In an industry particularly prone to financial failures, construction lenders and writ/execution creditors often find themselves at odds when seeking repayment of debts. This is partially because, in the construction context, mortgage funding works differently. Instead of advancing all funds on closing as is often done post- construction, a certain percentage of funds (also known as “draws”) are advanced as different stages of construction and development are completed.
For example, a first optional draw of 15 per cent of the total mortgage amount may be available when excavation and the building’s foundation are complete, but a second 25 per cent draw may be required to be taken when a roof is placed on the building and it becomes airtight.
Unfortunately for execution creditors, this state of affairs makes it far more difficult to collect on any court judgments they may obtain against the legal or beneficial owners of the property being constructed. The concern is that, even if execution creditors file a writ of seizure and sale (writ) to try to obtain the property’s net sale proceeds in order to satisfy the judgment amount, there may be no funds available upon the sale due to the priority nonetheless given not only to prior draws but also to subsequent mortgage advances after the writ was filed. As execution creditors already rank lower than contractors with construction liens for the materials and services they supply, this further diminishes available debt repayment funds.
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