THE IMPORTANCE OF AN EFFECTIVE NOTICE OF COMMENCEMENT ON YOUR LIEN RIGHTS

imagesContractors, subcontractors, and suppliers need to appreciate the importance of an EFFECTIVE Notice of Commencement.    This recorded document, among other things, governs the priority of YOUR lien rights on a private construction project because a construction lien RELATES BACK in time to an effective Notice of Commencement.

 

The Notice of Commencement is recorded in the public records where the project is located.  It is a statutory form (per Florida Statute s. 713.13) and gives the lienor the required information about the project so that the lienor can preserve its lien / bond rights.  A copy of the Notice of Commencement form is included at the bottom of this posting.   The Notice of Commencement must be recorded within 90 days of construction otherwise the Notice is invalid.

 

The Notice of Commencement is effective for 1 year unless a different expiration date is specified.  If a project is going to last longer than a year, a more realistic expiration date should be specified.  However, the Notice of Commencement can be amended at any time within its effective period to extend the expiration date.  The amended Notice of Commencement should reflect that it is amending the original Notice of Commencement that is recorded (and specify the book and page of the recording) and a copy must be served by the owner on the contractor and any other lienor that served a Notice to Owner to preserve its lien rights “before or within 30 days after the date the amended notice is recorded.”  Fla. Stat. s. 713.13(5)(b).

 

In demonstrating the importance of an effective Notice of Commencement, Section 713.13(6) provides:

 

Unless otherwise provided in the notice of commencement or a new or amended notice of commencement, a notice of commencement is not effectual in law or equity against a conveyance, transfer, or mortgage of or lien on the real property described in the notice, or against creditors or subsequent purchasers for a valuable consideration, after 1 year after the date of recording the notice of commencement.”

 

 

What does this mean?  The best way to explain is to apply this statutory language to the following facts of a condominium project:

 

Construction loan recorded on 1/1/09.

Notice of Commencement recorded on 5/1/09.  It is only effective for 1 year and an amended Notice was never recorded.

On 6/15/10 a mortgage is recorded on a condominium unit.  When this is recorded, the unit owner’s mortgagee secures a release from the construction lender relating to the lender’s mortgage relating to the unit.

On 7/1/10 a construction lien is recorded.

 

Under this factual pattern, the lienor that recorded a lien would absolutely want its lien to take priority over the unit owner’s mortgage.  The lienor will argue it takes priority since the lien should relate back to the Notice of Commencement that was recorded prior to the mortgage on the unit.  But, wait.  The Notice of Commencement expired before the lien was recorded and an amended Notice of Commencement was never recorded.  This means the lien takes priority as of the date it is recorded and, thus, the mortgage on the condominium unit takes priority.

 

Now, let’s add another realistic wrinkle to this fact pattern.  Let’s say the Declaration of Condominium (the instrument creating the condominium) is recorded on 6/1/10, before the lien is recorded.

 

The Declaration of Condominium would need to be recorded before mortgages are recorded on individual units.  For the construction of a new condominium, the lien would apply to the ENTIRE condominium property provided the lien relates back to the Notice of Commencement.  This is because the lien would take priority before the Declaration of Condominium was even recorded.  But, if the Notice of Commencement expired, then the Declaration of Condominium would take priority over the lien since the Declaration of Condominium would have been recorded first (since the lien would not relate back to the Notice of Commencement).  This means that the lien would not apply to the entire condominium property, but would more equitably apply to each unit based on the unit’s pro rata share of the common expenses. See Fla. Stat. 718.121.  In other words, if the lien is $100,000 and there are 100 units each responsible for 1% of the condominium association’s budget, each unit would be responsible for the principal amount of $1,000 in order to discharge the lien relating to the unit. And, mortgages on the individual units may take priority over the lien potentially nullifying the value of the lien based on the equity in the units.

 

Notably, even if a lien relates back to the Notice of Commencement and takes priority over the Declaration of Condominium, a court may still find the equitable result is that each unit is only liable for its pro rata share of common expenses.  See Southern Colonial Mortgage Co., Inc. v. Medeiros, 347 So.2d 736 (Fla. 4th DCA 1977).  However, this equitable approach should arguably not apply because the lien would attach to the entire condominium property and the lienor should be entitled to foreclose that property including all units since the lien would have priority over any mortgage and deed associated with those units.  At this point, the unit owner should look to its title insurance policy.

 

UnknownTake-aways:

 

  • Make sure the Notice of Commencement is recorded within 90 days from the start of construction.  If not, there will be a strong argument that the Notice is not valid.  This means that a lien would not be able to relate back to the Notice.

 

  • Make sure the lien is recorded within an effective Notice of Commencement.  If not, the lien will not relate back to the Notice, but will take priority as of the date it is recorded.  This is a big difference.

 

  • If the Notice of Commencement is on the verge of expiring, prepare and send a letter to the owner advising the owner that it needs to record an amended Notice of Commencement to ensure the parties are performing construction within an effective Notice of Commencement.

 

  • Understand the potential priority of your lien based on the recording of the Notice of Commencement, any amended Notice of Commencement, the Declaration of Condominium, and other recordings that may impact the priority of your lien if the Notice of Commencement expired.

 

 

 

 

NOTICE OF COMMENCEMENT

State of _____

County of _____

The undersigned hereby gives notice that improvement will be made to certain real property, and in accordance with Chapter 713, Florida Statutes, the following information is provided in this Notice of Commencement.

1. Description of property: (legal description of the property, and street address if available).

2. General description of improvement: __________.

3. Owner information or Lessee information if the Lessee contracted for the improvement:

a. Name and address: __________.

b. Interest in property: __________.

c. Name and address of fee simple titleholder (if different from Owner listed above): __________.

4. a. Contractor: (name and address) .

b. Contractor’s phone number: _____.

5. Surety (if applicable, a copy of the payment bond is attached):

a. Name and address: __________.

b. Phone number: _____.

c. Amount of bond: $_____.

6. a. Lender: (name and address) .

b. Lender’s phone number: _____.

7. Persons within the State of Florida designated by Owner upon whom notices or other documents may be served as provided by Section 713.13(1)(a) 7., Florida Statutes:

a. Name and address: __________.

b. Phone numbers of designated persons: __________.

8. a. In addition to himself or herself, Owner designates __________ of __________ to receive a copy of the Lienor’s Notice as provided in Section 713.13(1)(b), Florida Statutes.

b. Phone number of person or entity designated by owner: _____.

9. Expiration date of notice of commencement (the expiration date will be 1 year from the date of recording unless a different date is specified) _____.

WARNING TO OWNER: ANY PAYMENTS MADE BY THE OWNER AFTER THE EXPIRATION OF THE NOTICE OF COMMENCEMENT ARE CONSIDERED IMPROPER PAYMENTS UNDER CHAPTER 713, PART I, SECTION 713.13, FLORIDA STATUTES, AND CAN RESULT IN YOUR PAYING TWICE FOR IMPROVEMENTS TO YOUR PROPERTY. A NOTICE OF COMMENCEMENT MUST BE RECORDED AND POSTED ON THE JOB SITE BEFORE THE FIRST INSPECTION. IF YOU INTEND TO OBTAIN FINANCING, CONSULT WITH YOUR LENDER OR AN ATTORNEY BEFORE COMMENCING WORK OR RECORDING YOUR NOTICE OF COMMENCEMENT.

 

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.