by: Jim Slack - Fidelity National Title Group NCS
One of the potential pitfalls that may arise at the time of closing and is often a surprise to the parties of the transaction is called “Broken Priority”. The possibility of Broken Priority is an issue that all commercial real estate professionals should be aware of in order to advise their clients and avoid a potential delay in closing and possibly losing a lenders commitment to make a loan. Many developers and builders are familiar with the timeframes and requirements involved with construction projects, but sometimes subcontractors and workers may not be aware that being proactive on a project may significantly delay or compromise the closing.
Broken Priority in Nevada, is established when any work on a project begins before any transactional documents on the property have been recorded. Lenders will typically require a title insurance policy to be issued insuring a priority position over all other parties in the chain of title. If there is Broken Priority, the title company typically will not issue a policy without including a mechanic’s lien exception.
If construction commences before recording, the mechanics liens would have priority over any deed of trust recorded against the property. Once priority is broken, every subsequent encumbrance and conveyance of a property are subordinate and subject to the mechanics liens position. Even if the lien notifications are recorded in the future regardless of the recording date, they still take priority and can jeopardize the lenders interest in the property. This is contrary to the “first in time, first in right” rule that many learn in Real Estate Law classes.
With regards to Nevada law, the express priority hierarchy is established in the Nevada Revised Statutes and it prohibits any contractual or verbal waivers of the mechanics lien priority provision of the statute. A Lien is considered a statutory right that cannot be waived or modified. Any attempt in a contract to waive lien rights of contractors or suppliers is considered void.
Some common examples of Broken Priority include, but are not limited to, portable toilet rentals, fencing and supplies, pruning, cleared brush, staking or markings by surveyors, recent equipment tracks, materials and equipment visible during a reasonable inspection of the site, even if waiting nearby.
New construction is not the only time Broken Priority can become an issue. Sales or refinances of existing buildings may also subject to issues from Broken Priority. If construction or the impression that work has commenced on a property come up during the inspection it can halt the process until the statutory lien period has expired. This can also include work done by a tenant of the property.
A preferred solution to Broken Priority is to take a hands off approach with the land or building until after closing the transaction with the title insurance policy firmly in place.
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