Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

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

No. Unless the person providing labor or materials waives his right to a mechanic's liens or subordinates to the construction mortgage. Otherwise, the mechanic's lien judgment relates back to the day upon which the labor was begun or the furnishing of material was commenced. 25 Del. C. Section 2718.

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

Yes. A mortgage creating a lien on real property in Delaware will only secure future advances, whether obligatory or at the option of the lender, if the mortgage, or a separate loan agreement incorporated therein, specifically provides that the mortgage shall secure not only existing indebtedness, but also future advances, to the same extent as if such future advances were made on the date of the execution of such mortgage or loan agreement, although there may be no advances made at the time of the execution of such mortgage or loan agreement and although there may be no indebtedness outstanding at the time any advance is made. The total indebtedness secured may decrease or increase from time to time, but the total unpaid balance secured shall not exceed the maximum principal amount stated in the mortgage, plus interest and lawful disbursements. 25 Del. C. Section 2118.

If priority is lost, can it be regained?

No. If priority is lost, it cannot be regained unless the prior mechanic's lien claimant waives or subordinates his lien.

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

There does not appear to be any difference between on-site and off-site work, so long as the person claiming the lien contributed labor or materials for the erection, alteration or repair of any structure. It has been held that an architect is included within the definition of "any person" having performed or furnished labor or material, or both, in and for the erection, alteration or repair of any structure pursuant to a contract, express or implied, with the owner of such structure or an agent thereof. May v. Howell, Del. Super., 121 A. 650 (1923).

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

No, the priority is not the same for all contractors and subcontractors on the same project. As indicated previously, provided the filing of a mechanic's lien is timely, the lien relates back to the date labor or material was first furnished. Thus, a contractor or subcontractor, provided his filing was timely, would have priority based upon the date he first performed work or supplied material for or to the site. Notwithstanding the above, if more than one claimant has perfected his mechanic's lien, and if the proceeds received from any sale under a writ of levari facias are not sufficient to pay in fill all liens, then the proceeds are ratably divided among all claimants who have availed themselves of the mechanic's lien laws, without priority or preference of one over the other as to payment. 5 Del. C. Section 2720. However, any claimants who did not perfect their mechanic's lien would not share ratably in the division of any proceeds because there would be no property to which their claim could attach. In re Republic Eng's Co., Del. Super., 130 A. 498 (1925).

Time Limits

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

A contractor who has made his contract directly with the owner or reputed owner of any structure and has furnished both labor and material is not permitted to file a statement of claim until after the expiration of ninety (90) days from the completion of such structure contracted by him, but must thereafter file within thirty (30) days after the expiration of the 90-day period. All other contractors or materialmen must file a statement of claim within ninety (90) days from the completion of their labor or from the last delivery of materials that have been furnished. 25 Del. C. Section 2711.

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

If no statement of claim for mechanic's lien is filed within ninety (90) by a subcontractor or materialman, or within 120 days by a general contractor furnishing both labor and material, then a lien cannot be filed and thus is effectively waived. Thereafter, a claimant has only a personal action against the general contractor or the owner or reputed owner of the structure. 25 Del. C. Section 2711.

Removing or Waiving Liens

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

Delaware does not have a statutory procedure for affidavits of completion or notices or completion.

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

There is no statutory bond procedure. The normal practice would be to file a motion with the Court requesting that security, such as a bond, be offered for the full amount of the claim in exchange for the lien being released. Assuming the proffered security was adequate, there would be no reason for the Superior Court to deny such an application.

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

It is expressly held under Delaware law that claimants entitled to avail themselves of the mechanic's lien laws shall not be considered as waiving the same by granting a credit or receiving notes or other securities, unless the same are received as payment or the lien expressly waived, and the sole effect shall be to prevent such claimants from availing themselves of their lien rights until the expiration of the time agreed upon. 25 Del. C. Section 2706. However, it is clear under Delaware law that the right to a mechanic's lien may be expressly waived G.R. Spnaugle Sons v. McKnight Constr. Co., Del. Super. 304 A.2d 339 (1973). The waiver may be by separate agreement or incorporated with other understandings, but if it is by separate agreement, it must be supported by separate consideration. Id. If the terms of the waiver are ambiguous, then any doubt is resolved against an effective waiver, and a waiver will not apply to extra work not contemplated at the time the contract was executed. Id. A contract between a contractor and an owner which waives mechanic's lien rights does not bar a lien by a subcontractor who is not a party to the contract unless the subcontractor assumes the general contractor's obligations expressly or is put on notice expressly of such obligations and limitations. Steel Suppliers, Inc. v. Ehret, Del. Super., 486 A. 2d 32 (1984).

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

A bona fide purchaser or a bona fide lender does not as a matter of course take free of mechanic's liens later filed for earlier work. However, 25 Del. C. Section 2707 provides that no lien shall be obtained upon the lands, structure, or both of any owner which is used solely as a residence of said owner when the owner has made full or final payment to the general contractor in good faith, with whom he contracted for the construction, erection, building, improvement, alteration, or repair of such residence. Considerable litigation has occurred over the meaning of "good faith", which has been held to be subject to determination by the court from all relevant circumstances. Bedford v. Sussex Elec. Constr. Co., Del. Super., 382 A.2d 246 (1978). It is also been held that the phrase "in good faith" requires the owner of the residence to have no reason to believe that his action of payment to the general contractor would lessen the likelihood of payment to the remote lienholder. Grier Lumber Co. v. Tryan, Del. Super., 337 A. 2d 323 (1975).

Title Company Requirements

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

Normally, the owner of the property will be questioned as to whether any work has been performed or materials delivered to the construction site. In all instances, an affidavit will be obtained from the property owner indicating that there has not been any work performed or materials delivered during the last 120 days for which payment has not been made. Also, if the owner indicates that work has been performed or materials delivered, or if we have knowledge of such, then a release of mechanic's liens through the date of settlement is required in order to issue a loan policy insuring against 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 mortgage?

We do not normally take a mechanic's lien exception in the Loan Policy unless we have reason to believe that work has been performed or materials delivered during the previous 120 days that has not been paid for, and the landowner has failed to provide the necessary release. A "pending disbursement" clause is normally inserted in the loan policy, the form of such pending disbursement clause being attached to this response.

"Pending disbursement of the full proceeds of the loan secured by the Mortgage herein insured, this policy insures only to the extent of the amount actually disbursed but increases as each disbursement is made, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan the title must be continued down to such time for possible lines, including mechanic's liens, and other objections, intervening between the date hereof and the date of such disbursement."

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