Maryland Construction Lending Requirements

Maryland Lien Law Overview

Maryland’s mechanics lien framework is highly unique and generally favorable to owners and lenders. Unlike most states, a mechanics lien in Maryland is not inchoate; it does not automatically attach to the property when work begins. Instead, a claimant has no lien until a circuit court reviews the case and issues an order establishing the lien.

A critical distinction exists between new construction and renovations/improvements. To establish a lien on an existing building, the work must improve the building’s value by at least 15% (Md. Code Ann., Real Prop. § 9-102(a)). Additionally, under Md. Code Ann., Real Prop. § 9-103(c)(2), if a building is erected, repaired, rebuilt, or improved to the extent of 25% of its value by a tenant for life or years, or by a person employed by that tenant, any mechanics lien established applies only to the extent of the tenant’s interest. Lenders financing tenant improvements should review the lease, landlord consent, title status, and any landlord-authorized work with Maryland counsel and the title insurer.

Maryland also provides a limited statutory “defense of payment” for subcontractor lien claims involving a single-family dwelling being erected on the owner’s land for use as the owner’s own residence. If the owner has made full payment to the general contractor before receiving the subcontractor’s required Notice of Intent to Claim a Lien, the subcontractor may be barred from establishing a lien against the property. Lenders should not treat this as a general rule for all residential, 1-4 unit, investment, renovation, or non-owner-occupied projects.

Public Projects Excluded: It is critical to note that mechanics liens cannot attach to public property or government-owned projects in Maryland. Unpaid contractors working on public projects must instead pursue claims against payment bonds under Maryland’s “Little Miller Act” (Md. Code Ann., State Fin. & Proc. § 17-108). This guide focuses strictly on private construction lending.

Mortgage Priority

Because a mechanics lien in Maryland does not exist until a court establishes it, Maryland provides significant priority protections for construction lenders.

Establishing Priority: Maryland does not generally follow the “relation-back” doctrine for mechanics liens. Under Md. Code Ann., Real Prop. § 9-102(d), a building or land may not be subjected to a mechanics lien if, prior to the establishment of the lien by a court, legal title has been granted to a bona fide purchaser for value. Construction mortgagees and deed-of-trust lenders are generally analyzed within Maryland’s bona fide purchaser priority framework, but lender priority should be confirmed through title review, recording status, notice analysis, and counsel where facts are complex.

A properly recorded construction mortgage or deed of trust will generally take priority over a mechanics lien established after the mortgage or deed of trust is recorded, subject to title, notice, bankruptcy, recording, and case-specific issues. Once a claimant files a Petition to Establish a Mechanics Lien, the filing constitutes constructive notice to a purchaser or lender under Md. Code Ann., Real Prop. § 9-102(e). Lenders should ensure their deed of trust is recorded promptly and should verify that no petition has been filed before closing or funding additional draws.

Bankruptcy Escalation Warning: If a property owner or general contractor files for bankruptcy, the interaction between unestablished mechanics liens and the federal automatic stay is complex. Draw administrators should immediately escalate any project involving a bankruptcy filing to legal counsel to determine the impact on the lender’s mortgage priority, the status of the claimant’s lien rights, and the available remedies for the lender.

Retainage Overview

Maryland regulates private retainage through its Prompt Payment statutes.

Exemptions: Maryland’s private construction prompt payment and retainage rules apply except to contracts expressly excluded by Md. Code Ann., Real Prop. § 9-305. Excluded categories include:

• contracts for the construction and sale of a single-family residential dwelling;
• transactions under the Maryland Custom Home Protection Act; and
• home improvement contracts by contractors licensed under the Maryland Home Improvement Law.

Lenders should analyze the actual contract type, not just the property type, before determining whether Maryland prompt payment and retainage provisions apply. Payment deadlines for excluded contracts are generally governed by the private contract. Additionally, Md. Code Ann., Real Prop. § 9-304 does not apply to a contract or subcontract for a project funded wholly or in part by or through the Department of Housing and Community Development (DHCD). Lenders should review DHCD-funded projects separately for applicable program, contract, and regulatory requirements.

Retainage Limits: For covered private construction contracts of $100,000 or more, Maryland retainage rules may apply. If the contractor has furnished 100% performance security and 100% payment security for the contract, the owner may not retain more than 5% of each progress payment under Md. Code Ann., Real Prop. § 9-304(b).

Downstream Retainage Caps & Withholding: A prime contractor may not withhold a greater percentage of retainage from a subcontractor than the owner withholds from the prime contractor. Owners and contractors are permitted to withhold amounts from progress payments or retainage that are reasonably necessary to protect against claims, damages, or incomplete work.

Release Timeline: For covered contracts, undisputed retention proceeds retained by an owner under Md. Code Ann., Real Prop. § 9-304 must be paid within 90 days after substantial completion, as defined by the applicable contract or subcontract.

Escrow: Maryland does not statutorily mandate that private retainage be held in a separate, interest-bearing escrow account.

