Please reference the specific sections that follow for a more in-depth discussion of each topic. 

12.12.1 Contains relevant definitions involved in mechanic’s liens.

12.12.2 Constitutional Mechanic’s Lien is self-executing, and the claimant must have a direct contractual relationship with the owner.

12.12.3 Contains reference to the statute for statutory mechanic’s liens. Explains that priority of all mechanic’s liens relates back to the first delivery of materials or commencement of construction. 

12.12.4 Contains reference to the statute for persons entitled to claim a lien.

12.12.5 Mechanic’s liens extend to the improvement but not abutting sidewalks and streets. In a town it extends to each lot on which an improvement was placed and outside a town to no more than 50 acres.

12.12.6 Identifies what the lien secures payment for.

12.12.7 Covers the procedure for perfecting the lien.

Homestead requires a contract signed by the owner and spouse before any work is done or material delivered, and it must be recorded with the county clerk. 

An Affidavit must be recorded by the claimant within the time prescribed by statute, it must have the required contents and for homestead, must contain the required notice.

12.12.8 Sets forth the priority of mechanic’s liens and identifies the time of inception of the lien.  Mechanic’s liens for removables are superior.

12.12.9 The affidavit of commencement establishes the time in which a mechanic’s lien gains priority and is assumed correct unless overcome by other evidence. It must be filed within 30 days of actual commencement of construction or delivery of materials.

12.12.10  The affidavit of completion establishes evidence of the date of completion of construction.  If filed before 10 days after completion, the affidavit is assumed correct unless overcome by further proof.  If filed after 10 days after completion, the date the affidavit is filed is considered the completion date.

12.12.11 Contains the requirements for waivers and releases of lien and bond claims.

12.12.12 Mechanic’s Liens may be foreclosed only on judgment of a court foreclosing the lien and ordering the sale of the property subject to the lien. Foreclosure may include costs and attorney’s fees.

12.12.13 Contains the statute of limitations to enforce a statutory mechanic’s lien, which is one year from the deadline to file the affidavit claiming a lien. The deadline may be extended one additional year if the owner agrees in writing and such agreement is recorded with the county clerk.

12.12.14 Provides how an affidavit claiming a mechanic’s lien may be discharged.

12.12.15 Requirements for a Bond to Indemnify Against Liens.

12.12.16 Requirements for bonding around a lien or claim of lien.

12.12.17 Requirements for Payment Affidavits of Contractors and Sellers. 

12.12.18 An original contractor may not require a residential owner to convey property to the contractor as a condition of the performance of a residential construction project. 

12.12.19 List of Claim Indicators relating to mechanic’s liens.  

 General

A lien is a charge imposed upon specific property as security for a debt.

For title insurance purposes, mechanic's liens secure the payment of contributions by persons who have furnished material, labor, or skill in the improvement of real property belonging to another.

Statutory (Property Code Sec. 53.001)

• Improvements - includes but is not limited to:

o   abutting sidewalks and streets and utilities in or on those sidewalks and streets;

o   clearing, grubbing, draining, or fencing of land;

o   wells, cisterns, tanks, reservoirs, or artificial lakes or pools made for supplying or storing water;

o   pumps, siphons, and windmills or other machinery or

o   apparatuses used for raising water for stock, domestic use, or irrigation; and

o   planting orchard trees, grubbing out orchards and replacing trees, and pruning of orchard trees.

• Labor - labor used in the direct prosecution of the work.
• Material means all or part of:

o   the material, machinery, fixtures, or tools incorporated into the work, consumed in the direct prosecution of the work, or ordered and delivered for incorporation or     consumption;

o   rent at a reasonable rate and actual running repairs at a reasonable cost for construction equipment used or reasonably required and delivered for use in the direct     prosecution of the work at the site of the construction or repair; or power, water, fuel, and lubricants consumed or ordered and delivered for consumption in the direct     prosecution of the work.

• Original contractor - a person who contracts with an owner directly.
  
