Construction Lending State Compliance Library
Kentucky Construction Lending Requirements
A supplier can record a notice of contract before you record — and jump ahead of your mortgage from the start.
Reviewed April 11, 2026Last statutory change 2025 · Amendment to KRS § 371.160Statutes and disclaimer
Priority over prior mortgageCan relate back
Statutory waiver formNot statutory
Notice of commencementNot recognized
Contractor licensingNo general license
Preliminary notice75 or 120 days
Retainage10% cap, then 5%; 1–4 units by contract
The brief
What a construction lender needs to know about Kentucky
Kentucky at a glance
Kentucky’s signature trap is the notice of contract: a contractor or supplier can record a statement of intent to furnish with the county clerk, and if it’s recorded before your mortgage it takes absolute priority whenever work later begins — so a pre-closing search has to look for notices of contract, not just liens. Otherwise liens relate back to first furnishing, and on owner-occupied homes a subcontractor’s lien is unenforceable to the extent the owner paid the GC before the notice to owner arrived — a defense that lives on your disbursement records. Retainage steps down from 10% to 5% once the project is 51% complete on commercial and multi-family (5+ units) work (1–4 units by contract), and since 2025 private contracts of $2M+ must hold retainage in interest-bearing escrow.
Lien law
On a home, payment before notice is a defense.
Kentucky is first-in-time modified by relation-back: a lien attaches and reaches back to the date that claimant first furnished labor or materials. On an owner-occupied residence, a sub-tier lien is unenforceable to the extent the owner already paid the general contractor before the notice to owner arrived.
That defense is only as good as your disbursement records — it turns on what was paid, and when.
- Owner-occupied residential
- Amounts paid before the notice to owner are protected.
- Commercial and multi-family
- No such limitation. Broader hidden-lien risk.
Priority
Watch for a pre-emptive notice of contract.
Record before work commences and liens generally stay behind you. The trap is statutory: a contractor or supplier may record a statement in the county clerk’s office declaring an intent to furnish labor or materials, and a notice of contract recorded before your mortgage puts that claimant ahead of you.
So the title search at closing has to look for these filings, not just for liens and prior mortgages.
The Kentucky signature
Retainage steps down at 51% complete.
Commercial and multi-family of five units or more fall under the Fairness in Construction Act: retainage is capped at 10% for the first 50% of the project and must be reduced to 5% once the project is 51% complete. Residential of 1 to 4 units is exempt and runs on the contract.
- 10%, then 5%
- The step-down is mandatory at 51% completion, not optional.
- 2025 escrow mandate
- Private contracts of $2 million or more now require retainage in an interest-bearing escrow account.
- Residential 1 to 4 units
- Exempt from the caps. Follow internal policy, but read the contract.
Lien waivers
Regulated by the Fairness in Construction Act.
Any provision waiving or extinguishing lien rights before work is performed or materials furnished is void. Both conditional and unconditional waivers are standard here — conditional while payment is pending, unconditional only after funds are secured.
Collect only waivers that match the dollar amounts actually disbursed.
- Conditional · payment pending
- Unconditional · after funds clear
Notices
The notice-to-owner clock differs by property type.
Any claimant without a direct owner contract must send a notice to owner; general contractors need not. On owner-occupied residential work it is due within 75 days of last furnishing, and the lien is only valid to the extent the owner had not yet paid.
Licensing is local — the state licenses electrical, plumbing, and HVAC trades only, so general contractor verification runs through the city or county.
Kentucky Lien Law Overview
Kentucky’s mechanics lien laws provide robust protections for those who improve real property. The statutes operate under a “first-in-time, first-in-right” framework, heavily modified by a relation-back doctrine. A lien attaches to the property and relates back to the date the claimant first furnished labor or materials.
A critical distinction exists between owner-occupied residential properties and commercial/non-owner-occupied properties. On owner-occupied residential properties, a subcontractor’s mechanics lien is not enforceable to the extent the owner has already paid the general contractor prior to receiving the required “Notice to Owner.” This creates a strong protective shield for residential owners and their lenders, provided disbursements are strictly tracked. This limitation does not apply to commercial or multi-family projects, exposing commercial lenders to broader “hidden lien” risks.
Mortgage Priority
Will a Kentucky Lien have priority over pre-existing mortgages or construction loans?
Generally, no, provided the construction loan is executed and properly recorded before the commencement of any work or delivery of materials.
