Under Oregon law, a construction lien generally has priority over a trust deed or mortgage on an improvement. ORS 87.025(1). If a construction lien claimant has priority over a trust deed or mortgage, the construction lien claimant will get paid from the proceeds of a foreclosure sale before the trust deed holder or mortgagee. Having priority is important because it often determines whether a construction lien claimant gets paid. Priority clearly is a legal right that a lien claimant will want if it becomes necessary to record and foreclose a construction lien.
Nevertheless, it is possible for a lien claimant to lose priority by mistakenly falling into one or both of two exceptions. The first exception involves notice to the trust deed holder, and the second exception involves the segregation of charges on the claim of lien. Under the first exception, if a lien claimant fails to send a trust deed holder a notice of right to a lien, or similar notice, then, in accordance with ORS 87.023, the trust deed has priority over the materials portion of a construction lien. ORS 87.025(3). The general rule regarding construction lien priority is subject to a second exception that involves the segregation of charges on the construction lien claim. Under that exception, if a lien claimant fails to provide the notice discussed above and fails to segregate materials charges from the other charges in its claim of lien, the entire construction lien loses priority to previously recorded mortgages and trust deeds on the improvement. Benj. Franklin Fed. Sav. & L. Ass’n v. Hallmark, Inc., 257 Or 436, 479 P2d 740 (1971); see also Cal-Roof Wholesale, Inc. v. Contractors West, Inc., 262 Or 343, 497 P2d 1181 (1972) (applying Benj. Franklin priority rule to a trust deed).
Contractors can maintain priority of their construction liens by taking three important steps:
(1) Perform a title search before materials are delivered to the property. A simple title search—often provided free of charge by title companies—should reveal the identity of any mortgagees or trust deed holders.
(2) Send any trust deed holders and mortgagees a notice of right to a lien. The notice of right to a lien should be sent eight days, not including Saturdays, Sundays and other legal holidays, after the date of delivery of materials or supplies for the project.
(3) Carefully segregate materials charges from other charges (labor, equipment, etc.) in the claim of construction lien. (This step is absolutely critical if you have failed to perform the first two steps.)