Prompt Payment Act & Misapplication of Funds

The Maryland Prompt Payment Act (Md. Code Ann., Real Prop. § 9-301 et. seq.) dictates payment deadlines on private construction projects, but applicability is limited.

Applicability: Maryland’s private construction prompt payment and retainage rules apply except to contracts expressly excluded by Md. Code Ann., Real Prop. § 9-305. Excluded categories include:

• contracts for the construction and sale of a single-family residential dwelling;
• transactions under the Maryland Custom Home Protection Act; and
• home improvement contracts by contractors licensed under the Maryland Home Improvement Law.

Lenders should analyze the actual contract type, not just the property type, before determining whether Maryland prompt payment and retainage provisions apply. Payment deadlines for excluded contracts are generally governed by the private contract.

Owner to Prime Contractor — Covered Private Construction Contracts: If the contract provides specific dates or times for payment, the owner must pay the contractor all undisputed amounts within 7 days after the date or time specified in the contract. If the contract does not provide specific dates or times for payment, the owner must pay undisputed amounts owed under the written contract within the earlier of:

• 30 days after the day on which the occupancy permit is granted; or
• 30 days after the day on which the owner or the owner’s agent takes possession.

Contractor to Subcontractor — Covered Private Construction Contracts: The prime contractor must pay its subcontractors undisputed amounts within 7 days of receiving payment from the owner (Md. Code Ann., Real Prop. § 9-302(b)(3)).

Lender Impact: Draw administrators managing covered loans should process funding quickly to align with the private contract’s stipulated payment dates. Unjustified delays that cause the owner to miss these deadlines can trigger legal remedies for the unpaid party, potentially including interest and attorney’s fees if a court finds the withholding was in bad faith.

Title Practices

Under Maryland law, state statutes do not require 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 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), and (3) Title endorsements (which provide actual insurance to the lender).

Because Maryland liens are not legally established until ordered by a circuit court, running routine title updates is an effective way to spot a filed “Petition to Establish a Lien” before the court officially grants the lien order. It is recommended that lenders utilize ALTA 32 (Construction Loan) and ALTA 33 (Disbursement) title endorsements to help protect against specific mechanics lien risks associated with disbursements to the extent covered by the endorsement terms.

Coverage depends on the title policy, endorsement language, exclusions, underwriting conditions, date-down procedures, and title insurer instructions. ALTA 32, ALTA 33, or similar endorsements do not provide blanket protection against all court actions, unrecorded matters, boundary disputes, off-record claims, or lender-controlled disbursement issues. Lenders should coordinate with the title company before closing and before each insured disbursement.

Lien Waivers

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

Lien Waiver Summary

Maryland regulates lien waivers to protect downstream project participants from coercive contract clauses.

Advance Waivers Prohibited for Subcontractors: Under Md. Code Ann., Real Prop. § 9-113, any provision in an executory contract between a contractor and a subcontractor that waives or requires the subcontractor to waive their right to claim a mechanics lien before work is performed or payment is made is void as against public policy. However, this anti-waiver rule targets advance waivers; it does not prohibit properly timed waivers that are linked to or exchanged for actual payment.

Notes and Credits Do Not Waive Lien Rights: Under Md. Code Ann., Real Prop. § 9-110, a claimant does not waive their right to a mechanics lien simply by granting a credit or receiving a promissory note or other security, unless the note is explicitly received as payment and the lien right is expressly waived in writing. Lenders should be aware that a subcontractor accepting a promissory note from a GC in lieu of cash does not automatically extinguish that subcontractor’s lien rights.

Best Practice: Lenders should rely on carefully drafted, Maryland-specific waiver forms reviewed by Maryland counsel and acceptable to the issuing title insurer. Conditional waivers should be used for current draw amounts that have not yet cleared. Unconditional waivers should be used only for amounts that have actually been paid and cleared. Waivers should not be drafted to waive unpaid retainage, unresolved change orders, disputed amounts, or future lien rights unless reviewed by counsel.

Lien Waiver Notarization

Maryland law does not require lien waivers to be notarized to be considered legally valid and effective. A signed, written agreement clearly stating an intent to waive mechanics lien rights is sufficient.

Notices

Notice of Commencement (or similar like event)

Maryland does not utilize a recorded Notice of Commencement for private construction projects. Priority is based on the recording of the deed of trust prior to a court order establishing a lien, rather than a recorded commencement document.

Preliminary Lien Notifications

Who Must Send: Any subcontractor, material supplier, or laborer who does not have a direct contract with the property owner. General contractors are not required to send preliminary notices.

Deadline: The subcontractor must send a written “Notice of Intent to Claim a Lien” to the property owner within 120 days after the claimant’s last date of doing the work or furnishing the materials (Md. Code Ann., Real Prop. § 9-104(a)).

