Act 479 alters construction lien laws

The 95th General Assembly of the Arkansas State Legislature, which adjourned in May, saw 1,026 bills become law. In terms of sheer numbers, it was more active than the 2023 session, and it has left a lot to sift through for those so inclined.

That said, for those engaged in real estate development and construction, and the lenders, attorneys, title companies and others orbiting around that sphere, there was one legislative development that may garner a little more attention than others.

Act 479, which took effect Aug. 5, offers significant changes to the process of establishing priority in regard to mechanic and materialman liens, which for simplicity, I will refer to as construction liens. Here I will provide some background on the lien process and offer insight into the potential impact of the new legislation.

In most real estate transactions, the principle of “first in time, first in right” generally governs the priority of competing interests. The first party to file a lien in the county records would have priority over those filing afterward. However, construction liens in Arkansas have traditionally operated differently. Their priority can be established by simply starting work or delivering materials to a job site, even before any notice of the lien is filed. This somewhat “hidden” or “secret” status of construction lien rights has presented issues for lenders over the years.

The most common issue experienced by lenders, known as “broken priority,” occurs when an often well-intentioned contractor or supplier begins work before the lender’s mortgage is filed. Under the version of the law that has governed for many years, this single action could compromise the lender’s priority, placing the mortgage behind not just the first worker, but all other contractors and suppliers on the project due to the “relation back” doctrine.

For a lender who is often providing the majority of the financing required for the construction, this is a big deal. In practice, it can lead to a complex and messy process for lenders, title companies, and others, involving the tracking of numerous lien waivers and increased financial risk. Project delays and higher costs have typically followed.
Act 479 alters the construction lien laws in a couple of key ways.

1. Adjusts the “relation back” doctrine. While a construction mortgage will still be subordinate to liens from work or materials supplied before its filing, it now holds priority over lien claims from parties who began their work or supplied materials after the mortgage was recorded.

2. Affidavits of non-commencement. The act introduces a new tool: the affidavit of non-commencement. This allows lenders and other parties to rely on a recorded affidavit from a licensed professional (i.e. appraiser, architect, surveyor or engineer) to confirm that construction has not yet started, giving a “safe harbor” period of four business days before or after filing of the affidavit in which the construction mortgage can be recorded and establish priority. This affidavit is presumed to be true, and its validity can only be challenged with a finding of actual fraud. Anyone who provides a false affidavit can be held liable for damages.

Ultimately, Act 479 creates a more secure and predictable environment for construction financing in Arkansas. By limiting the “relation back” doctrine, the act reduces risk and clean-up work when “broken priority” situations arise. Further, by introducing the affidavit of non-commencement, the law provides more clarity and confidence to all parties involved by simplifying the method to verify the start date of work.

All in all, the law should help streamline a process often fraught with uncertainty, saving time and money and helping get projects off the ground faster. In a state facing well-documented inventory shortages, a step toward more efficient development should be very welcome news.

Editor’s note: Brian Blackman is co-founder and general counsel of Fayetteville-based Allegiance Title Co. The opinions expressed are those of the author.