Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over mechanic's liens?

Yes, if the Construction Loan Mortgage contains a clause required by Section 13 of the New York Lien Law, and certain other requirements are met (see bulleted item two, below).

It is essential to timely file building loan contracts and amendments to building loan contracts, within ten days of execution. A total loss of priority can result if filing is not timely.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Construction loans or building loans are made by lenders to finance construction projects, where the loan amount exceeds the value of the unimproved property. As improvements are made, thus presumably enhancing the value of the property, the lender makes advances of portions of the loan proceeds. Special rules are provided in the Lien Law with regard to building loans.

The building loan mortgage must be recorded, and it must contain the "lien law" clause required by Section 13 of the Lien Law. Before the mortgage is recorded, however, a Building Loan Contract must be filed (not recorded!) in the office of the County Clerk, within ten days of closing. In four of the five counties within the City of New York, that means filing with the County Clerk, and not the City Register (In Richmond County, the County Clerk still performs both recording and filing functions).

The filed building loan contract must contain an affidavit which is required by Lien Law § 22. This section governs building loan contracts in general, and provides specific instructions as to the contents of the required affidavit. The statement under oath must include a showing of the "net sum available to the borrower for the improvement."

The reason for this is to allow mechanics and materialmen to check the records of the County Clerk to see if money is available to fund a project before doing work or providing goods. As a general rule, no one looks at the building loan contract at all until a flaw is discovered in the § 22 affidavit.

Lien Law § 22 also requires filing of a modification of building loan contract within ten (10) days of the making of the modification. Such a filing will only affect priority against work not already commenced. A failure to timely file would subordinate the entire mortgage to any potential mechanic's liens.

An extension of the completion date is not a sufficient modification, but if the net sum available in accordance with the Section 22 affidavit is changed, such a modification must be timely filed or the consequences are draconian.

If priority is lost, can it be regained?

Probably not. However, if the mechanic's lien, once filed, does not have the proper proofs of service filed within 35 days, the lien is lost.

Also, if enforcement proceedings have not been commenced or the lien is not extended within the year after the filing, the lien is extinguished and cannot be renewed, even by a nunc pro tunc order of the court.

Is there a difference between on-site and off-site work?

By definition in §§ 3 and 4 of the Lien Law, a mechanic's lien is a statutory lien, in favor of contractors, subcontractors, materials suppliers, laborers and certain others, which is an encumbrance on real property (and the buildings and improvements thereon) improved by their work or materials

The improvement must be permanent in nature. A mechanic's lien will not attach where materials are supplied for a temporary improvement.

Is priority the same for all contractors and subcontractors on the same project?

In New York, laborers, subcontractors and materialmen have priority over the lien of a contractor, under Lien Law §56, and laborers for daily or weekly wages have priority over all other mechanic's lienors.

Time Limits

What are the time periods for filing notices of mechanic's lien by original contractors and subcontractors?

Section 10 of the New York Lien Law provides that the notice of lien may be filed at any time during the progress of the work and/or the furnishing of materials, or within eight (8) months after the completion of the contract, final performance of the work, or the final furnishing of the materials. (The eight month period becomes four months in the case of premises improved or to be improved by a single family dwelling.)

After what period of time can you waive a mechanic's lien if no action is commenced?

A New York mechanic's lien is effective for one year from the date of filing, as provided in Lien Law § 17, unless an action is commenced during that period and a notice of pendency (See Civil Practice Law and Rules, Article 65) is filed, or an extension to the lien is filed (except for property improved or to be improved by a one family dwelling) within the period. The lien can otherwise be continued by a court order. In the event of a mortgage foreclosure or the foreclosure of another mechanic's lien, the lien remains until the final disposition of the matter.

Lien rights can also be extended by filing successive liens.

Removing or waiving liens

Is there a statutory procedure for affidavits of completion or notices of completion?

Lien Law § 34 expressly prohibits the execution of waivers of the right to file or enforce mechanic's liens. Such waivers are void and unenforceable. This provision does not preclude a waiver executed on or after the time of payment, and does not apply to agreements to subordinate, release or satisfy liens already filed.

Can a statutory bond terminate the mechanic's lien as an encumbrance on the title?

A mechanic's lien can be discharged by payment, by filing a surety or fidelity bond with the court (See Lien Law § 19.(4)) on notice to the lienor, by filing an undertaking of two or more sureties (who must be freeholders) (See Lien Law § 19.(4)) on notice to the lienor, or by paying the amount claimed (plus interest) into court prior to the commencement of a mechanic's lien foreclosure. (See Lien Law § 20 or § 55). If the action to foreclose has already been commenced, the lien can be discharged against the property by payment into court, after court determination by order on notice, of the amount necessary.

The discharge under these methods (other than by payment to the lienor), is accomplished by removing the lien from the real property, and attaching it to the deposit, bond or undertaking.

Because of the parity issue, and the possibility that other liens may be filed with the same priority as an existing lien, the taking of escrow deposits in connection with filed mechanic's liens is not possible, except in extraordinarily limited circumstances, and then only after receiving the approval of Company Counsel.

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?

Lien Law § 34 expressly prohibits the execution of waivers of the right to file or enforce mechanic's liens. Such waivers are void and unenforceable. This provision does not preclude a waiver executed on or after the time of payment, and does not apply to agreements to subordinate, release or satisfy liens already filed.

Can a bona fide lender take free of mechanic's liens later filed for earlier work?

Generally, Lien Law § 13 provides that mechanic's liens have priority over conveyances, mortgages, judgments or other claims against the property, which are not recorded, docketed or filed at the time the notice of lien is filed. One exception is judgments which are obtained for labor, materials or money advanced, see Corbin-Kellog Agency, Inc. v. Tasker, 248 A.D. 58, 289 N.Y.S. 156 (1936).

Conveyances and mortgages recorded after commencement of the improvement or materials furnishing, and before the expiration of the time in which the lien notice may be filed, are not valid against liens filed within the four or eight month period, unless the instrument contains a special covenant by the grantor or mortgagor. This covenant is known as a "Section 13" or "Lien Law" clause.

Two exceptions to this rule are (a) deeds made by referees or other court-appointed personnel for the sole purpose of selling real property, and (b) mortgages taken by the Home Owners' Loan Corporation (created by the federal Home Owners' Loan Act of 1933), which maintains lien priority on the basis of recording, whether or not funds are advanced at a later date, and without the necessity of filing a building loan contract.

Title Company Requirements

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

The New York endorsements to the 1992 ALTA Owner's and Loan Policies provides coverage against mechanic's liens filed during the gap period, and within the statutory period after the recording of the deed or mortgage.

It is essential to make sure the lien law clause appears in every conveyance and mortgage to be recorded.

It is essential to timely file building loan contracts and amendments to building loan contracts, within ten days of execution. A total loss of priority can result if filing is not timely. A building loan policy must contain a pending disbursements clause approved for use in New York State.

Escrow deposits are not permitted for mechanic's liens, except in severely limited circumstances, and only after Counsel's approval has been obtained.

Is it customary to add a "pending disbursement" clause or mechanic's lien exception in the Loan Policy insuring a construction loan mortgage?

A building loan policy must contain a pending disbursements clause approved for use in New York State. In the absence of a pending disbursements clause, exception must be taken as to all loss, cost or damage which may occur by virtue of any mechanic's lien filed after the closing date.

Also subject to any bulletins relating to mechanic’s liens.