Equitable Liens and Construction Financing

Equitable liens are legal claims that can be placed on property when there is no specific law or contract that allows for it. This often happens in construction projects when things go wrong. The construction lender may have to deal with claims from the people who provided materials or worked on the project, as well as from those who bought the property. This usually happens when the builder or developer has failed or disappeared, and the only way for the contractors or buyers to get their money back is from the property or the construction lender. When contractors don’t get paid for their work, they can try to get their money back through a legal claim called an equitable lien. This claim is based on either unfair actions by the lender or the lender benefiting from the contractor’s work without paying for it. However, it’s hard for contractors to win these claims because they have to prove that the lender did something wrong and that they have no other way to get their money. In Florida, courts have made it tough for contractors to win these claims, even when the lender clearly benefited from their work. It’s hard for contractors to get their money back if they don’t finish the job, even if the owner didn’t pay them. A recent court case in Florida changed the way contractors can make claims against construction lenders. The court said that a law from 1992 stops contractors from making certain claims against lenders. The law says that lenders have to tell contractors if they’re going to stop giving them money for the construction. If they don’t tell the contractor, the lender has to pay the contractor for the work they’ve already done. The First DCA said that when a law is made, the common law still applies unless the law says otherwise. They decided that the new law about contractor claims replaces the common law, so contractors can only use the new law to make their claims. But other cases after the new law was made still used the common law to make claims. The new law is also unclear about whether a lender can avoid paying for work that was already done if they give notice later. It doesn’t seem fair for a lender to wait and then avoid paying for work that was already done. In Florida, there’s a law about construction projects and who’s responsible for paying for work that’s been done. If a lender doesn’t give notice about a problem, they might have to pay for the work. But in a recent case, a contractor couldn’t use this law to get their money because they didn’t ask for it in their lawsuit. So now they have no way to get their money back. Another issue can happen when people buy houses that are being built. Their deposits are used to pay for the construction, but if the project isn’t finished, the money might not be there. This can cause problems for the bank that loaned the money for the construction. In some cases, home buyers have been able to claim a lien on a property that is being foreclosed by a lender. This means that the buyers have the right to be paid before the lender if the property is sold. This is because the lender knew about the buyers’ interest in the property due to their purchase contracts. This has happened in a few court cases, where the courts have ruled in favor of the buyers. This shows that the buyers have a strong legal claim to the property, similar to being the actual owners. In the Hayward case, the Florida Supreme Court made an exception to the usual rules for construction loans. The court said that when a bank gives a loan to a developer, the part of the loan used to buy the property has priority over the claims of people who have signed contracts to buy the property. But the rest of the loan, used for construction, does not have priority. This means that the bank’s mortgage might be “subordinated” or put in second place behind the claims of the contract buyers. This ruling doesn’t seem to have scared banks away from making construction loans, though. The risk of subordination can be avoided if the contracts with buyers include language giving priority to the bank’s loan. And actually, most contracts already have this kind of language. Equitable lien claims in construction cases can be based on different legal reasons, depending on who is making the claim. Contractors should be aware of a court case called Jax and make their claims based on a specific Florida law. For construction loans, developers and lenders need to include certain language in contracts to protect themselves from potential lien claims by buyers. These are cases where banks and contractors were in a legal dispute over construction loans and mortgages. The courts had to decide who gets paid first if there’s not enough money to go around. In one case, the court said the bank shouldn’t keep the construction loan money and the security for the loan, because that would be unfair to the contractor. Another case talked about how some mortgages have priority over others, and it’s important to have the right paperwork to show who gets paid first. And in another case, the court didn’t make a decision about a legal issue involving property rights. Martin A. Schwartz is a real estate lawyer at a firm in Miami. He helps people with buying, selling, and leasing property. He is also an expert in condominium law.

Source: https://www.floridabar.org/the-florida-bar-journal/equitable-liens-and-construction-financing/