Under Minnesota law, work completed after a mortgage is granted and recorded can, in some situations, nonetheless give rise to a mechanic's lien that has higher priority than the mortgage. If, before the mortgage was granted, any contractor completed "actual and visible" work on the land in connection with the same improvement, then the later work, even if completed by a different contractor, relates back to that earlier work and the associated lien is superior to the mortgage interest. This potential to create a lien with a higher priority than a mortgage is important because it allows the contractor to recover a greater share of the value of its work upon foreclosure when the total encumbrances exceed the value of the property. In a recent unpublished decision, the Minnesota Court of Appeals held that the construction of a building did not relate back to the pre-mortgage clearing of the lot and preparation of the site through demolition. Accordingly, the lender's interest was higher than the mechanic's lien of a contractor who contributed to the construction of the condominium.
Premier Bank v. Dan-Bar Homes
The Minnesota Court of Appeals considered the mechanic's lien relation back statute in Premier Bank v. Dan-Bar Homes, Ltd., 2010 WL 4941681, No. A10-853 (Minn. App. Dec. 2, 2010). Dan-Bar planned to develop, in three phases, condominium buildings spanning four adjoining parcels in Minneapolis. In 2005, to begin phase two, A-1 Hauling and Excavating removed trees, excavated and demolished an existing house, and then filled the excavation on one of the parcels. Dan Bar paid A-1 for its work and then, in 2006, Dan Bar borrowed $1.8 million from Premier Bank. In 2007, A.M.E. Construction contributed to the construction of the building, but Dan-Bar did not pay A.M.E. for its work. When Dan-Bar also failed to pay Premier, Premier brought litigation to foreclose its mortgage. A.M.E. asserted that its interest related back to the site clearing and demolition and, therefore, was superior to Premier's. After a court trial, the district court found that A-1 and A.M.E. performed work relating to separate and distinct improvements. A.M.E.'s lien therefore did not relate back to A-1's work and Premier's mortgage had priority.
Priority of Interests
The Court of Appeals affirmed the district court decision, holding that the site preparation and the building construction constituted separate and distinct improvements. Pursuant to Minnesota statute, all mechanic's liens become effective earlier than the contractor's actual work if they relate back to earlier work and the contractor was unaware of encumbrances on the property. Minn. Stat. § 514.05, subd. 1. If a contractor and a mortgagee contest the priority of their interests, then the mechanic's liens are effective at the time of "the actual and visible beginning of the improvement on the ground." Id. Therefore, if an owner receives a loan after actual and visible signs of an improvement exist on the land, contractors who complete work after the mortgage is recorded are entitled to a higher priority interest than the mortgage interest, so long as their work concerns the same improvement as the earlier work. The questions to be decided in these disputes are (1) to which improvement did the work contribute? and (2) what was the first actual and visible work for that improvement?
A connection of the work to the overall project is not sufficient under Minnesota law to relate two components of work to one another. Instead, a more detailed, fact-intensive inquiry is required. To determine which improvement the labor or material contributed to, courts evaluate the contracting parties' intent, the subjects of the contracts, the time period between the performance of the work, and the financing of the components of work. Earlier appellate decision have held that excavation of a particular lot in a new subdivision related to work on a home on that lot, while paving of streets, curbs and gutters in a development did not relate to the construction of buildings.
The issue in Premier Bank was whether the work completed by A.M.E. to construct the condominium related to the "same improvement" as the work by A-1 to prepare the site. The work by A.M.E. clearly related to the construction of the building. Although A-1's work was necessary for the construction of the building, the Court of Appeals determined that the demolition and site preparation work completed by A-1 did not "bear directly on the construction of the building itself." It accordingly affirmed the district court's finding that A-1 and A.M.E. contributed to separate improvements. A.M.E.'s lien therefore did not relate back to A-1's work.
Conclusion
In a recent decision, the Minnesota Court of Appeals held that the lien of a contractor contributing to the construction of a building was not entitled to priority over an earlier mortgage because it could not relate its interest back to the pre-mortgage site preparation. This decision resulted from a fact-intensive inquiry requiring a trial. A lien claimant may not be able to determine from a mere examination of title documents the priority of its interest. In many cases, a more detailed evaluation of the facts is necessary and may result in a determination that the mechanic's lien is higher priority than an earlier mortgage. In such a situation, the contractor will be able to recover a greater percentage of the amount due to it than would otherwise occur.
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