or withdrawn. See Utah Code Ann. § 38-1a-102(17). Generally, each preliminary notice that is timely filed on the State Construction Registry database is considered to have been filed at the time of the first preliminary notice. See Utah Code Ann. § 38-1a-503.

There is an exception to this new priority rule. A person who filed a preliminary notice prior to a construction loan or trust deed may withdraw that preliminary notice. See Utah Code Ann. § 501(5)(a). Under the new statute, that if the “first preliminary notice filing” is withdrawn, it is no longer the preliminary notice filing on which priority is measured. The next preliminary notice filing will become the “first preliminary notice filing.” This new priority scheme gives rise to an interesting situation. Previously, if a construction lender or trust deed was inferior to a mechanic’s lien, all liens would need to be paid off or released before the construction lender or trust deed would be in a first place/priority position because all liens related back to the time of first visible improvements. Now, if a construction lender finds itself in an inferior position to construction liens, it is conceivable that the construction lender could pay off only those lien holders that filed preliminary notices prior to the recording of the mortgage or deed recorded by the construction lender in exchange for withdrawal of their preliminary notice. If all preliminary notices filed before the recording of the construction lender’s mortgage or deed are withdrawn, the construction lender’s mortgage or deed will now be in a priority position ahead of any remaining mechanic’s liens. Essentially, a mechanic’s lien claimant’s priority over a mortgage or deed can be lost by payment to only a few lien claimants.

It bears noting that a timely preliminary notice may be withdrawn and refiled, if the person filing the preliminary notice is paid in full for the work it did prior to the recording of the note or trust deed. This protects those lien claimants that are still doing work on a project and need to preserve their rights for future work. The “refiled preliminary notice” will be deemed as filed immediately after the deed of the lender that made payment to the lien claimant.

This new priority rule significantly changes the priority of mechanic’s liens and makes the filing of a timely preliminary notice even more important. Additionally, it makes the issue of priority a moving target because the date on which priority for mechanic’s liens are measured can now be changed.

Skoubye, Nielson, Johansen Attorneys Salt Lake City Utah

Kevin Bischoff