Kentucky follows a relation-back doctrine. A mechanics lien relates back to the date the claimant first performed labor or furnished materials. Therefore, if a mortgage is recorded after work has visibly commenced, all mechanics liens associated with that project will leapfrog the mortgage and take superior priority.
The “Notice of Contract” Exception: There is a highly dangerous statutory exception under KRS § 376.010(2). A contractor or supplier may record a statement in the county clerk’s office declaring their intent to furnish labor or materials. If this “Notice of Contract” is recorded prior to the recording of the construction mortgage, the mechanics lien will have absolute priority over the mortgage, regardless of when the actual work begins. Lenders must conduct rigorous pre-closing title searches to ensure no such notices have been filed.
Retainage Overview
Retainage in Kentucky is governed by a split statutory framework that distinguishes between residential 1-4 unit projects and all other private construction.
- Residential (1-4 Unit): These projects are explicitly exempt from statutory retainage caps. Retainage amounts and release timelines are governed strictly by the construction contract between the owner and contractor. Lenders should follow internal policy (typically 10%) but must review the specific contract terms.
- Commercial & Multi-Family (5+ Units): These projects are subject to the Kentucky Fairness in Construction Act (KFCA).
- Statutory Caps (KRS § 371.425): Retainage is capped at 10% for the first 50% of the project. Once the project is 51% complete, retainage must be reduced to 5% for the remaining duration.
- 2025 Escrow Mandate (KRS § 371.160): For private contracts of $2 million or more, owners/lenders must deposit withheld retainage into an interest-bearing escrow account. Failure to comply can result in statutory penalties and interest claims from contractors.
- Lender Implications: Construction lenders must ensure their draw administration software or manual spreadsheets account for the “step-down” from 10% to 5% on commercial/multi-family projects to avoid violating the KFCA. For large-scale loans ($2M+), the lender must verify that the borrower has established the required escrow account or manage the escrow as part of the disbursement service.
Title Practices
Under Kentucky law, title companies are not required to administer construction loan disbursements. Lender-managed disbursements (or third-party draw administration) are the standard practice.
To maintain first lien priority, it is recommended that construction lenders require American Land Title Association (ALTA) 32 (Construction Loan) and ALTA 33 (Disbursement) endorsements. Kentucky is a “Safe Harbor” state where a properly recorded mortgage generally retains priority over subsequent mechanics liens, provided the mortgage is recorded before any physical work commences. However, because mechanics liens can relate back to the date of first furnishing, the lender must utilize title companies to perform date-down title updates prior to every draw. The lender must ensure no “Notice of Contract” was recorded prior to the mortgage and must proactively clear any encumbrances discovered during the draw administration process. Title insurance serves as the lender’s primary risk mitigation tool against unrecorded or “hidden” liens relating back to early project commencement.
Lien Waivers
Lien Waiver Summary
Kentucky lien waivers are heavily regulated by the Kentucky Fairness in Construction Act (KRS § 371.405(2)(b)).
- Advance Waivers Prohibited: Any contract provision that attempts to waive or extinguish mechanics lien rights before work is performed or materials are furnished is void and unenforceable as a matter of public policy.
- Conditional and Unconditional Waivers: Both conditional and unconditional waivers are acceptable and commonly used in Kentucky. Because advance waivers are prohibited, a conditional waiver is used when payment is pending (the waiver only becomes legally effective if and when the payment is actually received and clears). An unconditional waiver should only be executed after payment has actually been made and funds are secured.
- Best Practice: Lenders must ensure they only collect waivers corresponding to actual dollar amounts disbursed. The use of Conditional Waivers for current draws (conditioned strictly upon the receipt of that draw’s funds) and Unconditional Waivers for previously funded draws is the legally sound approach to navigating Kentucky’s prohibition on advance waivers.
Statutory Lien Forms
Kentucky does not mandate specific, fill-in-the-blank statutory forms for lien waivers or preliminary notices. However, the statutes strictly govern the content and timing of the Statement of Lien (KRS § 376.080) and the Notice to Owner (KRS § 376.010), requiring specific informational elements (e.g., claimant name, amount, property description) to be valid.
Lien Waiver Notarization
Kentucky does not require lien waivers to be notarized to be considered legally valid and effective. A signed, written agreement is sufficient. (Note: The formal ‘Statement of Lien’ filed with the county clerk MUST be notarized, but standard progress/final waivers collected by the lender do not).
Notices
Notice of Commencement (or similar like event)
Kentucky DOES NOT recognize or require a Notice of Commencement for private construction projects. Priority is dictated by the date of first physical furnishing of labor/materials or the filing of a pre-emptive “Notice of Contract,” rather than a formalized commencement document.
