Alabama Construction Lending Requirements

Alabama Lien Law Overview

Alabama’s mechanics lien laws (Ala. Code § 35-11-210 et. seq.) are highly procedural and create a bifurcated system of lien rights for subcontractors and suppliers. The statutes apply to both residential and non-residential construction, but the Prompt Payment and Retainage laws contain massive exemptions for residential homebuilders and smaller multi-family projects.

The most critical distinction in Alabama lien law lies in the two tiers of subcontractor/supplier liens:

1. “Full Price Lien”: If a subcontractor or supplier provides written notice to the owner before furnishing any materials, they secure a lien for the full price of their contract.
2. “Unpaid Balance Lien”: If a sub-tier party fails to provide advanced notice, their lien rights are strictly limited to the unpaid balance the owner still owes the general contractor at the time the owner receives a formal Notice of Intent to Lien.

Mortgage Priority

Alabama operates under a unique, bifurcated priority framework that poses a severe risk to construction lenders. Priority is split between the “land” and the “improvements.”

Priority Over the Land: Under Ala. Code § 35-11-211(a), a construction mortgage holds first-lien priority over the land itself against all mechanics liens, provided the mortgage is recorded prior to the commencement of work.

The “Severable Improvements” Exception (Extreme Lender Risk): Under Ala. Code § 35-11-211(b), a mechanics lien holds absolute “super-priority” over a previously recorded mortgage specifically regarding the building or improvement itself, provided the improvement is an entirety and is “separable from the land” (e.g., framing, HVAC systems, or even an entirely new structure). If a lien claimant forecloses on a severable improvement, they possess the statutory right to physically dismantle, sell, and remove the building from the land to satisfy their claim, leapfrogging the lender’s first-position mortgage.

Priority of Progress Draws (Future Advances): In Alabama, the priority of subsequent progress draws depends heavily on whether the advances are “obligatory” or “optional” under the loan agreement and Ala. Code § 35-10-123. If the loan agreement makes advances optional, and the lender disburses funds after receiving actual knowledge of an intervening mechanics lien, those newly disbursed funds lose their first-lien priority. Therefore, the lender should ensure the loan agreement clearly defines advances as obligatory, or strictly halt funding upon notice of any lien.

To establish priority over the land, the construction mortgage MUST be recorded before any visible work begins (Ala. Code § 35-11-211(a)). However, because the lender cannot statutorily defeat the super-priority of a lien on severable improvements, securing specific title insurance endorsements is a crucial risk-mitigation strategy.

Retainage Overview

Alabama’s retainage regulations differentiate heavily based on the number of units being constructed.

Commercial & Multi-Family (17+ Units): Under Ala. Code § 8-29-3, retainage on private commercial and large multi-family projects is strictly capped. An owner MUST NOT withhold more than 10% of the estimated amount of work properly done (Ala. Code § 8-29-3(i)). Crucially, once the project reaches 50% completion, no further retainage may be withheld from subsequent progress payments (Ala. Code § 8-29-3(i)).

• Release Timeline: The owner MUST release and pay the retainage no later than 60 days after the completion of the contractor’s work or substantial completion of the project, whichever occurs first (Ala. Code § 8-29-3(l)).

Residential & Small Multi-Family (1-16 Units) Exemption: Under Ala. Code § 8-29-7, residential homebuilders and improvements to real property intended for residential purposes consisting of 16 or fewer units are explicitly exempt from the state’s statutory retainage caps. On these projects, the percentage of retainage and release timelines are governed entirely by the private construction contract.

Escrow: Alabama does not statutorily mandate that private retainage be held in an interest-bearing escrow account.

Prompt Payment Act

The Alabama Prompt Payment Act (Ala. Code § 8-29-1 et. seq.) applies to private commercial and large multi-family projects, but explicitly exempts residential projects of 16 or fewer units and any contracts under $10,000 (Ala. Code § 8-29-7).

