Mechanic’s Lien Coverage Requires Underwriter Approval.

The Utah legislature mandated the creation of the State Construction Registry ("SCR") which is an internet based facilitator used to provide a central repository for preliminary notices and notices of completion filed in connection with all construction projects. The registry can be accessed by visiting http://www.utah.gov/scr/. The SCR was created in 2004 and began implementing filings for commercial projects on May 1, 2005. On November 1, 2005, the registry began implementing filings for residential projects.

Priority

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

Yes. A mechanic's lien relates back to, and takes effect as of, the time of the first preliminary notice filing on the SCR. Utah Code Ann. A§ 38-1a-503(1). A construction loan deed of trust will have priority over mechanic's liens as long as the deed of trust is recorded prior to the filing of a preliminary notice on the SCR. After recording a deed of trust securing a construction loan, a notice of construction loan must be promptly filed on the SCR. Utah Code Ann A§ 38-1a-601. Accordingly, either the title agent or the lender must file the notice of construction loan on the SCR. You should obtain verification that the lender has made the filing or you must make the filing.

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

Yes. Future disbursements from a construction loan secured by a deed of trust that has priority over mechanic's liens will maintain priority as long as the deed of trust provides for obligatory advances. Advances that are optional or discretionary do not have priority.

A modification of a construction deed of trust securing additional advancements will not have priority if a preliminary notice has been filed on the SCR prior to the recording of the modification.

• If priority is lost, can it be regained?

Yes. A recorded trust deed has priority over all lien claimants that filed preliminary notices on the SCR if each lien claimant that filed a preliminary notice on the SCR before the construction deed of trust recorded accepts payment in full for the work or material provided to the project before the trust deed was recorded. Utah Code Ann A§ 38-1a-503(2)(b).

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

Utah statutes make a distinction between preconstruction services (architectural, engineering design, etc.) and construction services, but mechanic's lien priority is based upon the filing of the first preliminary notice on the SCR.

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

Liens filed by subcontractors or contractors are on equal footing regardless of the SCR preliminary notice filing date, the recording of a notice of claim of lien, or the date the subcontractor or contractor performed their work or furnished material. Utah Code Ann. A§ 38-1a-504. Accordingly, mechanic's liens all share the same priority which is based on the first preliminary notice filed on the SCR.

Time Limits

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

A lien claimant has 180 days from the final completion of the original contract if no notice of completion is filed on the SCR or 90 days from the filing of a notice of completion on the SCR to record a mechanic's lien. Utah Code Ann. A§ 38-1a-502. Final completion of the contract occurs when a certificate of occupancy is issued or, in those instances where no certificate of occupancy is required, when the local government which  has jurisdiction over the construction project performs a final inspection or, if no inspection is required, the date on which there remains no substantial work to be completed to finish work on the original contract. The notice of completion may be filed on the SCR upon final completion of the project. The owner or a title company can file the notice of final completion on the SCR.  Best practice is for the title company to file the notice or confirm filing by the owner.

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

A lien claimant must file an action to enforce the lien and record a lis pendens within 180 days from the day on which the lien claimant recorded a notice of lien. Utah Code Ann. A§ 38-1a-701. The requirement to file an action within 180 days applies both to liens recorded on residential and commercial properties. A title agent may delete the exception to a recorded lien that is not accompanied by a foreclosure action and lis pendens filed within 180 days from the recording of the notice of lien.

Removing or Waiving Liens

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

Yes. Upon the final completion of a construction project, the owner of the construction project, the original contractor, lender, surety or title company may file a notice of completion on the SCR. Utah Code Ann. A§ 38-1a-507.

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

Yes. As long as there is strict compliance with the requirements of Utah Code Ann. § 38-1a-804, an owner of a construction project, a contractor or subcontractor who disputes a lien may record a notice of release of lien and substitution of alternate security ("Notice"). The Notice releases a recorded mechanic's lien if the Notice is recorded prior to the expiration of 180 days from the time the person recording a Notice was served with a summons and lien foreclosure complaint. The Notice must attach a surety bond or have evidence of a cash deposit that is an amount equal to 150% of any lien for $25,000.00 or more, 175% of any lien between $15,000.00 and $25,000.00, and 200% of any lien that is less than $15,000.00.

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

No. A provision of a contract purporting to waive or limit a right or privilege under the Utah mechanic's lien statutes is void. A lien claimant may only waive a lien right in exchange for payment (consideration) for work done or materials supplied. Utah Code Ann § 38-1a-105 and Olsen v. Chase, 2011 UT App 181, Utah Ct. App. June 1, 2011.

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

No in most instances. However, a bona fide purchaser of a single-family residence may apply to the Utah Lien Residential Recovery Fund if there are mechanic's liens filed for previous work. A lien cannot be maintained against residential land where such purchaser took the property without notice of the liens and complies with the Residence Lien Restriction and Lien Recovery Fund Act. Utah Code Ann. Section 38-11-204.

A lender advancing money on a purchase mortgage does not take the property free of mechanic's liens, unless the borrower complies with the Recovery Fund Act noted above. Capital Assets Fin. Servs. v. Maxwell, 2000 UT 9, 994 P.2d 201; Butler v. Wilkinson, 740 P.2d 1244 (Utah 1987).

Title Company Requirements

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

See procedures outlined in these bulletins:

UT2015002

UT2014002

MU2010008

UT2021001

• What are the procedures for insuring permanent financing when construction is completed?

The title agent needs to verify that a notice of completion was filed on the SCR. The Affidavit of Debts, Liens and Possession must be completed and signed by the owner of the property  and then be reviewed by the title agent who also verifies that  the general and the subcontractors and suppliers have been paid pursuant to SLS2008006 Builder Transactions and Mechanic's Liens.

• Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the loan policy insuring a construction loan deed of trust.

No.  

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