Construction Financing and Mechanics’ Liens in Connecticut
Bankers and other professionals who have worked on construction loans in states other than Connecticut will know how much of a pain it can be to make construction loan advances. You usually need to perform a title update and obtain lien waivers and various indemnifications from contractors and borrowers. This is because many states give priority to liens for construction services and materials (i.e. mechanic’s liens) over subsequent construction loan advances.
This is not true in Connecticut.
In general, Connecticut law gives priority to the lien that “attached” first. A mortgage lien attaches at the time the mortgage is recorded in the appropriate land records. A mechanic’s lien attaches at the time the particular contractor (or subcontractor) commences work on the property. Therefore, if your construction loan mortgage is recorded prior to the commencement of work on the property (and your mortgage meets all other requirements for the recording of a valid future advance mortgage) you will have priority over subsequent mechanic’s liens.
Beware, however, that the same is true in reverse if a contractor commences work on the property before the mortgage is recorded.
Even if the contractor is paid current as of the date the mortgage is recorded, if the borrower/landowner later fails to pay the contractor for work performed/materials delivered subsequently, the mechanic’s lien for those materials/work will relate back to when work commenced and will have priority over your mortgage. Therefore, at the closing of construction loan in Connecticut, it is customary to require an affidavit (and indemnity) of the owner that no work was performed or materials delivered during the preceding ninety days that could give rise to a mechanic’s lien with priority over the mortgage (see Connecticut General Statutes Section 49-34 providing that a contractor has ninety days from completing work on a property to file a mechanic’s lien with the town clerk). If that is not the case, you generally would require written lien subordinations from any contractor and subcontractor that have commenced work on the property prior to the closing. (Note that waivers of mechanics’ liens may not be enforceable under Connecticut law, so lien subordination is the norm; see Connecticut General Statutes Section 42-158l which provides in relevant part, “[a]ny provision in a construction contract or periodic lien waiver . . . that purports to waive or release the right of a contractor . . . [to] claim a mechanic’s lien . . . for services, labor or materials which have not yet been performed or paid for shall be void and of no effect.”).
Therefore, if all of these matters are properly addressed prior to the loan closing, there is no need to perform title run-downs and obtain lien waivers at the time of any construction loan advances in order to maintain the priority of your mortgage. That being said, there may be other reasons to obtain these items. For example, you could use this procedure to confirm that construction is proceeding apace and that the borrower is not defaulting in its other obligations.