• Retainage - an amount representing part of a contract payment that is not required to be paid to the claimant within the month following the month in which labor is performed, materials is furnished, or specifically fabricated material is delivered.
• Subcontractor - a person who has furnished labor or material to fulfill an obligation to an original contractor or to a subcontractor to perform all or part of the work required by an original contract.
•  Work - any part of construction or repair performed under an original contract.
  

Article 16, Section 37, of the Texas Constitution provides as follows:

• “Mechanics, artisans, and material men, of every class, shall have a lien upon the building and articles made or repaired by them for the value of their labor done thereon, or material furnished therefor; and the Legislature shall provide by law for the speedy and efficient enforcement of said liens."
  
  
• The Supreme Court of Texas in First National Bank of Dallas vs. Whirlpool Corporation, 517 S.W. 2d 263 (Tex. 1975) held that the Constitutional lien is available to a manufacturer only upon articles made especially for a purchaser pursuant to a special order and in accordance with the purchaser's plans or specifications. Therefore, such lien would not encompass items made according to the manufacturer's specifications and for sale to the general public.
  
  
• It has been established that the above constitutional provision is self-executing, and that the constitutional lien exists independently and apart from any legislative act.
  
  
• The constitutional lien claimant must have a direct contractual relationship with the owner.
  
  
• The lien may be enforceable against a purchaser if he has actual or constructive notice that improvements are being made.

• Except for the constitutional provisions, the law is located in Sections 53.001-53.239 of the Texas Property Code.
• A mechanic's lien does not attach to personal property but may attach to fixtures.  See Whirlpool (cited previously) and cases following it for specific items that are included in a mechanic's lien.

o   Examples of removables are:

_  carport, appliances, stereo systems, doors and windows.

o   Examples of non-removables are:

_  paint, foundation, framework.

o   Priority of a mechanic's lien claim relates back to the commencement of construction or delivery under the original contract. See also Section 12.12.8 of the Texas Property Code.

• A person has a lien if the person, under a contract with the owner or the owner's agent, trustee, receiver, contractor, or subcontractor:

o   labors or furnishes labor or materials for construction or repair of an improvement;

o   specially fabricates material, even if the material is not delivered;

o   is a licensed architect, engineer, or surveyor providing services to prepare a design, drawing, plan, plat, survey, or specification;

o   provides labor, plant material, or other supplies for the installation of landscaping for an improvement, including the construction of a retention pond, retaining wall, berm, irrigation system, fountain, or other similar installation; or

o   performs labor as part of, or furnishes labor or materials for, the demolition of an improvement on real property.

• The lien extends to the house, building, fixtures, or improvements, but does not extend to abutting sidewalks, streets, and utilities on public property.
  
  
• A lien against land in a city, town, or village extends to each lot on which the house, building, or improvement is situated or on which the labor was performed.
  
  
• A lien against land not in a city, town or village extends to not more than 50 acres on which the house, building, or improvement is situated or on which the labor was performed.

• The lien secures payment for the labor done or materials furnished for the construction, repair, design, survey or demolition; or the specifically fabricated material, even if the material has not been delivered or incorporated into the construction or repair, less its fair salvage value.

• Homestead - The Texas Constitution Article 16, Section 50 a (5) establishes the matter for filing a construction lien against a homestead. See Section 53.254, Property Code.
• To perfect the lien on a homestead, the person who is to furnish material or perform labor and the owner must execute a written contract setting forth the terms of the agreement.
• The contract must be signed before any labor is performed or material is furnished.
• The contract must be filed with the county clerk of the county in which the homestead is located.
• If the owner is married, the contract must be signed by both spouses before any work is done.

Homestead - Mechanic's Lien Contract (Property Code Sec. 41.007)

• The mechanic's lien contract must contain the following warning conspicuously printed, stamped, or typed in a size equal to at least ten-point bold type or computer equivalent, next to the owner's signature line on each instrument creating an encumbrance on the homestead property:

"IMPORTANT NOTICE: You and your contractor are responsible for meeting the terms and conditions of this contract. If you sign this contract and you fail to meet the terms and conditions of this contract, you may lose your legal ownership rights in your home. KNOW YOUR RIGHTS AND DUTIES UNDER THE LAW.

