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The priority dispute between mechanics liens and construction mortgages is governed by NH RSA 447:12-a. The Bank is given priority if it obtains the appropriate affidavit with each disbursement or disburses “toward payment of invoices from or claims due subcontractors and suppliers…”[1]   The statute gives a roadmap and New Hampshire banks have become familiar with the routine to disburse and maintain the priority of construction loans.

Even with the statutory roadmap, the priority of mechanics liens is a source of dispute.  One aspect of that potential dispute is the interplay between mechanics liens and the security for the financial guarantees required to obtain municipal approval of real estate development.  The municipal approval process commonly requires a performance bond or other financial guarantee assuring completion of improvements.[2]

A performance guarantee often used in New Hampshire is a letter of credit: the bank financing the development, often, issues a letter of credit to the municipality assuring completion of the improvements shown on the approved plan.[3]  That bank financing the development typically makes a construction loan and the letter of credit is an ancillary service.

The relationship between the construction loan and the letter of credit creates the prospect that the financing bank, even though it has followed the statutory roadmap,  will find its mortgage subordinated to mechanics liens to the extent of the letter of credit.

The problem arises when the bank uses a single mortgage to secure both the construction loan and the letter of credit.  The banker’s view is that the two obligations (the construction note and the letter of credit) are really the same – they work together to fund the project.  The banker’s view is that the letter of credit is just another draw on the note financing construction.  The banker treats the letter of credit as a “blocked” part of the construction line.  The banker tells the lawyer “the total loan is $X, but only $X minus the letter of credit amount is available to be lent until the letter of credit is released.”  Having been instructed the lawyer drafts a single mortgage securing the construction note and the letter of credit.

The banker and the lawyer have now walked into a trap. The trap springs when the municipality drafts on the letter of credit. If the draft on the letter of credit were like any other draw on a construction loan the loan officer would refuse to permit the draw without satisfaction of the requirements of NH RSA 447:12-a:  payment to suppliers or an affidavit that all materialmen are paid.  But the draft on the letter of credit is not a draw on the construction line; the bank may not refuse to pay a proper draft.

What is worse, the draft is ordinarily presented to the bank when the project is in trouble – there are unpaid workers or suppliers of material.  Those unpaid suppliers and workers have mechanics liens.  Are those mechanics liens senior to the mortgage securing the reimbursement obligation under the letter of credit?

The answer depends on whether the mortgage securing the letter of credit is a construction mortgage. The statute defines “construction mortgage” by looking at the purpose when executed:

a construction mortgage shall mean any mortgage loan made for the purpose of financing the construction, repair or alteration of any structure on the mortgaged premises where the lien secured by such attachment arises from the same construction, repair or alteration work.

N.H. Rev. Stat. Ann. § 447:12-a.  What about a mixed-use mortgage – one which secures financing for both construction and land acquisition?  If the loan is (originally) a mixed-use loan, i.e., in part to fund acquisition and in part to fund construction, then the portion of the loan that secures acquisition debt is not a construction mortgage.[4]

But our banker’s mortgage has not secured acquisition funding. The funding was construction plus a letter of credit. If all had gone as planned, the funding would be all construction and the letter of credit would never have been drawn.

When the letter of credit (contrary to plan) is drawn, what is the priority of that portion of the loan; is it senior to or junior to attaching unpaid contractors?  Has the mortgage become aa “mixed use” mortgage being in part a construction mortgage (and therefore dependent for priority on affidavits or tracing under RSA 447:12-a) and in part not a construction mortgage (exempt from the priority rules of RSA 447:12-a)?

The answer is critical to the priority of the portion of the mortgage securing the reimbursement obligation because the bank’s obligation to pay under the letter of credit is absolute.  The bank owes payment and cannot condition payment on any affidavit or payment of subcontractors.  The bank, owing payment under the letter of credit, cannot assure compliance with the mechanics lien statute, RSA 447:12-a.  If the mortgage securing the reimbursement obligation is a construction mortgage then, because the bank cannot comply with the statute, the bank’s recovery will be junior to unpaid mechanics liens.

When faced with this problem, the bank (and its lawyer) will find that the answer does not depend on the purpose of each advance, but instead, on the intent of the mortgage when given – the Court will focus on the “agreement level, not the disbursement level.”[5]

At the agreement level what is the purpose of the construction mortgage?  If it says it is a construction mortgage, it discusses construction disbursements, and is in an amount that is equal to the anticipated construction financing, then it is very likely that a trial court will find that at the “agreement level” the purpose of the mortgage was to finance construction and the fact that a disbursement was made under a letter of credit is of no consequence.  So, if the bank provides the letter of credit and “blocks” a certain amount of the construction loan to cover the letter of credit, it runs a significant risk of losing its priority to unpaid contractors.

The lesson is that a bank that funds a construction project and, also, provides a letter of credit for the project should record two mortgages: the first to secure the letter of credit reimbursement obligation and the second to secure the construction financing.  By recording two mortgages, the bank can isolate the construction purpose at the agreement level in the construction mortgage and keep the non-construction priority of the mortgage securing the reimbursement obligation under the letter of credit.


April 7, 2022

Edmond J. Ford, Esq.

Ford, McDonald & Borden, P.A.

10 Pleasant Street

Suite 400

Portsmouth, NH. 03801


[email protected]



[1] N.H. Rev. Stat. Ann. § 447:12-a

[2] See, e.g., Manchester Subdivision and Site Plan Review Regulations, §4.14, https://www.manchesternh.gov/Departments/Planning-and-Comm-Dev/Regulations

[3] This article will not address whether a letter of credit is properly used as a guarantee of performance in the face of the independence principle of Article V: “Rights and obligations of an issuer to a beneficiary or a nominated person under a letter of credit are independent of the existence, performance, or nonperformance of a contract or arrangement out of which the letter of credit arises or which underlies it, including contracts or arrangements between the issuer and the applicant and between the applicant and the beneficiary.” N.H. Rev. Stat. Ann. § 382-A:5-103 (d)


[4] Lewis v. Shawmut Bank, N.A., 139 N.H. 50, 52, 650 A.2d 744, 745–46 (1994) (“Therefore, if the defendant’s loan is regarded **746 as a “mixed” loan (i.e., its purpose is to finance not only construction, but also land acquisition or discharge of mortgages on land), then, under the race-notice rule of priority, the defendant would enjoy priority with respect to non-construction disbursements.”)


[5] Lewis v. Shawmut Bank, N.A., 139 N.H. 50, 53, 650 A.2d 744, 746 (1994) (“The trial court appeared to focus on this disbursement level in concluding that the loan was mixed. Gerrity Co., Inc. v. Laconia Savings Bank, 120 N.H. 304, 307, 414 A.2d 1278, 1280 (1980), however, makes clear that for purposes of RSA 447:12–a priority, the inquiry as to the type of loan is focused on the agreement level, not the disbursement level.”)