Service Requirements: The Notice of Intent must be served on the owner via registered or certified mail, return receipt requested, or personally delivered. If there are multiple owners, serving the notice on one owner is generally sufficient. If the notice cannot be served personally or by mail (e.g., the owner cannot be found or is deceased), the claimant may satisfy the requirement by posting the notice on the door or other front part of the building.

Implications of Failure: If a subcontractor fails to properly serve the required notice within the 120-day period, the subcontractor may lose the right to establish a mechanics lien. Lenders should not make this determination alone. Any notice that appears late, defective, disputed, or unclear should be escalated to the borrower, title insurer, and counsel before disputed funds are released.

Notice of Completion (or similar like event)

Maryland does not utilize a statutory Notice of Completion to truncate or alter the deadline for contractors to file mechanics liens. Claimants generally must file a Petition to Establish a Mechanics Lien within 180 days after the claimant last performs work or furnishes materials.

Additional State-Specific Notices

Petition to Establish a Mechanics Lien: To establish a lien, the claimant must file a complaint (petition) in the circuit court for the county where the property is located within 180 days of the work being completed or the materials furnished (Md. Code Ann., Real Prop. § 9-105).

Show Cause, Interlocutory & Final Orders: Once a petition is filed, the court reviews it. If it has merit, the court issues a “Show Cause Order” giving the owner 15 days to file an affidavit explaining why a lien should not attach. The court will hold a hearing to determine if there is “probable cause” to believe the claimant is entitled to a lien. If probable cause exists, the court issues an “Interlocutory Order” establishing the lien temporarily until a final trial. Following a full trial, the court may issue a “Final Order” permanently establishing the lien.

Lender Action: A filed Petition to Establish a Mechanics Lien should be treated as an immediate title and funding-control event. The lender should suspend or condition further disbursements, obtain a title update, notify the title insurer, review loan agreement default and holdback rights, and involve counsel. The owner may be able to release the property from the lien by filing a bond or paying cash into court as a substitute for the real property. Lenders should not attempt to resolve a petition without legal and title insurer involvement.

Maryland Construction Trust Statute: Under Md. Code Ann., Real Prop. § 9-201 and § 9-202, any money paid by an owner (via the lender’s draw) to a contractor is legally held in trust for the benefit of the subcontractors and suppliers. If the general contractor’s officers or directors knowingly retain or use these trust funds for any purpose other than paying the subcontractors, they can be held personally liable. Importantly, the statute does not require the contractor to maintain a separate trust account for these funds, and the commingling of trust funds with other operational funds is not, by itself, a violation of the statute. While the lender is not typically the direct trust beneficiary, the statute is useful context when evaluating suspected fund diversion. Lenders should respond through documented draw controls, payment affidavits, joint checks, title review, borrower communication, and escalation to counsel rather than relying on the trust statute as a standalone enforcement tool.

Document References

• Notice of Intent to Claim a Lien: A statutory notice required from subcontractors and suppliers who do not have a direct contract with the owner. It must generally be served within 120 days after the claimant last performs work or furnishes materials, by registered or certified mail, return receipt requested, or by personal delivery. If notice cannot be given because of absence or other statutory causes, the claimant may be able to satisfy the requirement by posting the notice on the door or other front part of the building. It benefits the lender and owner by providing a critical warning of unpaid debts, allowing them to trap funds before the claimant can file a lawsuit. (Md. Code Ann., Real Prop. § 9-104).
• Petition to Establish a Mechanics Lien: The formal lawsuit filed by a claimant in circuit court to request the establishment of a lien. It must be filed within 180 days of the claimant’s last work. If not filed timely, the claimant loses all lien rights. (Md. Code Ann., Real Prop. § 9-105).

Contractor Licensing & Bond Requirements

Contractor licensing in Maryland is divided by project type, trade, and jurisdiction. General commercial construction may involve local or county-level requirements, while specific residential and specialty trade work is regulated at the state level.

• Home Improvement Contractors: Anyone performing home improvement work on residential property must hold a license from the Maryland Home Improvement Commission (MHIC) (Md. Code Ann., Bus. Reg. § 8-301). Note: The separate MHIC subcontractor license category was eliminated; however, prime home improvement contractors must still be licensed.
• Home Builders: Contractors constructing new residential homes must register with the Home Builder Registration Unit under the Maryland Attorney General’s Office (Md. Code Ann., Bus. Reg. § 4.5-301).
• Specialty Trades: Electrical, plumbing/gas, and HVACR work may require state trade licensing through the Maryland Department of Labor, Division of Occupational and Professional Licensing, subject to applicable local or jurisdictional exceptions. MHIC licensing applies to covered home improvement work and should not be treated as a substitute for Home Builder Registration Unit registration for covered new home construction.
• Local Commercial Licenses: Lenders should verify local or county-level licensing requirements for commercial general contractors, as these vary by jurisdiction.
• Surety Bonds: MHIC applicants may be required to post a surety bond if they do not meet minimum financial solvency requirements.
• License Lookup: Lenders should verify state-level credentials via the official portal: Maryland Department of Labor License Search.