• If a mechanic's lien contract is executed on or after September 1, 1987, without the above notice, an action may be maintained under the provisions of the Deceptive Trade Practices Act.
  

Underwriting Standard

When initial construction or additional improvements are to be made on the property intended to be used as or is used as a homestead (even if the homestead, residence, or business is a part of a large building erected or to be erected on the tract) such improvements must be made subsequent to a valid mechanic's lien contract.

• Mechanic's Lien Affidavit
  

Filing (Property Code Sec. 53.052)

An original contractor claiming a mechanic's lien must file an affidavit with the county clerk of the county in which the property is located not later than the 15th day of the fourth calendar month in which the original contractor's work was completed, terminated, or abandoned. (Residential construction projects the 3^rd calendar month).

A claimant other than an original contractor claiming the lien must file an affidavit with the county clerk not later than the 15th day of the fourth month (3^rd calendar month on residential construction projects) after the later of:

(1)  the month the claimant last provided labor or materials; or

(2)  the month the claimant would normally have been required to deliver the last of specially fabricated materials that have not been actually delivered.

Contents (Property Code Sec. 53.054)

• The affidavit must be signed by the person claiming the lien or by another person on the claimant's behalf.
  
• The affidavit must contain:
  

o   a sworn statement of the amount of the claim;

o   the name of the owner or reputed owner;

o   a description of the kind of work done and/or materials furnished;

o   the name of the person who employed the claimant or to whom materials or labor were furnished;

o   the name of the original contractor;

o   a legal description of the property sought to be charged with a lien; and

o   the claimant's business address.

o   Unnecessary Information

o   It is not necessary, even though it is informative, that the affidavit set forth individual items of work done or material furnished or specifically fabricated.

o   Attachment of Contract

o   The mechanic's lien claimant may attach a copy of any applicable written agreement or contract.

Additional Requirements on Homestead Property (Property Code Sec. 53.059)

• A mechanic's lien affidavit that relates to a homestead must contain the following notice conspicuously printed, stamped, or typed in a size equal to at least 10-point bold face or computer equivalent, at the top of the page:

"NOTICE: THIS IS NOT A LIEN; THIS IS ONLY AN AFFIDAVIT CLAIMING A LIEN."

Notice

• Certain notice requirements are imposed by the Property Code. For underwriting purposes, it should be assumed that notice as prescribed by law was given. Section 53.255, Property Code, provides the form of notice required for a residential construction contract. Section 53.256 Property Code requires that the contractor provide the owner with a list of sub-contractors and suppliers. The residential construction rules apply only to new construction and not to remodeling jobs.

Other Creditors of the Original Contractor (Property Code Sec. 53.121)

• All subcontractors, laborers, and materialmen who have a mechanic's lien have preference over other creditors of the original contractor.

Equality of Mechanic's Liens (Property Code Sec. 53.122)

• Except as provided in Property Code Sec. 53.101, et seq. and Sec. 53.124(e) for required retainage, perfected mechanic's liens are on equal footing without reference to the date of filing the affidavit claiming the lien.

• If proceeds of a foreclosure sale of property are insufficient to discharge all mechanic's liens against the property, the proceeds shall be paid pro rata on the perfected mechanic's liens on which suit is brought.

Priority Over Other Liens (Property Code Sec. 53.123)

• A mechanic's lien attaches to the house, building, improvements, or railroad property in preference to any prior lien, encumbrance, or mortgage on the land on which it is located.
  

•  However, the mechanic's lien does not affect any lien, encumbrance, or mortgage on the land or improvement at the time of the inception of the mechanic's lien, and the holder of the lien, encumbrance or mortgage need not be made a party to a suit to foreclose the mechanic's lien.
  

Time of Inception of Lien - "Relation Back" (Property Code Sec. 53.124)

• The time of inception of a mechanic's lien is:
  

• the commencement of construction of improvements, or
  

• delivery of materials to the land on which the improvements are to be located and on which materials are to be used.
  
  
• The construction of improvements or materials delivered must be visible from inspection of land.

• Regardless of the date of a lien claimant's contribution of labor or material was begun, the priority of all mechanic's liens relates back to the date of the commencement of the work of the improvement as a whole.

