Mechanic’s Lien Coverage Requires Underwriter Approval.

PRIORITY

Can the construction loan mortgage have initial priority over mechanic's liens?

Yes, provided that compliance with Section 507-46 of Hawaii Revised Statutes is carried out. [All statutory references in this entire section are to Hawaii Revised Statutes as amended.] That statute provides if a mortgage is recorded prior to the date of completion, and all or a portion of the money advanced under and secured by the mortgage is thereafter used for the purpose of paying for the improvement, the mortgagee shall be entitled, to the extent of the payments, to priority over liens of mechanics and materialmen, but no such priority shall be allowed unless the mortgage recites that the purpose of the mortgage is to secure the monies advanced for the purpose of paying for the improvement in whole or in part.

A mechanic's lien takes effect from the time of the visible commencement of operations for the improvement. It ranks equally in priority (subject to the provisos hereinafter contained) with all other mechanic's and materialmen's liens and has priority over all other liens of any nature, except liens in favor of any branch of the government and mortgages, liens, or judgments recorded prior to the time of the visible commencement of operations. Liens for wages for labor performed in the completion of the improvement, but not exceeding $300 for each claimant, shall have priority as a class over all other mechanics' and materialmen's liens where claims are filed by:

• the person who actually performed the labor;
• the person's legal representative in the event of death or incapacity, or
• the director of labor and industrial relations pursuant to chapter 371.

The term "visible commencement" means the first actual work of improvement as part of a continuous operation; or, the first delivery to the site of materials to be used as part of a continuous operation in the improvement. The work and/or delivery of materials must be of such manifest and substantial character as to notify interested persons that the real property is being improved or about to be improved. (§507-41).

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

Under Section 506-1, a mortgage which secures future advances, up to but not exceeding the maximum amount of future advances stated in the mortgage, is superior to any subsequently recorded mortgage, lien or other encumbrance or conveyance, other than liens for real property taxes and assessments for public improvements, even through the subsequently recorded mortgage, lien or other conveyance is recorded prior to the date on which any advance or advances have been made.

Under Section 507-46, if a mortgage is recorded prior to the date of completion of the improvement, and all or a portion of the money advanced under and secured by the mortgage is thereafter used for the purpose of paying for the improvement, the mortgagee shall be entitled, to the extent of the payments, to priority over liens of mechanics and materialmen, but no such priority shall be allowed unless the mortgage recites that the purpose of the mortgage is to secure the monies advanced for the purpose of paying for the improvement in whole or in part.

If priority is lost, can it be regained?

Notices of Cessation are not provided for under Hawaii Revised Statutes.

If a mortgage is recorded before the date of completion ("date of completion" is a term of art under Hawaii Revised Statutes), that mortgage has priority over a mechanic's lien that has been based on visible commencement of work on the improvement if:

• all or a portion of monies advanced under and secured by the mortgage are used to pay for the improvement and
• if the mortgage recites that its purpose is to secure the monies advanced for the purpose of paying for work done on the improvement in whole or in part.

The aforesaid mortgage recorded before the date of completion is entitled to priority over mechanics' liens that are based on visible commencement only to the extent the mortgage payments are used to pay for the work of improvement. (§507.46).

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

No statutory definition of the terms "on-site" and "off-site" has been found in Hawaii Revised Statutes; nor has a viable explication of the distinction between "off-site" and "on-site" been discovered in the case law.

It is arguable that the definitions of "furnishing of materials" and "improvement" (both found in Section 504-41 of Hawaii Revised Statutes) are broad enough to include off-site work within reach of a mechanic's or materialman's lien filed against the improvement.

Nakashima Associates, Inc. v Pacific Beach Corporation, 641 P.2d. 337 (1982), supports the view that engineers and architects preparation of plans for an improvement to real property are a basis to assert a mechanic's lien for labor furnished to the work of improvement. (But see Haines, Jones, Farrel, White, Gima Architects, Ltd. v Maalaea Land Corporation , 608 P.2d 405 (1980), which held that architect's remodeling and the firm's marking of boundaries and test borings did not constitute an actual or visible improvement sufficient to establish probable cause for a lien to attach to the work of improvement).