• Owner to GC: For applicable projects, the owner MUST pay the general contractor within 30 days of receiving a proper pay request or invoice, unless the contract specifies otherwise (Ala. Code § 8-29-3(a)).
• GC to Subcontractor: The prime contractor MUST pay subcontractors within 7 days of receiving payment from the owner (Ala. Code § 8-29-3(b)).
• Penalties: Late payments accrue interest at a steep statutory penalty rate of 1% per month (12% annually) and the prevailing party may be awarded reasonable attorney’s fees (Ala. Code § 8-29-6).

Lender Impact: Draw administrators managing commercial loans should ensure draw processing occurs swiftly. Unwarranted lender delays that force the owner to breach the 30-day payment window directly trigger 12% interest penalties against the borrower.

Title Practices

Under Alabama law, state statutes do not mandate title companies to administer construction loan disbursements. Lender-managed disbursements (or third-party draw administration) represent the standard industry practice.

To maintain first lien priority, verifying title and monitoring for liens at each draw is the primary best practice. Construction lenders should objectively utilize one of three primary options to achieve this: (1) Lien monitoring subscription services, (2) Title updates (which check public records but provide no insurance), or (3) Title endorsements (which provide actual insurance to the lender).

Strategic Benefit of ALTA Endorsements: It is highly recommended that lenders utilize ALTA 32 (Construction Loan) and ALTA 33 (Disbursement) title endorsements in Alabama. Because Ala. Code § 35-11-211(b) grants mechanics liens absolute “super-priority” over severable improvements (allowing a claimant to remove the building from the land even if the mortgage was recorded first), utilizing these endorsements is the only way a lender can shift this catastrophic priority risk to the title insurer. Regardless of the method chosen, leveraging these tools to clear encumbrances and verify public filings prior to releasing every single draw is crucial to mitigating risk.

Lien Waivers

Alabama does not dictate or publish specific, fill-in-the-blank statutory forms for lien waivers.

Lien Waiver Summary

Because Alabama does not provide statutory lien waiver templates, their enforceability is governed by standard contract law.

• Advance Waivers Permitted: Alabama has no specific statutory provision prohibiting the waiver of lien rights in advance of performance. So-called “no-lien” clauses in construction contracts are generally valid and enforceable, provided the terms clearly and explicitly express the intent of the parties to waive lien rights.
• Best Practice: While advance waivers are enforceable, lenders should still rely on heavily vetted, custom waiver forms to document payment flow. It is recommended to enforce a strict draw-by-draw exchange using Conditional Waivers for the current draw amount (conditioned upon the clearance of funds) and Unconditional Waivers for previously funded draws to definitively prove that payment reached the claimant and extinguished the corresponding lien right.

Lien Waiver Notarization

Alabama law does not stipulate that lien waivers be notarized to be considered legally valid and effective.

Notices

Notice of Commencement (or similar like event)

Alabama does not utilize a recorded Notice of Commencement for private construction projects to establish project start dates or trigger lien filing timelines. Priority is determined strictly by the actual, physical commencement of work.

Preliminary Lien Notifications

Preliminary notices in Alabama dictate whether a sub-tier claimant receives a “Full Price Lien” or an “Unpaid Balance Lien.”

• General Contractors: Not statutorily mandated to send preliminary notices.
• Subcontractors & Suppliers (Full Price Lien): To secure a lien for the full price of their contract, the claimant MUST provide written notice to the owner before furnishing any materials to the site (Ala. Code § 35-11-210).
• Subcontractors & Suppliers (Unpaid Balance Lien): If the claimant fails to send the advanced notice, they are not completely barred from filing a lien, but they are limited to an “Unpaid Balance Lien.” To enforce this, they MUST serve a formal Notice of Intent to Lien upon the owner before officially recording their verified statement of lien (Ala. Code § 35-11-218).

Notice of Completion (or similar like event)

Alabama does not utilize a statutory Notice of Completion to truncate or alter the deadline for contractors to file mechanics liens. The lien window is strictly driven by the individual claimant’s last date of furnishing.

