Bulletin: UT000008

Dear Associates:

The Utah Legislature recently amended Title 38 of Utah Code Annotated to include the following changes:

Change concept of completion of work

Change the length of time allowed to file and enforce mechanic liens

Make provision for a mechanic lien recovery fund for certain liens

Completion of Work

Historically, it was an important concept that the time for filing of liens was predicated upon the completion of the project. Thus, a project would be substantially completed and every lien claimant then had a stated amount of time in which to file their mechanic lien of record and act to protect that right. The amendments provided in Senate Bill 87 removed those protections, such as they previously existed, so that now the rights run from the time that last work was completed by each individual claimant.

Based upon this change to 53 UCA 38-1-7, concepts such as completion of the project, issuance of the certificate of occupancy and other indications that we have previously relied upon to evidence completion are no longer available. Obtaining final lien waiver from each subcontractor and supplier is then made more significant. Final lien waivers may be the only indication available to evidence completion of a project.

Consider a situation where the owner takes possession of a structure where a minor portion of the work was not completed. That lien claimant continues work taking several months after the final take out loan is obtained before completing their work, and files a mechanic lien claiming priority from first work on the project. Under prior law some reliance could be had based upon the substantial completion of the project. No more.

A more thorough evaluation needs to be made to determine that no work remains to be performed at the time that a final take out loan is consummated. At the very least, prior to giving mechanic lien coverage to a lender where there has been recent construction, the borrower should be required to offer an affidavit and indemnity providing that all construction has been completed and that no person has been allowed upon the premises since it has been completed. Coupled with final lien waivers from each subcontractor and supplier, the Company would then be in a position to give mechanic lien protection for a lender.

Further, on those projects where contracts exist with a certain named subcontractor and/or supplier for the original construction of the structure and, also, leasehold build outs, care will need to be taken that each contract is documented and a final lien waiver obtained on each contract. A significant risk exists that such a claimant will argue that the lien for the leasehold build outs runs from the first work on the structure and not from the contract for the leasehold build out. This situation may be further confused where the general contractor fails to distinguish between the work in their contracts. The claimant may then believe that they are acting under the original contract when the original contract was completed and work is now continuing on leasehold build out.

A common situation could occur where a purchaser requires changes to a newly built residence or finds defects in work thought to have been completed. The claimant may not consider such work to be a defect and expects payment. A claimant may find that they never in fact completed the contract or treats the additional improvements not as a new contract with the purchaser, but rather as a continuation of the original work. A large number of mechanic lien claims fall within these fact situations.

Underwriting Rule: Get Unconditional Waivers of Lien from Each Subcontractor and/or Supplier

Filing Period for Mechanic Lien Claims

Each contractor, subcontractor and supplier now has 90 days from the date of their last work to file a claim of a mechanic lien. Previously, the rule ran from the claimant's last work or completion of the project, whichever was later. The controlling concept was substantial completion of the project. No more. It has become even more important now that each subcontractor and supplier be identified.

It must be remembered that a significant number of the total number of mechanic lien claims received by the Company are the result of a subcontractor failing to pay their subcontractors and/or suppliers. It is not inconceivable on some projects that there could be 4 tiers of such contractors, subcontractors and suppliers.

You should obtain a complete list from the general contractor of all subcontractors and/or suppliers. They in turn should provide their subcontractors and/or suppliers. You should verify that each has waived lien rights on your land.

Underwriting Rule: Get Complete Listings of All Subcontractors and Suppliers Who Work on Every Project.

Time for Enforcement of Mechanic Liens

The time to file an action to foreclose a mechanic lien has been changed to 12 months, except for residences where it has been changed to 180 days from the date that last work was performed. Except as between the parties to the litigation to foreclose a mechanic lien, the statutes still require that a lis pendens be recorded giving notice to the work of the filing of the action. The Company is still placed at risk to provide a defense in those cases where no lis pendens is recorded, but the seller or borrower knew that an action was filed. Reliance should not be made strictly upon an indemnity where the record discloses the existence of a mechanic lien. The policy issuing agent should make an investigation of the Clerk of the appropriate courts inquiring as to whether an action has been filed between the parties.

In circumstances where a lis pendens has been filed by one mechanic lien claimant, another claimant may have well intervened into that action. A policy issuing agent should not remove a mechanic lien merely by the passage of time where a lis pendens has been filed by another claimant without checking the civil action file carefully to determine whether such claimant has been made a party to that action.

Underwriting Rule: Do Not Remove a Mechanic Lien Merely by Reason of the Passage of Time Without Checking with the Clerk of the Courts.

Residence Lien Restriction and Lien Recovery Fund Act

Senate Bill 87 adds a new section to Title 38, Utah Code Annotated, making provision for the Residence Lien Restriction and Lien Recovery Fund Act. This statutory enactment makes provision for certain types of licensees to make recovery for their mechanic lien claims upon the fund to be established. This Act only applies to residences or land to be occupied as a residence and only to such persons who are licensed by the Division of Occupational and Professional Licensing.

A general contractor, electrician, plumber or other person making application as a qualified beneficiary of the Act, must be licensed to seek an award from the Director. A person not so licensed has no rights to the fund and must foreclose their lien as provided by Chapter 1 of Title 38 in the manner in which we are familiar.

Reliance should not be made upon this section as providing insulation from the effects of mechanic liens. Before such reliance could be made, a policy issuing agent would have to ascertain that each and every subcontractor and/or supplier had registered with the Division and obtained the qualified services from a qualified beneficiary. Nothing would stop a contractor from using a non-qualified beneficiary at any time during a project. The result would then be a mechanic lien foreclosure action by the non-qualified beneficiary.

This matter becomes important to the Company in those situations where occasionally a builder breaks priority and commences construction prior to the recordation of the construction loan or upon completion of the improvements and mechanic lien assurances are required by the take out lender. It would increase our comfort where a licensed general contractor builds the residence only using qualified beneficiaries and has a sound financial statement. On the other hand, our comfort would be greatly lessened where an unlicensed general contractor was used on a project or a licensed general contractor dealt with non-qualified beneficiaries under the Act.

Another difficulty of this section is that the term residence must be interpreted to mean only the dwelling structure, not significant out buildings. A garage, barn, warehouse or other out building would not fall under the protections provided y this Act.

Underwriting Rule: Do Not Rely Upon this Act to Avoid Mechanic Lien Problems.

If you have questions or would like to discuss the matter further, please call the District Office.