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

Mechanic's liens have equal priority with all other mechanic's and materialmen's liens with certain qualifications noted hereafter.

A lien for wages for labor performed in completion of an improvement, but not exceeding $300 for each claimant, has priority as a class over all other mechanic's and materialmen's liens if claims are filed by (1) the person who actually performed the labor; (2) the person's legal representative in the event of death or incapacity; or, (3) the director of labor and industrial relations pursuant to chapter 371; and provided further that if a mortgage is recorded prior to the date of completion, and all or a portion of the money advanced under and secured by the mortgage is thereafter used for the purpose of paying for the improvement, the mortgagee shall be entitled, to the extent of the payments, to priority over liens of mechanics and materialmen, but no such priority shall be allowed unless the mortgage recites that the purpose of the mortgage is to secure the monies advanced for the purpose of paying for the improvement in whole or in part. (§507-46).

TIME LIMITS

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

Sec. 507-43(b) requires the contractor/materialman to file its Application and Notice of Lien not later than 45 days after the date of completion. ?Date of completion' is defined in §507-43 to mean the time when the owner or general contractor for the improvement completes the publication of a notice that the improvement has been completed (or has been abandoned) and an affidavit of the publication, together with a copy of the notice, has been filed in the office of the clerk of the circuit court where the property is located.

Section 507-43(e) provides the lien expires three months after entry of the Order Directing Lien to Attach unless an action is filed within that time to enforce the lien.

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

Once a Notice of Completion is properly filed (including off-record investigation that substantial completion of the improvement has taken place), the Application and Notice of Lien (one document) may be "waived' 46 days following filing of a property Notice of Completion. (§507-43).

REMOVING OR WAIVING LIENS

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

Yes.

See answer to the previous question, above. There is a detailed procedure for publication and filing of notice that the improvement has been completed. (§507-43).

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

A mechanic's or materialmen's lien may be discharged at any time by the owner, lessee, principal contractor or intermediate subcontractor by filing with the clerk of the circuit court of the county in which the property is located (or with the assistant registrar of the land court (if registered land is affected) - cash or a bond for twice the amount of the sum for which the claim for the lien is filed, conditioned for the payment of any sum for which the claimant may obtain judgment on the claimant's mechanic's or materialmen's claim of lien. (§507-45).

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

Lucas v Hustace , 20 Haw. 693 (1911), supports the view, obliquely, that materialmen furnishing materials pursuant to a contract with the general contractor may waive their materialmen's claim of lien. Waiver is a question of fact to be determined in view of the circumstances of each case.

Lucas decided, however, that under Hawaiian mechanic's lien statutes, materialmen "are not chargeable with notice of provisions in the original contract between an owner and a general contractor". (Lucas at 698). Lenders have certain requirements for reliance on lien waivers.

Can a bona fide purchaser or bona fide lender take free of mechanics' liens later filed for earlier work?

Yes.

Ordinarily, a mortgage will have priority only over a mechanic's lien if the mortgage is filed (recorded) before visible commencement of work begins on the improvement (§507-46).

A mortgage, however, recorded before the date of completion of the improvement may have priority mechanic's liens recorded after the mortgage even if the mortgage recorded after visible commencement of work on the improvement. (§507-46).

If all or a portion of the money advanced under and secured by the mortgage is thereafter used for the purpose of paying for the improvement and the mortgage recites that the purpose of the mortgage is to secure the monies advanced for the purpose of paying for the improvement, in whole or in part, then the mortgage will have priority over liens of mechanics and materialmen to the extent of such payments. (§507-46).

Mechanic's liens against condominiums are limited by statute but are permitted. (§514A-16).

TITLE COMPANY REQUIREMENTS

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

The title company will inspect the property to determine the existence of visible commencement of operations. This inspection is made as close as possible to the date on which the mortgage will be recorded.

In the event the inspection discloses visible commencement of operations, then before the priority of the mortgage to be insured can in fact be insured, indemnity agreements are required based on financial statements from the developer-owner. In some cases, a bond will be required before priority of the mortgage can be insured,

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

No.

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