Insights

Broken Priority May Cause Delay in Construction

Michael Tiffany,  |  March 16, 2017

Sometimes, construction will begin on a project before the construction loan is in place. When this happens and the deed of trust securing the construction loan has not been recorded, it is called “a broken priority.”

In the past, a title insurance company was willing to insure over a broken priority when it had a sufficient comfort level and a person or entity with substance would indemnify the title insurance company against liability.  This has changed.

Because of the current market downturn, there have been a substantial number of projects with broken priorities, unexpectedly requiring title companies to come up with funds  that they have had to pay to remove mechanics’ and materialmen’s liens filed by contractors, subcontractors, and material suppliers that were in a senior position to the lender’s lien.

As a result, a developer may not be able to close a construction loan for a project if the title insurance company determines that construction has in fact started or materials and equipment have been moved on to the construction site before the closing.  If that occurs, the developer will be required to delay the closing of the loan until the statutory period for the filing of mechanics’ and materialmen’s liens has expired.

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