Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

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

No. Although 770 ILCS 60/16 provides that a lender has priority by properly recording a construction mortgage prior to the date the contract between the owner and contractor is entered into, mechanic's lien claimants will share pro rata in the foreclosure sale proceeds in direct relation to how much their work enhanced the property. If the lien claimant(s) cannot show an enhanced value to the property, the lender will have absolute priority.  770 ILCS 60/16

The only way to protect priority is to review owners and contractors statements and collect lien waivers during all phases of the construction. When the project is completed, final lien waivers will be required.

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

The mechanic lien claimant in Illinois is given priority on the property for the enhancement value of their work regardless of whether the construction loan disbursements are obligatory or optional.

If priority is lost, can it be regained?

Since there is no initial priority, priority cannot be regained. In Illinois, construction loan disbursements are insured only after a review of the loan documentation.

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

Mechanic lien claims attach for materials delivered to the job site as well as for work performed on the job site.

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

According to 770 ILCS 60/1, each contractor in privity with the owner obtains priority based on the date of their contract with the owner. Subcontractors claiming under the contractors have a different hierarchy according to 770 ILCS 60/27. Under this statute, priority is given first to laborers, then to subcontractors and the balance to the contractor.

Time Limits

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

Original contractors must file lien claims within 4 months after completion of work and then file suit to foreclose within 2 years after completion or work (770 ILCS 60/7) in order to be enforced against Bona Fide Purchasers (BFPs) or a subsequent lender whose funds are not used for construction.

Subcontractors must give the owner notice within 90 days of their last contribution to the project or they will be limited to the amount shown on the last sworn contractor's statement relied on by the owner. If the construction project is an owner occupied residence, the subcontractor must also give notice of furnishing work within 60 days of commencement of work. Subcontractor must file lien claim within 90 days after completion of work in order to be enforced against BFP's or a subsequent lender whose funds are not used for construction. Suit to foreclose must be filed within 4 months of the last work done or furnishing of materials to the project. 770 ILCS 60/7

If a mechanic lien claimant records their lien after the specified time frames listed, and the property has been conveyed to a BFP, then the lien claimant will not be able to enforce their lien against the property.

If a mechanic lien claimant records their lien within the specified time frames listed, and the property has been conveyed to a BFP, then the lien claimant will still be able to enforce their lien against the property.

If a mechanic lien claimant records their lien after the specified time frames listed, and a new lender, unrelated to the construction project, has mortgaged the property, then the lien claimant loses their priority with respect to that lender.

If the property has not been conveyed or refinanced, a mechanic lien claimant can enforce their claim against the owner and construction lender within 2 years from the date of completion of the work, regardless of if and when they file their mechanic lien. 

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

Two years from the date of completion of the work unless the filing period is tolled. 770 ILCS 60/9

Removing or Waiving Liens

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

No.

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

Yes, a substitute bond may be obtained, which will remove the lien from the property and attach it to the bond. Pursuant to 770 ILCS 60/S8.1 - An applicant may file a petition to substitute a bond for the property subject to a lien claim with the clerk of the circuit court in the county in which the property subject to the lien is located. If approved, the court will enter an order that 1) substitutes the eligible surety bond for the property securing the lien, and 2) substitutes the lien claimant's right to recover on the bond for the lien claimant's causes of action under sections 9, 27, or 28 of the act.

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

Although it is against public policy for a contractor or subcontractor to waive their lien in anticipation of payment, they can waive or subordinate a lien claim that they have filed under the statutes.

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 lender may take the property free of mechanic liens or suits later filed by the contractor if the contractor did not record his lien or file suit against the owner within the four month period after completion of his work. 770 ILCS 60/7

Title Company Requirements

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

Stewart Title Guaranty Company only insures construction loans when a construction loan escrow is opened and contractor affidavits and waivers from proper parties are received.

The appropriate ALTA 32/33 series endorsements should be issued on all Loan Policies where the funds are being used for construction/improvements to the land.

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

If the appropriate ALTA 32 series endorsement is not being issued, the Loan Policy must be issued subject to "pending disbursement" clause and mechanic's liens exception.  

When issuing the ALTA 32 series endorsement, a “pending disbursement” clause is not required.

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

Updated February 2, 2023