Additional advances by a senior lender can present some difficult lien priority issues. This issue usually arises as follows. There is a senior lien, securing a certain amount of money. A junior lien is created, and then the senior lender loans additional money to the property owner. Is the junior lien only behind the original amount of the senior, or is it also behind the additional advances?

The short answer is that the additional advances made by the senior may be senior to the junior lender, but only if certain conditions are satisfied.

First, the recorded deed of trust of the senior lender must state expressly that it is security for future advances. Imhoff v. Title Insurance & Trust Co. (1952) 113 Cal. App. 2d 139 144. Please note, however, that the amount of the future advances need not be stated. Oaks v. Weingartner (1951) 105 Cal. App. 2d 598, Tapia v. Demartini (1888) 77 Cal. 383.

Second, the law distinguishes between obligatory and optional future advances. An obligatory advance is one that the lender is obliged to make by the terms of the loan documents. The most common type of obligatory advance is a construction loan agreement, in which the lender is obligated to make further advances, as work is completed on the project. Hayward Lumber & Investment Co. v. Corbett (1934) 138 Cal. App. 644. Obligatory advances by the senior lender are senior to the interests of intervening junior lienholders.

An optional future advance is one that the lender is not required by the loan documents to make. If the senior lender chooses to make an optional advance, AND, if the senior lender has actual knowledge of the existence of the junior lien, then the additional advance will not be senior to the intervening junior lien. Note, however, that constructive knowledge of the junior lien (such as is acquired by the junior lien being recorded) is not good enough; the senior lender must have actual notice of the junior lien. Lanz v. First Mortgage Corp. (1932) 121 Cal. App. 587.