Preliminary Lien Notifications
In Kentucky, preliminary notices (Notice to Owner) are heavily dependent on the project type and the claimant’s contractual privity.
- Who Must Send: Any subcontractor, supplier, or laborer who does not have a direct contract with the property owner. (General contractors do not need to send this notice).
- Owner-Occupied Residential Projects: The Notice to Owner must be sent within 75 days after the claimant’s last date of furnishing labor or materials. Crucially, the lien is only valid up to the unpaid balance the owner owes the general contractor at the moment the notice is received.
- All Other Projects (Commercial, Multi-Family, Non-Owner-Occupied): If the claim is under $1,000, the notice must be sent within 75 days of last furnishing. If the claim is over $1,000, the notice must be sent within 120 days of last furnishing.
- Implications of Failure: Failure to send the Notice to Owner within the statutory timeframes strictly invalidates the claimant’s right to file a mechanics lien.
Notice of Completion (or similar like event)
Kentucky DOES NOT recognize or require a statutory Notice of Completion to shorten or alter the mechanics lien filing period. The deadline to file a lien is strictly calculated from the claimant’s individual last date of furnishing labor or materials (six months).
Additional State-Specific Notices
- Notice of Contract (Pre-Mortgage Priority Notice): As highlighted in the priority section, KRS § 376.010(2) allows a contractor to file a statement of expected labor/materials in the county records. If filed before a mortgage, the contractor gains super-priority. Lenders must specifically screen for this document during pre-closing title searches.
Document References
- Notice to Owner (Pre-Lien Notice): Required from subcontractors, suppliers, and any party without a direct contract with the property owner. It informs the owner of the claimant’s intent to hold the property liable for unpaid amounts. For the lender and owner, receiving this notice dictates that funds must be withheld from the general contractor to resolve the claim. Failure to provide this notice strictly invalidates the claimant’s lien rights. (KRS § 376.010).
- Notice of Contract (Statement of Intention): An optional, pre-emptive filing made by a contractor or supplier in the county clerk’s office stating they expect to furnish labor or materials. While not required to preserve general lien rights, filing this before a mortgage is recorded grants the mechanics lien priority over that mortgage. For lenders, this creates significant title risk if filed prior to loan consummation. (KRS § 376.010(2)).
- Statement of Lien (Mechanics Lien): The formal, verified document filed with the county clerk to perfect the lien. It must contain the claimant’s name, amount due, property description, and owner’s name. It must be filed within six (6) months after the last date of furnishing labor or materials, and mailed to the owner within seven (7) days of filing. The lien automatically dissolves if a lawsuit to enforce it is not filed within twelve (12) months. (KRS § 376.080 & § 376.090).
- Interim/Partial Lien Waiver: A document executed by a contractor or subcontractor releasing lien rights to the extent of payment actually received or conditioned upon receipt. Used during the draw process to mitigate lender and owner exposure. (KRS § 371.405(2)(b)).
Contractor Licensing & Bond Requirements
Kentucky utilizes a bifurcated regulatory framework, dividing licensing responsibilities between the state and local municipalities.
- State-Level Licensing: The state of Kentucky does not issue a statewide general contractor license. However, the state strictly regulates and requires licensing for specialty trades, specifically: Electrical, Plumbing, and HVAC contractors. These are governed by the Kentucky Department of Housing, Buildings and Construction (DHBC).
- Local-Level Licensing: General contractors, residential builders, and remodelers are regulated at the county or municipal level (e.g., Louisville/Jefferson County, Lexington/Fayette County, Bowling Green). Local jurisdictions typically require occupational licenses, proof of workers’ compensation insurance (or an affidavit of exemption), and minimum commercial general liability insurance (often ranging from $100,000 to $500,000 depending on the jurisdiction).
- Surety Bonds: There is no blanket statewide surety bond requirement for general contractors, but local municipalities frequently require a compliance or permit bond to operate within their jurisdiction.
- License Lookup: * State Trades (DHBC): Kentucky DHBC License Search
- General Contractors: Must be verified directly through the local municipal or county revenue/building department.
Frequently Asked Questions
What is the “Notice of Contract” red flag, and how does it threaten our mortgage priority?
