Does Preparatory Site Work, Such as Clearing or Grading, Constitute Commencement of Construction
for Purposes of Lien Priority? The Dangers of Failing to File a Notice of Lending and When a
Contractor’s Mechanic’s Lien Takes Priority Over a Construction Loan Mortgage
By: Jeffrey R. Escobar
From a construction lender’s perspective, intuition would say that a subcontractor’s lien rights would never take
priority over those of the lender unless and until general construction on a project site had visibly begun. This is
because, until the Great Recession, for purposes of determining when a mechanic’s lien attaches and priority
can be established, the majority of jurisdictions had interpreted their respective statutory definition of the “date of
commencement” to be the date when materials are, or labor is, first provided by a contractor or subcontractor for
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the visible improvement of the subject property. Simply put, the majority of jurisdictions had previously viewed
site preparation work – such as site demolition, clearing, pit testing, and grading – as non-“visible
improvements” with the result that the contractor’s or subcontractor’s mechanic’s lien rights for such work would
always be junior to, and not take priority over, the lien rights of a construction lender since such activity, by its
very definition, fails to constitute visible commencement of “actual, on-site construction” and improvement of the
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subject property. Relying on such history, construction lenders rarely saw a need to file or record a Notice of
Lending or a security instrument prior to its borrower’s commencement of actual general, on-site construction
work.
Unfortunately, due to recent changes in how courts have interpreted what constitutes visible improvement of, or
on-site construction activity at, a subject property, the soundness of such practice by lenders is being called into
question and prudence would dictate that lenders rethink their timing of when they file their notices of lending.
The same majority jurisdictions which previously concluded that site preparation work was merely non-visible
preparatory work that failed to establish construction commencement sufficient for attachment of mechanic’s lien
rights, have changed their tune and are now adopting the position that the entire scheme of a property’s
improvement – including all work, materials and equipment used or to be used in, or for, the construction,
alteration or repair of that property – should be considered when deciding whether or not a contractor’s or
subcontractor’s activity constitutes a lienable “improvement.” Now, the “overall construction” of the improvement
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Specifically: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana,
Iowa, Kansas, Michigan, Minnesota, Missouri, Montana, Nevada, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma,
Oregon, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, Wyoming.
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See J.E. Dunn Northwest, Inc. v Corus Const. Venture, LLC, 249 P3d 501, 509, 127 Nev Adv Op No 5 (Nev 2011).
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as a whole is evaluated when determining whether or not lienable construction has commenced, rather than
looking at whether or not the specific activity in question constitutes preparatory, structural or vertical
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construction work. Stated differently, more and more jurisdictions have recognized that the interests of a
construction lender who fails to timely file a notice of its lending will be subordinate to a pre-construction
contractor’s or subcontractor’s mechanic’s lien rights when pre-construction activity of such contractor or
subcontractor is integral to the improvement of the subject property.
A clear example of this rising trend is the decision handed down by the Nevada Supreme Court in Byrd
Underground, LLC v Anguar, LLC (332 P3d 273,130 Nev Adv Op 62). For purposes of determining lien priority,
the Court in Byrd was asked whether the placement of fill materials, clearing and grading of a construction site
constituted “construction of a work of improvement,” even when such work was not, by its nature, a visible
commencement of construction.
In Byrd, two limited liability companies (the “Joint Venture”) purchased a parcel of unimproved property with the
intent of eventually constructing a strip mall (the “Project”) on such property. Prior to the Joint Venture’s
selection of a general contractor for the Project, (x) two different contractors (the “Dirt Subcontractors”) were
directed by the Joint Venture to place and spread more than 200 truckloads of dirt at the site of the Project, (y)
one of the bidding general contractors (“General Contractor”) directed its site preparation subcontractor (the
“Site Preparation Subcontractor”) to dig test pits to determine how much dirt/material had been brought to the
subject property by the Dirt Subcontractors, and (z) the Site Preparation Subcontractor was directed by General
Contractor to begin preparation of the Project site for the commencement of general construction work. After
General Contractor and the Joint Venture executed a written agreement for the construction of the Project, the
Site Preparation Subcontractor commenced its demolition and grading of the Project site. Although the Joint
Venture obtained Project financing from the construction lender (“Lender”) some three weeks earlier, no notice
of such financing and funding of the Project was filed until some thirty days after the Site Preparation
Subcontractor commenced its site preparation work (but prior to the commencement of general construction).
