January 2, 2015

Lenders Beware: Engineers May Have a Superior Priority Lien

By: Chad E. Bernards

Idaho’s Supreme Court has recently answered a long-standing question in Idaho regarding the priority of an engineer’s lien under Idaho Code section 45-506.  In Hap Taylor & Sons, Inc. v. Summerwind Partners, LLC, WL 5861063(2014), the Court held that under 45-506, an engineer’s lien relates back to the date the engineer commenced to furnish any authorized professional services related to a development project opposed to relating back to just the date in which physical work was first conducted on the subject real property.

The Court took a strict statutory reading of the applicable statutes in reaching its result.  The first relevant statute, Idaho Code section 45-501, reads in pertinent part as follows:

[E]very professional engineer or licensed surveyor under contract who prepares or furnishes designs, plans, plats, maps, specifications, drawings, surveys, estimates of cost, on-site observation or supervision, or who renders any other professional service whatsoever for which he is legally authorized to perform in connection with any land or building development or improvement, or to establish boundaries, has a lien upon the same for the work or labor done or professional services or materials furnished, whether done or furnished at the instance of the owner of the building or other improvement or his agent.

The second relevant statute, Idaho Code section 45-506, states that liens under chapter 45 of the Idaho Code are:

preferred to any lien, mortgage or other encumbrance which may have attached subsequent to the time when the building, improvement or structure was commenced, work done, equipment, materials or fixtures were rented or leased, or materials or professional services were commenced to be furnished….

The trial court held that the decisive question as to the priority of an engineer’s mechanic’s lien is whether visible construction commenced before the lender filed its deed of trust.  In so doing, the trial court relied upon a California case (Walker v. Lytton Savings, 2 Cal.3d 152, 84 Cal.Rptr. 521, 465 P.2d 497 (Cal 1970), that interpreted a similar California statute.  However, California’s statute omitted certain language contained in Idaho’s statute, specifically, language stating that a mechanic’s lien is preferred over any mortgage which attaches after “materials or professional services were commenced to be furnished.”

The Idaho Supreme Court was not persuaded by the lender’s argument that an engineer’s lien as to “furnishing” contemplates the act of delivering, giving over, or providing, not just merely preparing or doing professional services off site.  The lender argued, by analogy, that because a materialmen’s lien, under established Idaho case law, is only considered “furnished” when the actual materials are first physically delivered to the construction site and not before (for example, preparing or loading the materials prior to actual delivery to the site would not qualify), then an engineer’s lien is not considered “furnished” until there is some physical improvement to the land.  Opining that the providing of professional services is “fundamentally different than providing materials,” the Court did not accept this argument when reading the broad language provided in Idaho Code section 45-501.  This result by the Court is additionally supported by the statutory language of “estimates of costs” which contemplates work performed off site and before physical construction begins on the land.

Because the language in Idaho Code section 45-501 is plain and unambiguous, as held by the Court, an engineer has a lien for services actually furnished under a contract authorizing such services which relates back to the date such professional services commenced off site.  Thus, the trial court erred in ruling that an engineer’s lien can only relate back to the date actual physical work was conducted on the subject property.  Accordingly, the Idaho Supreme Court vacated the trial court’s decision and remanded the matter back for further proceedings to determine whether the engineer “commenced to furnish professional services” before the lender recorded its deed of trust.

This recent ruling will require lenders to conduct much stricter due diligence requirements before they lend money to fund construction projects.  Whereas the existing practice has typically been to conduct a physical inspection of the property to see if any physical work has commenced on the project site (in addition to researching any existing encumbrances of record), a lender will now need to research to determine if any professional services by an engineer (or surveyor) have commenced off site pursuant to a contract with the developer/owner.  If not, they could find their security position compromised by a mechanic’s lien filed after the lender funds the project and records its security instrument.  Of course, the lender can and should require a written subordination of any engineer’s lien right before funding the project if such professional services were furnished before the date of the lender’s recording.