Daily Development for
Wednesday, June 24, 1998

By: Ira Meislik

Daily Developments normally are edited and prepared by Prof. Patrick A. Randolph, who is in China until late July. Ira Meislik will file periodic developments reports in Professor Randolph's absence.

MECHANICS' LIENS; CONTRACTORS; OWNERS: Homeowners, who execute a contract with vendors/builders to purchase real property improved by a dwelling to be constructed during the executory period of contract, are not "owners" of the property under the mechanics' lien law and their equitable interest cannot be reached by a mechanic's lien.

Wolf Organization, Inc. v. Oles, 119 Md. App. 357, 705 A.2d 40 (Md. App. 1998).

The question presented was whether one who executes a contract with an owner/builder to purchase real property improved by a dwelling to be constructed during the executory period is an "owner" of the property, whose equitable interest may be reached by a mechanic's lien. The contract contained the following provision: "Seller is not acting as a contractor for Purchaser in the construction of the dwelling and ... Purchaser shall acquire no right, title or interest in the dwelling except the right and obligation to purchase the same in accordance with the terms of this Contract upon its completion. Equitable title shall remain vested in Seller until delivery of the Deed."

During the course of construction, the seller failed to pay for certain materials used in the construction of the dwelling. The material supplier sent an intention to claim a lien notice to the contract purchaser. At settlement, some suppliers were paid, but this particular supplier's name did not even appear on the settlement sheet. Following closing, the supplier sought to establish and enforce a mechanics' lien against the property. It asserted that notice was properly sent to the then contract purchaser because, at the time, it was the equitable owner of the property. As a statutorily created in rem remedy, mechanics' liens are effective against the owner of a property for the benefit of subcontractors who perform their contractual obligations but are not paid. A bona fide executory contract for the sale of real property vests equitable ownership of the property in the contract purchaser. During the executory period, the purchaser owns equitable title to the property and the seller retains bare legal title, holding it in trust for the purchaser, as security for the payment of the purchase money. Generally, a judgment is a lien only against whatever interest and estate a debtor has in land when the judgment is obtained and recorded. The judgment creditor's lien, however, does not attach to the judgment debtor's bare legal title and property, held as security for a debt. Therefore, a judgment creditor of a debtor holding bare legal title of the property cannot attach the equitable interest in the property, as it is vested in another. An analogy was drawn between mechanics' liens and judgment liens. By that analogy, a seller of real property under an executory contract has no real right in the property. Rather, it has bare legal title, as security for the purchase price, which is an interest in personality, not realty. "Just as a judgment creditor has no equity that can attach the purchaser's equitable interest in the property by judgment lien, a mechanics' lien claimant has no equity in the property it can attach in the purchaser's equitable interest in the property by mechanics' lien. Accordingly, the subcontractor could not place a mechanics' liens against the propert[y], as its claims against the propert[y], through the legal titles of the owner/seller, could not attach the purchasers' equitable interests."

Having established that the mechanics' lien could not attach to the property because the seller/contractor had no true property interest (other than a security interest), the court then continued. It held that, even though the purchasers acquired equitable interest in the property upon execution of the contract itself, this equity interest alone did not make them "owners," as that term is intended in the Maryland Act. The court explained that the definitions of "owner," "contractor," and "contract" in the Act are inter-related, so as to make plain that an "owner" must be a party to an agreement for the doing of work or the furnishing of material, or both, for or about the building that is sought to be subject to the lien. Here, the purchasers were not parties to the contract; therefore, although they owned equitable title, they were not the "owners" of the property for purposes of establishing a mechanics' lien. Moreover, even if the purchaser had actual knowledge of the unpaid debts, the results would not have differed. The language in the contract provided that the seller/contractor was not operating as a general contractor for the purchaser. Therefore, it was the seller/contractor that was acting as the legal owner and builder. Had the material supplier been a contract creditor of the purchaser, it could have obtained a judgment and attached the purchaser's equitable interest in the property. Here, that was not the case.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1-6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Stacy Woodward at the ABA. (312) 988 5260 or woodwars@staff.abanet.org

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