Additional State-Specific Notices

Demand for List of Materialmen: Under Ala. Code § 35-11-219, an owner (or a lender acting as an agent) possesses the statutory right to demand a complete list of all materialmen, laborers, and employees who have furnished materials or labor to the project from the original contractor. If the contractor fails to provide this list, they statutorily forfeit their own mechanics lien rights. This is a highly recommended tool for lenders to proactively map the supply chain and uncover hidden subcontractors before final disbursements.

Bonding Off Liens (Transfer to Security): Under Ala. Code § 35-11-233, an owner or lender possesses the statutory right to transfer a mechanics lien from the real property to a surety bond. The bond MUST be executed in an amount equal to double the amount of the lien claimed (or in such amount as approved by the judge of probate) (Ala. Code § 35-11-233). It is highly recommended that a lender ensure the borrower executes this process if a lien is filed, because filing this bond statutorily releases the property from the lien, clears the title, and allows the lender to safely resume loan disbursements.

Document References

• Notice to Owner (Before Furnishing): A preliminary notice served by a subcontractor or supplier to the owner before materials are delivered. It benefits the claimant by establishing a “Full Price Lien.” For the lender, receiving this notice indicates that the noticing party possesses full lien rights, and it is highly recommended the lender collect a lien waiver before funds are disbursed. (Ala. Code § 35-11-210).
• Notice of Intent to Lien: A statutory warning notice that MUST be sent to the owner by sub-tier claimants prior to officially recording a lien for the unpaid balance (Ala. Code § 35-11-218). It provides the lender and owner a crucial window to trap funds and resolve the dispute.
• Verified Statement of Lien: The formal, notarized document filed in the probate court to perfect the encumbrance against the property’s title. Original contractors MUST file within 6 months of their last work; journeymen/laborers within 30 days; and all other sub-tiers within 4 months (Ala. Code § 35-11-213 & § 35-11-215).
• Demand for List of Materialmen: A written demand served on the GC forcing them to reveal the supply chain. While there is no rigid statutory form, the document typically looks like a formal, certified letter from the owner (or lender) to the General Contractor, explicitly citing Ala. Code § 35-11-219. To be effective, the document MUST explicitly demand a “complete list of all materialmen, laborers, and employees” who have furnished or are contracted to furnish materials or labor. Practically, it should be formatted to request a detailed schedule listing each sub-tier party’s name, contact information, scope of work, contract amount, and outstanding balance. It benefits the lender by identifying unknown parties. If the GC fails or refuses to respond to this written demand, they statutorily forfeit their own lien rights. (Ala. Code § 35-11-219).

Contractor Licensing & Bond Requirements

Alabama heavily regulates contractor licensing at the state level through two distinct boards based on the property type and project value.

• Commercial & Public Works: The Alabama Licensing Board for General Contractors licenses contractors performing commercial, industrial, or public works where the cost of the undertaking (labor and materials) is $100,000 or more (Ala. Code § 34-8-1). For commercial swimming pool projects, the threshold is $5,000 or more (Ala. Code § 34-8-1(b)).
• Residential Builders: The Home Builders Licensure Board (HBLB) licenses residential home builders performing construction or remodeling on residential structures (3 stories or less, 4 units or fewer) where the cost exceeds $10,000 (Ala. Code § 34-14A-2).
• Subcontractors: Subcontractors working under a licensed prime contractor are REQUIRED by state law to hold their own state license if their specific portion of the work is $100,000 or more for commercial jobs (Ala. Code § 34-8-7) or exceeds $10,000 for residential jobs (Ala. Code § 34-14A-2(16)).
• Surety Bonds & Specialized Trades: There is no blanket statewide surety bond mandate for general contractors, but applicants are statutorily expected to submit financial statements (CPA prepared) demonstrating a minimum net worth and working capital. Roofers taking residential jobs where the cost exceeds $2,500 are REQUIRED to be licensed as residential roofers (Ala. Code § 34-14A-2(16)).
• License Lookup: Lenders should verify commercial credentials via the Alabama Licensing Board for General Contractors Portal and residential credentials via the Home Builders Licensure Board Portal.