• In determining the date of "commencement of a work of improvement” reliance is usually made upon the "visible to the eye" test.

o   Deeds of Trust recorded prior to the commencement of work of improvement or prior to the filing of a mechanic's contract are superior in priority to mechanic's liens.

o   Deeds of Trust recorded subsequent to the commencement of a work of improvement or subsequent to the filing of a mechanic's lien contract are inferior in priority to mechanic's liens.

Removables - Whirlpool Doctrine

• The Supreme Court of Texas in First National Bank in Dallas vs. Whirlpool Corporation, 517 S.W. 2d 262 (Tex. 1975) held that mechanic's and material man's liens on improvements are superior to a prior recorded Deed of Trust lien when such improvements can be removed without material injury to the land and pre-existing improvements, or to the improvements removed.
  

• The Court held that disposals and dishwashing machines could be removed from the project without injury to the project, the realty, the remaining improvements, or materials themselves, and ordered foreclosure of the lien.
  
  
• Courts have determined that the following materials are "removable improvements”:
  

o   windows and doors;

o   air conditioning and heating units;

o   carpets, appliances, smoke detectors, burglar alarms, light fixtures, and door locks;

o   an entire structure installed or set on a foundation;

o   a motion picture screen and frame, ticket booths, neon sign, and speaker pole;

o   plumbing fixtures;

o   pumps attached to existing machinery.

o   Courts have determined that the following materials are not "removable" improvements:

o   plaster and paint;

o   lumber used in the construction of a house;

o   roof repairs;

o   window frames;

o   bricks used in a fireplace and chimney;

o   concrete roofing tiles;

o   new roof;

o   shell home;

o   garage.

• Thus, the priority of a prior Deed of Trust lien does not affect a subsequent valid mechanic's lien for materials furnished which are removable items.

Underwriting Standard
Include an exception to all such removable items which do not lose their priority to a previously recorded Deed of Trust lien or require releases from all mechanics and materialmen involved with the construction.

• Section 53.057 of the Property Code provides:

a)    A claimant may give notice under this section instead of or in addition to notice under Section 53.056 or 53.052 if the claimant is to labor, furnish labor or materials, or specially fabricate materials, or has labored, furnished labor or materials, or specially fabricated materials under an agreement with an original contractor or a subcontractor providing for retainage.

b)    The claimant must give the owner or reputed owner notice of contractual retainage not later than the earlier of:

1.      The 30^th day after the date the claimant’s agreement providing for retainage is completed, terminated, or abandoned; or

2.     The 30^th day after the date the original contract is terminated or abandoned.

Comment: This section extends the time for providing the owner with notice of a claim for retainage from 15 to 30 days.

(b-1) If an agreement for contractual retainage is with a subcontractor, the claimant must also give the notice of contractual retainage to the original contractor within the period prescribed by Subsection (b).

c)    The notice must generally state the existence of a requirement for retainage and contain:

1.      The name and address of the claimant; and

2.     If the agreement is with the subcontractor, the name and address of the subcontractor.

d)    The notice must be sent to the last known business or residence address of the owner or reputable owner or the original contractor, as applicable.

Comment: This section requires a subcontractor to a subcontractor to provide notice in the manner set out.

e)    A claimant has a lien on, and the owner is personally liable to the claimant for, the retained funds under Subchapter E if the claimant:

1.      Gives notice in accordance with this section and:

a)    Complies with Subchapter E; or

b)    files an affidavit claiming a lien not later than the date required for filing an affidavit under Section 53.052;    

2.     Gives notice of the filed affidavit as required by Section 53.055.  

What you should do: Even when the construction contract calls for retainage, you should not remove the P-8 exceptions from the policy until at least 30 days have passed from the end of construction.  Read and understand Bulletins SLS 2009007 and TX2010008. A subcontractor who does not receive proper notices as required under this bill may file a mechanic’s lien claim in the usual manner.

What you should do: Require a release of any MLA filed against the property being insured.  

An owner and original contractor may jointly file an Affidavit of Commencement with the county clerk - not later than thirty (30) days after the date of actual commencement of construction or delivery of materials.

