As the construction industry adjusts to the new process involving lien agents, it is predictable that oddities and quirks will arise. One which has been prevalent but not overwhelming is the spate of requests for Subordination Agreements to be signed. The genesis of these requests is unclear but it appears given the sporadic but pervasive nature of the requests that a minority of lenders, owners or contractors have misapprehended the law. To see the form at issue, visit http://www.nclta.org/forms and review form 7 – Subordination of Liens.
This form has a perfectly legitimate use in the construction industry. In a situation in which a lender has notice or concern that improvements may have started before the deed of trust was recorded or in the event of a mid-project refinance, a subordination agreement is used to ensure that the construction lender retains its first priority position and is not at risk of the super-priority interest created by a laborer or materialman’s lien. In those circumstances, in order to free up the funding from the lender, most subs and suppliers will execute the subordination agreement, essentially agreeing to step behind the bank which is the position most assumed they were in anyway. There are good and valid reasons for not agreeing to subordinate, but we will hold that discussion for another day.
In the lien agent model, one of two things is happening. Either, a minority of entities are confusing the Notice to Lien Agent with an actual lien — the notice is simply a flag waved to let the owner, contractor and anyone else on the project know you are there; it does not establish priority or first dates, so subordination should not be an issue — or, because the new lien law provides that subcontractors and suppliers may rely upon and use the first date of performance of the contractor, it may be an abundance of caution in making certain that if there is any chance the contractor’s first date is ahead of the bank, the owner/lender wants all subcontractors and suppliers to subordinate.
Advice: Pick your battles. There is no reason to execute a subordination agreement where your only action has been to serve a Notice to Lien Agent and where there is no chance your claim would jump ahead of the lender. By the same token, if you have no risk then it may not be worth picking a fight. Ask questions and then make an educated decision.