Can contractors subordinate mechanic's lien priority through private agreements? Olsen v. Chase Explained

In Olsen v. Chase, the Utah Court of Appeals addressed whether a contractor could validly subordinate its mechanic’s lien priority to a construction loan through a private subordination agreement. The court’s ruling provides important guidance on the enforceability of lien subordination clauses under Utah’s Mechanics’ Liens Act.

Background and Facts

Maestro Builders began construction on a Layton home in November 2006. The property owner obtained a construction loan from First Utah Bank, secured by a trust deed recorded on November 9, 2006. At the loan closing, Maestro’s agent signed a “Guaranty of Completion and Performance” that contained a subordination clause making any claims Maestro had against the borrower subordinate to the bank’s construction loan. Maestro completed construction but was not paid in full before the owner defaulted. The bank foreclosed, and the property was eventually sold to the Chases. Maestro recorded a mechanic’s lien and assigned it to the plaintiffs, who sought to foreclose on the lien.

Key Legal Issues

The central issue was whether the subordination agreement violated Utah Code section 38-1-29, which states that “[t]he applicability of the provisions of this chapter, including the waiver of rights or privileges granted under this chapter, may not be varied by agreement.” The trial court ruled that the subordination agreement was enforceable and did not run afoul of the statute.

Court’s Analysis and Holding

The Court of Appeals reversed, holding that section 38-1-29 broadly prohibits any attempt to vary the provisions of the Mechanics’ Liens Act by private agreement. The court rejected a narrow reading that would limit the prohibition to agreements explicitly using terms like “applicability” or “waiver.” Instead, the court interpreted the word “including” as enlarging rather than limiting the scope of the prohibition. The court noted that the 2007 enactment of section 38-1-39, which allows lien waivers under specific conditions, supported this interpretation—if subordination agreements were already permitted under section 38-1-29, section 38-1-39 would be superfluous.

Practice Implications

This decision clarifies that during the 2001-2007 period between the enactment of sections 38-1-29 and 38-1-39, subordination agreements affecting mechanic’s liens were unenforceable. The ruling emphasizes the protective nature of Utah’s Mechanics’ Liens Act and the legislature’s intent to prevent private parties from circumventing statutory lien priorities. Practitioners should be aware that current law under section 38-1-39 now allows certain lien waivers and subordinations, but only when specific statutory conditions are met, including that the lien claimant receives payment for the waived amount.