This affidavit must contain:

•  the name and address of the owner;
  
• the name and address of each original contractor;
  
• a legal description of the property;
  
• the date the work actually commenced; and
  
• a general description of the improvements.

Such affidavit is "prima facie" (assumed correct until overcome by further proof) evidence of the date of the commencement of construction of the improvements described in the affidavit.

The time of inception of a mechanic's lien which arises from work described in an Affidavit of Commencement is the date of the commencement of the work stated in the affidavit.

Underwriting Standard

An Affidavit of Commencement should be a requirement in all appropriate construction commitments for interim construction binders and policies. The affidavit increases the protection to the title company in claims involving loss of priority upon issuance of final policy.

Note: See 53.259 for residential construction projects).

• An owner may file with the county clerk an Affidavit of Completion which must contain:
• the name and address of the owner;
• the name and address of the original contractor;
• a legal description of the real property;
• a description of the improvements;
• a statement that the improvements have been completed;
• the date of the completion; and
• a conspicuous statement that the claimant may not have a lien on retained funds unless the claimant files the affidavit claiming a lien not later than thirty (30) days after the date of completion.
• A copy of the affidavit is required to be sent to all interested parties according to statute.
• If the affidavit is filed on or before the tenth (10th) day after the date of completion of the improvements, such affidavit is "prima facie" (assumed correct until overcome by further proof) evidence of the date on which work under the original contract is completed.
• If the affidavit is filed after the tenth (10th) day after the date of completion, the date of completion is the date the affidavit is filed.
• "Completion" means the actual completion of the work, including any extras or change orders reasonably required or contemplated under the original contract, other than warranty or repair work.

Underwriting Standard

Require the affidavit on all construction transactions to be insured after construction is completed. Require verification that all bills have been paid. A seller must provide an affidavit stating that all bills have been paid or those who haven't been paid. (Section 53.255, Property Code).

• When a debt for labor or materials is satisfied or paid by collected funds, the person who furnishes the labor or material shall, not later than ten (10) days after the date of receipt of a written request, furnish to the requesting persona release of the indebtedness and any lien claimed, to the extent of the indebtedness paid.
• An owner, original contractor or any person making the payment may request a release.
• Such release of lien must be in a form that would permit it to be filed of record.
• The statute does not have a provision for penalties in the event such a release is not timely furnished as requested.
• Rule of Practice If such indebtedness is paid through a closing, exchange payment of the claim for an executed release.
• The statue provides forms for conditional and unconditional waivers/releases of such liens.

Sec. 53.281. WAIVER AND RELEASE OF LIEN OR PAYMENT BOND CLAIM.

a) Any waiver and release of a lien or payment bond claim under this chapter is unenforceable unless a waiver and release is executed and delivered in accordance with this subchapter.
b) A waiver and release is effective to release the owner, the owner’s property, the contractor, and the surety on a payment bond from claims and liens only if:

1. The waiver and release substantially comply with one of the forms prescribed by Section 53.284;
2. The waiver and release is signed by the claimant or the claimant’s authorized agent and notarized; and
3. In the case of a conditional release, evidence of payment to the claim exists.

Sec. 53.282. CONDITIONS FOR WAIVER, RELEASE, OR IMPAIRMENT OF LIEN OR PAYMENT BOND CLAIM.

a) A statement purporting to waive, release, or otherwise adversely affect a lien or payment bond claim is not enforceable and does not create an estoppel or impairment of a lien or payment bond claim unless:

1. The statement is in writing and substantially complies with a form prescribed by Section 53.284;
2. The claimant has actually received payment in good and sufficient funds in full for the lien or payment bond claim; or
3. The statement is:

a) In a written original contract or subcontract for the construction, remodel or repair of a single-family house, townhouse, or duplex or for land development related to a single-family house, townhouse, or duplex; and

b) Made before labor or materials are provided under the original contract or subcontract.

Comment: It is important to note here that the bill seeks mostly to impact commercial contracts and allows a waiver in a single-family contract.

NOTE: the language does not use the customary 1-4 family designation.

