FOR LIEN CLAIMS, NO SUBSTITUTE FOR KNOWLEDGE

Date: May 4th, 2011

Construction liens in the United States are as old as our nation itself. At the urging of Thomas Jefferson and James Madison, Maryland enacted the nation’s first lien law in 1791. The law was enacted to encourage development of Washington, D.C. by protecting laborers and material suppliers building new houses in the area surrounding the nation’s capitol.

As the early Maryland law illustrates, construction lien laws seek to incentivize contractors to risk capital by providing contractors with a security interest in their work. By incentivizing contractors to risk capital and compete for construction work, lien laws facilitate the creation of new capital in the form of jobs, housing, and infrastructure. Recently, the Washington Court of Appeals published an encouraging opinion related to liens.

Zervas Group Architects, P.S. v. Bay View Tower LLC involved a lien for professional services, specifically architectural services. Though Washington’s lien laws were originally limited to “mechanics and materialmen,” Washington courts have historically interpreted the lien statute as including architectural services, too. In 1991, the Washington legislature repealed a separate set of lien laws allowing liens for engineering services and inserted into the construction lien statute a broad category for professional services.

Under the revised construction lien statutes, a lien for professional services is generally based on either a visible indication of the professional services, or because professional services are often not visible from physical inspection of the property, by filing a formal pre-lien notice with the county recorder’s office. The statute separately states that the service provider loses priority to a deed of trust if the deed of trust is recorded prior to the commencement of physical work and “without notice of the professional services being provided.”

The Zervas case pitted an architect against a bank. The two fought over what the legislature intended by the phrase “without notice.” The architect never filed a formal pre-lien notice with the county, but the architect had provided professional services to the project several months prior to the bank recording its deed of trust. In fact, at the time of seeking the loan, the owner informed the bank that the project had already incurred nearly $1 million in preconstruction soft costs that included architectural services.

The architect argued that it deserved priority because the bank knew that the architect had rendered services prior to the bank recording its deed of trust. According to the architect, the bank could not have recorded its deed of trust “without notice” because the bank knew that the architect had already provided professional services to the project.

The bank argued that the construction lien statute’s reference to “notice” was limited to the formal pre-lien notice that the architect failed to file with the county. According to the bank, the phrase “without notice” referred only to the recorded notice—not actual notice arising from the bank’s knowledge that professional services had been furnished to the project. Consequently, the bank argued, the deed of trust was recorded without notice of the architect’s services.

The Court of Appeals disagreed with the bank and affirmed the trial court’s interpretation of “notice” as including the bank’s actual knowledge that the architect had provided professional services to the project. The Court of Appeals noted that the bank admitted it had actual notice of the architectural services and possessed sufficient information to realize the potential existence of a lien for professional services.

In disagreeing with the bank’s interpretation of “without notice,” the appellate court stated that it was “improbable” the legislature “would intentionally create a loophole whereby a lender could ignore evidence of professional services.” The court therefore held that the bank’s deed of trust was not recorded “without notice” of the architect’s services, and thus, remained junior to the architect’s lien.

The Zervas decision is encouraging because the appellate court could have found reasons for supporting the bank’s formalistic interpretation of “notice.” But instead, the court apparently considered the context of the transaction, noting the fact that the bank knew the loan was being made for a project that was close to receiving construction permits and had already incurred substantial fees for professional services. Hopefully this is a signal that Washington courts are willing to take a practical view of construction projects and the construction lien statute.

The Zervas decision is also encouraging to contractors because it analyzes the architect’s services within the broad category of professional services. Contractors often provide valuable preconstruction services that help owners secure financing for the project. This trend is likely to continue under the current economic conditions as owners seek value engineering services and assistance procuring and building the project in as short of time as possible. The Zervas decision supports lien rights for contractors that have provided these preconstruction services. And the hope is that this balanced interpretation of Washington’s construction lien statutes will continue toward what the lien statutes describe as “security for all parties intended to be protected by [the statutes’] provisions.”