The “Notice of Contract” is a major red flag for lenders in Kentucky that can override standard priority rules. Under KRS § 376.010(2), a contractor or supplier can record a statement in the county clerk’s office expressing their intent to furnish labor or materials before work even begins. If this document is filed before your construction mortgage is recorded, that contractor’s lien will have absolute priority over your mortgage, regardless of when their physical work actually starts. This creates a dangerous exception to the standard “first-in-time” rules that usually protect recorded mortgages. To protect your security interest, your immediate next step is to conduct a rigorous pre-closing title search specifically screened for any recorded “Notice of Contract” or “Statement of Intention” filings. As an expert ally in your project’s success, we recommend requiring ALTA 32 and 33 endorsements to provide insurance against unrecorded or “hidden” liens. If you discover such a notice on the title, you must ensure the encumbrance is cleared or the contractor formally waives their super-priority before you close the loan or disburse funds.
How do we manage retainage step-downs and the new 2025 escrow mandate for large commercial projects?
When managing commercial or multi-family projects (5+ units) in Kentucky, you must comply with the mandatory retainage “step-down” required by the Kentucky Fairness in Construction Act (KFCA). According to KRS § 371.425, retainage is capped at 10% for the first 50% of the project, but once the project hits 51% completion, the withholding must be reduced to 5% for the remaining duration. Furthermore, a 2025 amendment to KRS § 371.160 mandates that for private contracts of $2 million or more, the owner or lender must deposit withheld retainage into an interest-bearing escrow account. Draw administrators should ensure their internal draw administration software or manual spreadsheets are configured to trigger this step-down automatically at the 51% completion threshold to avoid violating the KFCA. For any large-scale loan of $2 million or more, your best practice is to verify that the borrower has established the required interest-bearing escrow account or manage the escrow as part of your disbursement service. Failing to adhere to these step-down and escrow rules can result in statutory penalties and interest claims from contractors.
If our construction contract includes a “no-lien” clause, are we protected from mechanics liens filed by the general contractor?
No, you are not protected by such a clause in Kentucky. Lenders must be aware that Kentucky lien waivers are heavily regulated by the Kentucky Fairness in Construction Act. Specifically, KRS § 371.405(2)(b) states that any contract provision attempting to waive or extinguish mechanics lien rights before work is performed or materials are furnished is void and unenforceable as a matter of public policy. This means that “advance waivers” are legally meaningless, and a contractor retains their right to file a lien regardless of what the prime contract says. To navigate this legally, your best practice is to implement a disciplined trailing waiver process. You should exclusively collect Conditional Waivers for current draw requests, which are only effective once payment is received and clears, and Unconditional Waivers for previously funded draws where funds are already secured. By only collecting waivers that correspond to actual dollar amounts disbursed, you remain in compliance with the KFCA while ensuring your collateral remains protected from double-payment risks.
How does the “Notice to Owner” requirement protect us differently on residential versus commercial projects?
Kentucky law provides a significant protective shield for owner-occupied residential projects that lenders should leverage. Under KRS § 376.010, a subcontractor’s mechanics lien on an owner-occupied residence is only enforceable to the extent that the owner still owes the general contractor money at the time they receive the “Notice to Owner.” If the owner has already paid the general contractor in full before receiving this notice, the subcontractor’s lien rights are essentially neutralized. However, this “Defense of Payment” shield does not apply to commercial or multi-family projects, exposing those lenders to broader “hidden lien” risks. As a best practice, draw administrators should strictly track and document every disbursement made to the general contractor on residential builds to maintain a clear paper trail of the remaining contract balance. You must also monitor the statutory deadlines for these notices; for owner-occupied projects, the notice must be sent within 75 days of the claimant’s last furnishing of labor. By maintaining accurate payment records and verifying the timing of any received notices, you can provide a factual defense against subcontractor claims attempting to exceed the unpaid balance of the prime contract.
On the record
Statutes and disclaimer
State statute reference
- State statute
- Kentucky Revised Statutes (KRS) § 376.010 et. seq
- Last statutory change
- 2025 — Amendment to KRS § 371.160: Mandating retainage escrow for private projects of $2 million or more. Prior major change in 2007 implemented the Kentucky Fairness in Construction Act establishing strict prohibitions on advance lien waivers and statutory caps on retainage withholding
- Reviewed
- April 11, 2026 by Land Gorilla
Disclaimer
Information on this website is provided for informational purposes only and is not intended to be legal advice or establish an attorney-client relationship. Construction law can change at any time, so the information on this website may not be the most up-to-date information available. The information on this website is posted “as is” and no representations are made that the content is without errors. Use of this website does not create an attorney-client relationship between Land Gorilla, content creators, law firms, and any other contributors to this website. Users of this website should contact their own legal counsel for advice with respect to any legal matters.