S&H Holdings purchased commercial real estate in 2014. In 2018, S&H engaged Integrated Construction Management Service to construct a new Burger King at the site.
ICMS contracted with Nore Electric to furnish materials and services in the construction of the BK. Ultimately, ICMS failed to pay Nore and other subcontractors.
S&H sold the BK site to Realty Income Properties, and the deal closed on January 18, 2019. The warranty deed was recorded with the County Clerk two weeks later.
In March and April 2019, Nore and other subcontractors recorded construction liens against the BK site. Since neither S&H nor RIP were willing to pay the subcontractors, Nore Electric asserted a lawsuit to enforce its liens.
The district court concluded that Nore’s liens were valid and properly attached to the BK site, placing RIP at risk of losing its ownership interest if the liens were foreclosed. The court issued a decree of foreclosure, holding that the transfer from S&H to RIP did not cause the liens to lapse or the subcontractors to waive their lien rights.
S&H and RIP appealed.
S&H and RIP contend that construction liens can only attach to the contracting owner’s real estate. The appellants further argued that because S&H incurred the debts, but the liens were not recorded until after RIP had become the owner, the liens must fail.
The Supreme Court disagreed and found that construction liens relate back to the time work began at the site. Construction liens are considered “inchoate” or “hidden” liens. Consequently, one who buys property within the time a contractor is allowed to perfect the lien takes title subject to construction liens recorded after the date of closing.
As a result, even though the liens were not recorded at the time of the sale from S&H to RIP, Realty Income Properties could not be a “bona fide” purchaser.
The Supreme Court determined that the ability of a contracting owner’s interest to be subjected to future construction liens passes to the next owner. Perfection of construction liens that relate back in time may lawfully occur following the recordation of a Deed. Or a Mortgage. Security Agreement. Deed of Trust. Financing Statement. Assignment of Rents. UCC-1. &tc.
The liens filed by Nore Electric and other subcontractors are valid, and are superior to RIP’s Deed, even though the liens were filed after the date the Deed was recorded. The foreclosure decree is affirmed. The Judgment of the district court is also affirmed; Nore wins; S&H and RIP lose.
See Nore Electric v. S&H Holdings; Nebraska Supreme Court; Case Number S-23-282; March 15, 2024: https://casetext.com/case/nore-elec-v-s-h-holdings-llc.
Questions / Issues / Comments:
1. You are a buyer. Or lender. Maybe even a tenant. You checked title and there is nothing untoward. How do you protect yourself from this anomaly? Obtain affidavits from the seller and borrower. Conduct site inspections to determine if the property has been recently repaired or improved. Obtain construction escrows and holdback accounts, to secure the need to later pay the contractors. Get all-bills-paid affidavits from all major contractors and subcontractors. And of course, purchase the best title insurance policy with extended endorsements.
2. This is not an issue unique to Nebraska. It is my impression that most States have a similar process. The lien power of contractors, subcontractors, laborers, material providers, architects, surveyors, engineers, and similar labor and service providers, can be derived from States’ constitutions and supplemented by statutes. Perhaps this is a reflection of our agrarian-based USA societies from 200+ years ago, and the desires of those State legislators who wrote the constitutions and statutes to support the workers and laborers who were (and still are) pivotal to our economic success.
3. Conversely, you are a contractor, engineer, architect, laborer, surveyor, custom manufacturer, or material provider, and you haven’t been paid? Happy news, you may not be too late to assert your rights, even if the real estate has been sold. Mortgaged. Leased. Foreclosed by others.
Stuart A. Lautin, Esq.*
* Board Certified, Commercial (1989) and Residential (1988) Real Estate Law, Texas Board of Legal Specialization
Licensed in the States of Texas and New York
Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.