Sec. 53.283. UNCONDITIONAL WAIVER AND RELEASE: PAYMENT REQURIED.

• A person may not require a claimant or potential claimant to execute an unconditional waiver and release for a progress payment or final payment amount unless the claimant or potential claimant received payment in that amount in good and sufficient funds.

NOTE: You may rely on the accuracy of the release document as long as it is fully completed and is executed by the proper parties and contains the notice provisions in at least 10-point type and you have no information that would lead to a conclusion that the document is false.

A mechanic's lien may be foreclosed only on judgment of a court of competent jurisdiction foreclosing the lien and ordering the sale of the property subject to the lien.

Sec. 53.156. COSTS AND ATTORNEY’S FEES.

• In any proceeding to foreclosure a lien or to enforce a claim against a bond issued under Subchapter H, I, or J in any proceeding to declare that any lien or claim is invalid or unenforceable in whole or in part, the court shall [may] award costs and reasonable attorney’s fees as are equitable and just.
• With respect to a lien or claim arising out of a residential construction contract, the court is not required to order the property owner to pay costs and attorney’s fees under this section.

Comment: This bill makes court costs and attorney fees mandatory in proceedings to foreclose a lien or enforce a claim against a bond in cases dealing with commercial property.

For residential construction contracts, the court is not required to order the property owner to pay costs and attorney fees.

What you should do: Require a release of the lien for court costs and attorney fees any time you find a court case foreclosing a lien or enforcing a lien against a bond.

• Suit must brought to foreclose the lien within one (1) year after the last day a claimant may file the lien affidavit under Section 53.052. (Property Code Sec. 53.158)
• The limitations period established under Subsection (a) may be extended to not later than the second anniversary of the date the claimant filed the lien affidavit under Section 53.052 if, before the expiration of the limitations period established under Subsection (a), the claimant enters into a written agreement with the then-current record owner of the property to extend the limitations period. The agreement must be recorded with the clerk of the same county where the lien was recorded and is considered to be notice of the extension to any subsequent purchaser.

A mechanic's lien or affidavit claiming a mechanic's lien may be discharged of record by the following:

• recording of a lien release duly signed by the claimants;
• failing to institute suit to foreclose a lien within the period prescribed by statute;
• recording a final judgment or decree of a court of competent jurisdiction providing for the discharge;
• filing a bond, notice, and return in compliance with Property Code Sec. 53.171 et seq.; or
•  filing a bond in compliance with Property Code Sec. 53.202 et seq.

Bond; Recording

• The owner, contractor, or subcontractor, through whom a lien is claimed by a recorded instrument, other than a lien granted by the owner, may file a bond with the county clerk to indemnify against the lien. (Sec. 53.171)

Requirements

• The bond must

o   describe the property;

o   adequately describe the lien claimed;

o   be in an amount that is double the amount of the liens referred to in the bond unless the total amount claimed in the liens exceeds $40,000, in which case the bond must in an amount that is the greater of one and one-half times the amount of the liens or the sum of $40,000 and the amount of the liens;

o   be payable to the parties claiming the liens;

o   be executed by a principal and an authorized corporate surety; and

o   be conditioned that principal and sureties will pay the named obligees or their assigns the amount of the valid liens claimed, plus cost, if the claims are proved to be liens on the property. (Sec. 53.172)

Notice

• Upon filing, the county clerk shall issue notice to the named obligees.
• The notice must be served on each obligee by mailing a copy of the notice and the bond to the obligee by certified mail addressed to the claimant at the address stated in the lien affidavit for the obligee.  If the claimant's lien affidavit does not state the claimant's address, the notice is not required to be mailed to the claimant.
• A copy of the bond must be attached to the notice. (Sec. 53.173)

Recording

• The clerk shall record the bond, the notice and a certificate of mailing in the real property records. (Sec. 53.174)

Underwriting Standard

1) After the title person has determined that the procedure for recording the bond and notice have been properly completed, no exception is required to be made for the lien described in the bond notice and return.

2) No consent to insure around is required.

