Construction Mortgages. A mortgage is a “construction mortgage” if it secures debt for the construction of an improvement on land, including the acquisition cost of the land, if the mortgage so indicates. A special priority rule exists where construction mortgages compete with security interests in fixtures. If, at the time the fixture was installed a construction mortgage is on record, the construction mortgage has priority over all security interests in fixtures, if the goods become fixtures before completion of the construction. This is true even for purchase money security interests in newly installed goods which are part of the original construction.
If the Bank is financing goods which will be installed in a construction project and the Bank is not financing the construction, the Bank’s interest will probably be junior to the construction mortgage. The Bank should try to get from the construction lender a consent to the Bank’s interest in the goods or a disclaimer of any interests the construction mortgagee may have in those goods.
CAUTION: Bank Counsel should be consulted when financing fixtures for a construction project where the Bank is not the construction lender.
Readily Removable Collateral. For goods that are (i) readily removable factory or office machines, (ii) readily removable equipment that is not primarily used or to be used for use in the operation of the real estate, or (iii) readily removable replacements of domestic appliances which are consumer goods, a security interest perfected by any method permitted by the UCC (before the goods become fixtures) will have priority over conflicting interests of an owner or lienholder on the real estate.
Tenants’ Fixtures. If the borrower does not have an interest of record in the real estate or does not occupy the real estate where the fixture will be located, the Bank must be sure that the borrower has an unqualified right to remove the fixture. In most situations where the Bank’s borrower is a tenant, this right of removal will exist and the goods will fall into the category of “trade fixtures.” If this is the case, the goods remain personal property and the security interest can be perfected by a standard UCC filing.
If no right of removal exists, then the Bank’s security interest will be subordinate to the interest of any owner or mortgagee, unless the owner or other mortgagee consents in writing to the Bank’s interest or disclaims any interest it may have in the goods as fixtures. Obtaining a landlord’s waiver and subordination is the standard way of avoiding this problem. See the form Leasehold Subordination, Non-Disturbance and Attornment Agreement and Estoppel Certificate located at the end of this Chapter.