One year later, both the Dirt Subcontractors and the Site Preparation Subcontractor remained unpaid for their
respective work performed at the Project site, and each commenced mechanic’s lien actions in State court,
obtaining judgments against both the Joint Venture and General Contractor. After the construction of the Project
was completed, the Joint Venture filed for relief under Chapter 11 of the United States Bankruptcy Code. In
connection with such petition for relief, the Joint Venture and Lender entered into a forbearance agreement and
plan of reorganization, which stipulated that Lender was the only “Class 1” secured creditor.
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See Byrd Underground, LLC v Anguar, LLC, 332 P3d 273, 130 Nev Adv Op No 62 (Nev 2014).
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As lien claimants, both the Dirt Subcontractors and the Site Preparation Subcontractor objected to the Joint
Venture’s and Lender’s forbearance agreement and plan of reorganization on the basis that they, too, were
“Class 1” secured creditors, and filed an adversarial complaint in bankruptcy court to determine the respective
priority of their liens as against that of Lender. Specifically, both contractor lien claimants alleged that, because
they began their construction activities prior to the filing of Lender’s Deed of Trust/Notice of Lending, the
contractor mechanic’s liens were superior to the creditor claims of Lender. Finding that commencement of
construction does not occur until a “visible commencement of construction” has occurred on a project site, the
bankruptcy court disagreed with the Dirt Subcontractors and the Site Preparation Subcontractor and concluded
that the clearing and grading preconstruction activities of the contractors failed to constitute visible
commencement of actual, on-site construction. Consequently, the bankruptcy court held, the Dirt Subcontractor
and the Site Preparation Subcontractor’s interests in this matter could not be superior to that of Lender’s
because their interests never attached to the subject property at the time of their work since, for purposes of
determining lien priority, commencement of construction never really began.
On appeal, the Nevada Supreme Court disagreed, reversing the bankruptcy court’s findings and holding that
preparatory work, such as the contribution and incorporation of soil at the Project site by the Dirt Subcontractors
and the Project site clearing and grading completed by the Site Preparation Subcontractor, could constitute a
“work of improvement” when such work is compared against “the entire structure or scheme of improvement as
a whole … rather than evaluating the activities based on whether they are preparatory or structural or vertical
construction, in determining whether construction on a work of improvement has commenced.” The Nevada
Supreme Court found that, although construction contract dates, permit issuance dates and commencement of
actual construction were irrelevant when determining whether or not lienable improvements of a work had
commenced, such information can be supporting evidence in determining the scope of the work of the
improvement and when visible improvement of the project site began. A trier of fact, the Court reasoned, need
only look to the entire structure or improvement as a whole rather than individual scopes or phases of work to
determine when improvement of a property becomes lienable. As a result, the Court declared, the mechanic’s
lien claimants in Byrd could claim lien priority over all other competing interests, including that of Lender’s,
based on the work they performed – even if such work was completed months before a building permit was
issued – provided that such work was integral to the improvement of the property and no notice of lending or
similar notice was filed prior to or contemporaneously with the commencement of such work.
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Based on the decision in Byrd and others that have come before and after it, prudent construction lending
practice dictates that construction lenders must file notice of their lending (especially once a disbursement of
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See id.
See and compare Aspro Mech. Contracting, Inc v Fleet Bank, N.A., 1 NY3d 324, 805 NE2d 1037 (2004).
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funds from that lender has occurred) as soon as possible and, ideally, prior to the commencement of any work
on the subject property – regardless of whether such work is considered preparatory, vertical or horizontal
construction work. With the evolving and changing interpretation by the majority jurisdictions of what constitutes
the “commencement of construction,” gone are the days of when the filing of such notices of lending is
inconsequential. Today, in order to properly protect a construction lender’s rights, such a lender should never
hesitate to file its notice of lending with any transaction where funds are advanced for the purpose of completing
construction. Regardless of whether or not a lender views the activity of a contractor or subcontractor to be
general construction work or site preparation work, the majority of jurisdictions have begun to make it clear that,
if a construction lender does not timely file or record notice of its lending, then a contractor or subcontractor’s
mechanic’s lien rights and interests may take priority over the interests of that construction lender.
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