Bond; Recording

• An original contractor who has a written contract with the owner may furnish a bond which shall be filed with the county clerk together with the contract, copy of the contract or memorandum of the contract for the benefit of claimants. (Secs. 53.201 - 53.203)

Requirements

• The bond must

o   be equal to at least the total of the original contract;

o   be in favor of the owner;

o   have the written approval of the owner endorsed thereon;

o   be executed by the original contractor as principal and a Texas authorized and admitted corporate surety; and

o   be conditioned on prompt payment for all labor, contract materials, specially fabricated materials and normal and usual extras not exceeding 15% of the contract price. (Sec. 53.202)

Insuring Title

• A purchaser, lender, or other person acquiring an interest in the owner's property, or an insurer of title is entitled to rely on the record of the bond and contract as constituting payment of all claims and

o    liens for labor, subcontracts, materials or specially fabricated materials incurred by the original contractor as if the purchaser, lender, or other person acquiring an interest in the owner's property.

o   or an insurer of title or the owner who approved, accepted, and endorsed the bond and as if each person furnishing labor or materials for the work performed under the original contract, other than the original contractor, had filed a complete release and relinquishment of lien of record. (Sec. 53.204)

Underwriting Standard

1) A bond meeting the requirement of the Property Code and duly filed may be recognized as a prohibition against a claim of a mechanic's lien against the owner's property filed by a subcontractor to the contract filed of record with the bond and as constituting payment of such claims and liens, if any.

2) Verification of payment by owner and a release or waiver from a general contractor must always be obtained.

3) If the title person is unable to

a)     secure proper documentation and verification or

b)     any mechanic's lien affidavit has been filed or

c)     other circumstances indicate a dispute resulting in a possible claim,

d)     then, no reliance on the bond should be made without underwriter approval.

Procedural Rule 8

o   On all occasions, when a mortgagee's policy or interim construction binder is issued prior to completion of improvements, the usual pending disbursements and mechanic's lien exceptions are appropriate as provided in the binder and Procedural Rule 8 and may not be deleted.

• Any person who furnishes labor or material as a condition of final payment for construction of improvements on real property shall, upon request, provide an affidavit stating:

o   such contractor has paid his subcontractors, materialmen, and laborers in full, or

o   shall state the amount owed and the name of the person or

o   entity entitled to payment.

• A seller, on request or purchaser, prior to closing of the purchase of real estate, shall provide to such purchaser an affidavit:

o   stating full payment to each contractor, and that the seller is not indebted to such person or entity, or

o   shall state the amount owed and the name and, if known, the address and telephone number of each of the person or entity entitled to payment.

• A person commits a Class A misdemeanor if the person intentionally and knowingly makes a false or misleading affidavit.

Rule of Practice

• The title person should require payment affidavits of contractor and seller.

An original contractor may not require a residential owner to convey property to the contractor as a condition of the performance of a residential construction project.

Claims on mechanic's liens continue to be one of the highest risk areas in the title insurance industry. Occurrence of any of the following does not necessarily indicate that a mechanic's lien claim exists or is eminent, however, when one appears, the title person should closely scrutinize the transaction so that a claim may be avoided.

Mechanic's lien "red flags" are:

• Information and knowledge of community economic conditions and, in particular the building industry, indicates monetary problems exist;
  
  
• A building contractor on any prior occasion has executed a false affidavit purportedly verifying payment of all mechanics and materialmen. A subsequent affidavit would be unacceptable without additional verification and underwriter approval;
  
  
• Affidavits of Mechanic's Liens are repeatedly filed against the builder signifying slow payment practices, disputes, or cash flow problems.
  
  
• The builder has a greater than usual inventory of unsold projects, or unfinished projects (usually residential homes);
  
  
• Known disputes exist between the builder and any subcontractor;
  
  
• Substantial cost overruns have occurred in the project to be insured;
  
  
• The general business reputation of the builder is unfavorable or, the builder is new to the community or industry and his business practices and reputation are unknown.

The above list is not exhaustive of all possible indicators of claims in this area. Any unusual business practice may suggest to the title person a potential claim, whether a mechanic's lien problem or otherwise, and should be investigated.