Do you have a Mechanic’s Lien Issue?

One of the more dreaded underwriting issues that can result in a large claim is a mechanic’s lien, or what we call a broken priority issue. In general, a mechanic’s lien is filed against the land and possibly any constructed improvements by a general contractor, subcontractor or supplier of materials and equipment for a construction project taking place on the property. These liens can be troublesome depending on how and when priority is established for each claimant.

Depending on your local laws, it may be possible for a mechanic’s lien claimant to assert a lien interest that is superior to your lender customer’s previously recorded mortgage/deed of trust interest. Many states have laws that allow the lien to have priority from the date that work visibly commenced although no claim of lien was recorded until days after the work or supply was completed.

What to look out for

First, it is important to know the details of your transaction. Will there be financing? Will the purpose of the loan secured by the mortgage or deed of trust to be recorded be construction? This could be your first indicator that you need to look out for any work or supply commenced prior to closing.

Second, be sure to include a provision in any title affidavit for any transaction to be executed by your seller or borrower that there has been no construction, improvement or supply of construction materials and equipment to the property within the time period in which a mechanic’s lien can be filed or asserted (this time period is unique to each states’ laws).

Third, if you are dealing with vacant land, it may be necessary to obtain photographs of the property to confirm no work has commenced prior to closing.

If work has already started

Contact your underwriter. If work or supply has commenced on the property prior to your closing, it may impact our ability to insure the lender’s mortgage/deed of trust priority without including the standard exception for mechanic’s liens.

It is crucial to understand the steps necessary before embarking on this type of transaction. Make sure you have all the proper paperwork and information to make the process easier for your team and your client. If you are a Stewart Trusted Provider, your Stewart underwriting counsel will be able to evaluate any potential broken priority scenario and make adequate requirements or exceptions for your proposed title policies.

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