3.7.26 Design Professionals and Lien Priority

• Jurisdiction: Arizona

All mechanics’ lien claimants, including design professionals, share equal priority against other encumbrancers as of the date that labor was first commenced or materials were first furnished to the project.^[177] However, a construction lender’s mortgage or deed of trust that is recorded within ten days after labor was first commenced or materials were first furnished is given priority over mechanic’s liens.^[178] All mechanics’ lien claimants on a project share the same priority, and therefore share pro rata in the proceeds of the mechanics’ lien foreclosure sale.^[179] The public policy behind this provision is that those who provide their services later in the construction process should not be disadvantaged as against those who have performed earlier.

Although professional services, especially design services, are largely performed before construction commences on the project site, the mechanics’ lien law states that a lien for professional services does not attach to the property for priority purposes until actual construction work has commenced or materials have been delivered to the property so that it is visually apparent that construction has commenced.^[180] This seems fair, so that the project’s designers—who begin their work long before the start of construction—do not gain an unfair priority over other lienholders simply because its services are performed before those of other lienholders.

Pro rata lien priority is of little benefit, however, to the design professional or surveyor who provides services for a project that is never built. Without an “improvement” there is nothing to which the traditional mechanic’s lien will attach. Some relief from the hardship of this rule is provided in A.R.S. § 33-992.C, which states that, if construction is not commenced, a registered professional may record and foreclose a mechanic’s lien if the registered professional’s work has “added value to the property”. This “added value” requirement is not further defined in the statute and there are no reported Arizona cases interpreting this statute. Nonetheless, if a design professional’s survey, professional report, calculations, or drawings have been submitted and approved by the governmental authority having jurisdiction, and the property’s owner benefits from this approval by receiving a change in zoning, a use permit, regulatory clearance, or building permit, it is reasonable to assert that the design professional has “added value to the property”, and should be afforded a mechanic’s lien.

^[177] A.R.S. § 33-992(A). Earthwork and site preparation performed pursuant to the general contract for construction, for example, are sufficient commencement of labor on the project to establish priority. Woodridge Const. Co. v. First Nat’l Bank of Arizona, 130 Ariz. 86, 634 P.2d 13 (App. 1981).

^[178] Id. Also, under the doctrine of equitable subrogation, a purchaser or lender whose funds pay off a senior lien having priority over a mechanic’s lien or judgment lien, will assume the priority of the senior lienholder. Sourcecorp, Inc. v. Norcutt, 614 Ariz. Adv. Rep. 24, 258 P.3d 281 (Ct. App. 2011) (purchaser); Lamb Excavation, Inc. v Chase Manhattan Mort. Corp., 208 Ariz. 478, 95 P.3d 542 (Ct. App. 2004) (permanent lender paying off construction loan). A lender refinancing its own debt will also assume the lien priority of the deed of trust paid off by its new loan under the replacement lien doctrine. Continental Lighting & Contracting, Inc. v. Premier Grading & Utilities, LLC, 609 Ariz. Adv. Rep. 32, 258 P.3d 200 (Ct. App. 2011).

^[179] A.R.S. § 33-992(E).

^[180] A.R.S. § 33-992(B).

1800 Ocotillo, LLC v WLB Group, Inc., 219 Ariz. 200, 196 P.3d 222(2008)................................. 3.7-14

A Ins. Co. v. Valley Forge Ins. Co., 150 Ariz. 248, 722 P.2d 975 (Ct. App. 1986)........................ 3.7-26

A Tumbling-T Ranches v. Flood Control District of Maricopa County, 220 Ariz. 202, 204 P.3d 1051 (Ct. App. 2008)...................................................................................................................................................................... 3.7-27

Aesthetic Prop. Mgmt., Inc. v. Capitol Indem. Corp., 183 Ariz. 74, 900 P.2d 1210 (1995)................ 3.7-28

Albano v. Shea Homes Ltd. P’ship,227 Ariz. 121, 254 P.3d 360(2011).............................................. 3.7-24

Asphalt Engineers, Inc. v. Galusha, 160 Ariz. 134, 770 P.2d 1180 (Ct. App. 1989)....................... 3.7-20

Audlane Lumber & Builders Supply, Inc. v. D.E. Britt Associates, Inc., 168 So. 2d 333 (Fla. Ct. App. 1964). 3.7-12

Badia v. City of Casa Grande, 195 Ariz. 349, 988 P.2d 134 (Ct. App. 1999).................................. 3.7-15

Barmat v. John and Jane Doe Partners A-D, 155 Ariz. 519, 747 P.2d 1218 (1987)......................... 3.7-14

Barrett v. Harris, 207 Ariz. 374, 86 P.3d 954 (Ct. App. 2004)......................................................... 3.7-21

Bd. of Regents of the Univ. & State Colleges of Ariz. v. Cannon, 342 P.2d 207, 86 Ariz. 176 (1959) 3.7-20

Beaudry Motor Co., Inc. v. New Pueblo Constructors, Inc., 128 Ariz. 481, 626 P.2d 1113(Ct. App. 1981). 3.7-23

Blecick v. School Dist. No. 18 of Cochise County...