Anytime you are purchasing new construction or a newly rehabbed home or representing someone that is doing such, mechanic’s lien coverage should be part and parcel to the conversation regarding Title Insurance. The issue becomes making sure the Title Company is equipped with the proper waivers, affidavits and documentation in order to supply such coverage. Verifying such issues early in the process is vital.
Issuing Title Insurance against mechanic’s liens is a massive source of claims in the title insurance industry. This post is being written to remind real estate professionals as well as consumers of required procedures a title company must follow in regards to mechanics lien coverage.
Mechanic’s liens can encumber real property even though they may not be recorded in the public records. Many state statutes provide that mechanic’s liens can relate back in time to the first day that the work was performed. Additionally, some statutes afford that all mechanic’s liens of all potential creditors liens relate back in time to the commencement of the first work performed by anyone on the property. This is important to understand since the impact gives the laborer the potential to obtain priority over the insured interest. Therefore, in most states, title insurance commitments and title insurance policies should contain a general mechanic’s lien exception for “Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records.”
When requested to provide title insurance against mechanic’s liens, by deletion or modification of the general mechanic’s lien exception, we the Title Company must confirm that no lienable work was performed during the applicable lien period or that all such work has been paid in full.
There are a few ways to provide such:
- Where there has been no recent construction, the Title Company receives a satisfactory affidavit and indemnity executed by the owner stating that no improvements have been made to the premises during the applicable lien period
- If there have been only minor repairs during the applicable lien period, the Title Company receives a satisfactory affidavit and indemnity executed by the owner describing such repairs and stating that all such work has been paid in full. The Title Insurance Company may, at our option, also require proof of payment of all work
- If there has been recent construction, the Title Company receives a satisfactory final affidavit and indemnity, proof that all work and materials from which a lien may arise have been paid in full (e.g., lien waivers, copies of paid bills, etc.), and a list of all contractors, subcontractors and suppliers. In addition, the Title Insurance Company, at its option, may also require filing of a notice of completion and receipt of satisfactory financial statements, if applicable. With respect to any of the foregoing, if doubt exists as to whether work was performed and/or completed, we may require an inspection of the premises.
Keep in mind that the above guidelines are very general and are subject to modification as per local and state laws. For instance in the commonwealth of Pennsylvania the Mechanics Lien Laws are far different than in most other states. For information on what a PA Title Insurance Company will need to provide mechanics lien title insurance in Pennsylvania here is an old post that may be very helpful. (Obtaining Mechanics Lien Coverage in Pennsylvania)
Providing title insurance against mechanic’s liens during construction, where permitted, requires special attention by the title company. In some states, recording of the construction mortgage is sufficient to establish priority. In some states, you must require an inspection to verify that no work was begun prior to recording. However, in some states, particularly where the construction mortgage cannot obtain priority over mechanic’s liens or where priority has been lost, the Company requires compliance with special procedures, such as a pending disbursement clause in the policy, indemnities for possible mechanic’s liens, satisfactory financial statements, and proof that all work performed to date has been paid in full.
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