Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

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

Pursuant to section 572.18, construction mortgage liens shall be preferred to all mechanic's liens of claimants who commenced their particular work or improvement subsequent to the date of the recording of the construction mortgage lien. Thus, priority of the insured mortgage can be established by recording it before any work is done on the ground, but because each lien claimant's lien attaches only at the start of their individual work, a mortgage recorded after some work has been done is only junior to those subcontractors who actually did the prior work. All subs and suppliers first performing their specific work after the recording of the mortgage are subordinate.

Also, mechanic's liens shall be preferred to all other liens which may attach to or upon a building or improvement except liens of record prior to the time of the original commencement of the work or improvements.

Under this section, a lien is a "construction mortgage lien" to the extent that it secures loans or advancements made to directly finance work or improvements upon the real estate which secures the lien.

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

There are no special statutory provisions concerning these matters contained in the mechanic's lien statutes.

If priority is lost, can it be regained?

See the answer to whether a construction mortgage can have initial priority above

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

The mechanic's liens statute does not provide for a surveyor's, engineer's, or architect's lien. Nor is there any provision in the statutes affording lien rights to those doing only off-site work.

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

No. under 572.18 each claimant's lien attaches only at the time that each claimant begins its individual work on the ground. However, as between lien claimant's rights to being paid proceeds from die sale of the property through a mechanic's lien foreclosure, 572.17 establishes the relative priority between lien claimants in the order of the posting of the statements of accounts as provided in section 572.8.

Time Limits

What are the time periods for recording Hen claims by original contractors and subcontractors?

According to section 572.9, the statement of account required by 572.8 shall be filed by a principal contractor or subcontractor within ninety (90) days from the date on which the last of the material was furnished or the last of the labor was performed.

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

Under section 572.27 regarding limitations on action to enforce a mechanic's lien, the action must be brought within a two (2) year period from the expiration of the ninety (90) days for filing the claim.

There are no specific provisions concerning waivers. However, under section 572.28, the owner can make written demand upon the lienholder requiring the lienholder to commence action to enforce the lien. Such action must be commenced within thirty (30) days thereafter, or the lien and all benefits derived therefrom shall be forfeited.

Removing or Waiving Liens

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

There is no statutory procedure for affidavits of completion or notices of completion.

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

Under section 572.15, a mechanic's lien may be discharged at any time by the owner, principal contractor, or intermediate subcontractor by filing with the clerk of the district court of the county in which the property is located a bond in twice the amount of the sum for which the claim for the lien is filed, with surety or sureties, to be approved by the clerk.

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

There is no statutory prohibition for any contractual arrangement subordinating or waiving lien rights.

Can a bona fide purchaser or bona fide tender take free of mechanic's Hens later filed for earlier work?

Section 572.18 notes that the rights of purchasers, encumbrancers, and other persons who acquire interests in good faith and for valuable consideration, and without notice, after the expiration of the time for filing claims for mechanic's liens, are prior to the claims of all contractors or subcontractors who have not, at the date such rights and interests were acquired, filed their claims for such liens.

Title Company Requirements

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

Inspection of property plus affidavit concerning no work done on property;

•  Recordation of Deed of Trust

•  Record Notice of Commencement (where GC or owner/builder will be hiring subs on residential property only)

•  Indemnities from general contractor and owner/borrower and any guarantors.

•  Possible review of financials

If giving mechanic's lien coverage:

• Pending disbursement clause
• Date down

Review of lien waivers with owner's equity disbursed before any loan funds.

Note in owner's policy if insuring for amount of anticipated improvement.

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

Yes. Sample Pending Disbursement Clause:

Pending disbursement of the full proceeds of the loan secured by the Mortgage or Deed of Trust described in Schedule "A "hereof, this policy insures only to the extent of the amount actually disbursed. This policy insures against any loss or damage which might result from claims of mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to , except any such liens or notices thereof as may be recited under Schedule B hereof. At the time of each disbursement of proceeds of the loan, an endorsement to this policy must be secured increasing the amount insured hereunder up to the face amount of the policy, subject to the following requirements being met before issuance of such endorsement that: (a) the company is furnished evidence from the insured certifying that the disbursement has been made in good faith and without knowledge of any defect in, or objection to the title, (b) a title search by the Company reveals no liens, objections or any other adverse changes in the title, (c) the contractor and owner furnish this company satisfactory paid bills, lien waiver, or other evidence that all items from which a lien might arise, have been paid or otherwise satisfied, and (d) the Owner and Contractor furnish the Company satisfactory Affidavit and Indemnity Agreement(s) as to the matters referred to in (c) above.

This policy does not insure against mechanic's liens for labor performed and materials furnished subsequent to the last date to which mechanic's lien coverage has been extended, nor does this policy guarantee completion of the improvements in progress, or their compliance with plans and specifications. The Company in no way guarantees the sufficiency of the mortgage proceeds as adequate to complete said improvements.

Notwithstanding any other language contained in the insuring provisions of this policy, the above previsions are the sole provision applicable to the extension of coverage for loss or damage resulting from mechanic's liens or claims of such liens not of record.

NOTE: Section 15.32 of the Underwriting Manual also contains a sample Pending Disbursement Clause.

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