Priority: Mechanic’s Liens vs. Mortgages

A review of New York’s Lien Law §13(1) reveals that a mechanic’s lien shall have priority over a mortgage not recorded at the time of the filing of the Notice of Mechanic’s Lien. See Lien Law §13(1). As such, any mortgage, with the exception of a building loan mortgage, that has not been recorded prior to the time in which the mechanic’s lien is filed will be subordinated to the mechanic’s lien. See Merritt v. Dansmith Corp., 240 A.D. 388 (3rd Dep’t 1934) (where it was held that a purchase-money mortgage executed before, but recorded after, the filing of a mechanic’s lien, was subordinate to the mechanic’s lien). However, if the mortgage proceeds are used to satisfy a preexisting mortgage, the mortgage should have priority over the lien even if recorded after the filing of the lien. See P.T. McDermott, Inc. v. Lawyers’ Mortgage Co., 232 N.Y. 336 (1922).

Furthermore, mortgages recorded subsequent to the commencement of an improvement and before the expiration of the period specified in Lien Law §10 for filing a notice of lien, will have priority with regards to advances made thereunder if both the recordation of the mortgage and the making of such advances precede the filing of the lien and the mortgage contains a “trust-fund covenant” as provided in Lien Law §13(2). Again, however, advances made after the filing of the lien will be subordinate to the lien. See Sullivan v. Young, 95 Misc. 58 (Sup. Ct. 1916).

A trust fund covenant is a covenant made by the mortgagor stating that he/she will receive the advances secured by the mortgage and will hold the advances as a trust fund to be applied first to payment on the cost of improvements. See Lien Law §2(5). It must be noted, however, that the presence of the covenant is a necessary condition to priority of the mortgage under Lien Law §13(2), but is not necessary for the creation of a Lien Law Article 3-A trust claim. See Lien Law §70(4).

A mortgage that is otherwise entitled to priority pursuant to the Lien Law may lose its priority should it be found that the mortgage is “collusive.” Lien Law §7 provides that:

A conveyance, mortgage, lien or incumbrance made by an owner of real property, for the purpose of avoiding the provisions of this article, with the knowledge or privity of the person to whom the conveyance is made or in whose favor the mortgage, lien or incumbrance is created, shall be void and of no effect as against a claim in account of the improvement of such real property, existing at the time of the making of the conveyance or the creation of such mortgage, lien or incumbrance.

As such, any mortgage found to be collusive will lose priority with respect to any mechanic’s lien filed concerning the improvement of the property.

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