Bulletin: GA2014002

Date:
February 21, 2014
To:
All Georgia Issuing Offices
RE:
UNDERWRITING - Mechanic's Liens Coverage During Construction

Dear Associates:

Mechanic's liens are a significant source of claims. This bulletin advises you of required procedures relating to mechanic's liens and mechanic's liens coverage on Loan Policies during construction (including rehabilitation, renovation, and the like). It should be read in conjunction with other National and Georgia Bulletins, including GA2009001, relating to mechanic's liens.

THE GENERAL MECHANICS LIEN EXCEPTION IN ALL LOAN POLICIES

All commitments and policies should contain a general mechanic's lien exception for the following:

"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."

COMPANY APPROVAL: An underwriter must approve the deletion of the mechanics lien exception from any construction loan policy. Issuing Agents may not delete the general mechanic's liens exception from any construction loan policy without underwriter approval.

REQUIREMENTS FOR REMOVAL OF THE GENERAL MECHANICS LIEN EXCEPTION

It has generally been held that recording a construction mortgage before work has commenced establishes the priority of the mortgage - including the priority of obligatory advances - over subsequently filed mechanics liens. The holder of a security deed is deemed to have notice of all things that could be revealed by an inspection of property. If visible construction is observable during a trip to the site, then the holder of the security deed has notice of outstanding claims or potential lien claimants and the security deed will be inferior to those claims. Gamble v. Pilcher, 242 Ga. 556, 250 S.E.2d 416 (1978).

A.   Requirements to Establish that No Lienable Work has been Performed by Inspection, Indemnification and Documentation Before Recording the Construction Mortgage

As a condition to Underwriter approval of the deletion of mechanic's liens exception on a construction loan policy, you must furnish evidence of compliance with these requirements on the day of closing:

(1)   Inspection Requirement. Issuing Agents must confirm that no work has been performed during the applicable period by a visit and inspection of the property. The absence of commencement of work must be documented by photographs or a current certification by the surveyor. If your inspection reveals evidence of commencement of work on the property or you have knowledge that work has been done or materials furnished within 90 days prior to the recording of the mortgage, you may not proceed to insure without approval from an Underwriter. Please refer to Section B below for requirements.

(2)   Affidavit and Indemnity Requirement. The owner and general contractor must execute a satisfactory affidavit and the STG Construction Indemnity Agreement in favor of Stewart Title Guaranty Company stating that no work has been performed or materials delivered to the site within 95 days prior to the recording of the mortgage. A financial statement by a certified public accountant will be required of the owner in connection with the indemnity agreement in order to determine the indemnity is secured by sufficient assets, unless waived by Stewart Title Guaranty Company underwriting counsel. The acceptable forms of Final Contractor’s Affidavit and the STG Indemnity Agreement (Construction) form are below. Use of any other form of indemnity or affidavit requires approval of an Underwriter.

(3)   Recording Requirement. You must record the construction mortgage before work commences on the property. You must conduct a date down of title on the date of filing of the mortgage, and all Claims of Lien appearing of record must be cleared either by full payment or discharged by statutory bond, unless they are deemed expired under O.C.G.A. §44-14-361.1.  

COMPANY APPROVAL: When Stewart Title Guaranty Company is satisfied that all of the above requirements are met, an Underwriter will approve issuance of the Loan Policy without a general mechanic's lien exception. You must retain all of the above documents and Underwriter approval in your file.    

B.   Requirements for Documentation if No Priority or Loss of Priority or Priority Cannot Be Established at Time of Closing

As stated above, the failure to record the construction mortgage or security deed before commencement of work can jeopardize such priority. These "no priority" or "lost priority" situations present the potential for substantial claims.

Georgia Bulletin GA2009001 sets forth the statutory requirements and form which must be followed in order to waive and remove liens where work has commenced before recording of the construction mortgage. You must comply with procedures set forth in O.C.G.A. §44-14-361.2 relating to payment in full or pro rata and under O.C.G.A. §44-14-366 in order to restore the priority of the mortgage to be insured. Pursuant to O.C.G.A. §44-14-361.2, the property owner or general contractor must give a sworn Owner’s Affidavit or Final Contractor’s Affidavit which identities each person who has provided labor, services or materials for the construction within 95 days of recording of the mortgage. The Affidavit must identify all subcontractors and suppliers of each contractor who has a direct contract with the owner. The owner or contractor must pay each party described in the Affidavit in full for services rendered up to the time construction ceased, and obtain a statutory Waiver and Release of Lien Upon Final Payment from each. Before construction resumes, the mortgage, mortgage modification, deed or other interest sought to be restored to priority must be recorded. All amounts billed, previously paid, and currently due to all such contractors, subcontractors and suppliers to date (including architects, engineers, surveyors, and demolition) must be paid in full and lien waivers obtained from the general contractor and all subcontractors and suppliers who have furnished labor, services or materials through the date of the recording of the mortgage as required by law.

O.C.G.A. §44-14-366(c)(1) provides that lien claimants may subordinate lien rights to any other party who has an interest in the real estate. This is an alternative to the interim and final statutory waivers upon payment. Pursuant to O.C.G.A. §44-14-361.2, the property owner or general contractor must give a sworn Owner’s Affidavit or Final Contractor’s Affidavit which identities each person who has provided labor, services or materials for the construction within 95 days of recording of the mortgage. The Affidavit must identify all subcontractors and suppliers of each contractor who has a direct contract with the owner. Subordination may be given in advance of furnishing labor, services or materials by the contractor, suppliers and subcontractors and may be given even though these parties have not received payment. Please contact an Underwriter for approval of the form of subordination of lien to the construction lender.

COMPANY APPROVAL: An underwriter must approve issuance of the Loan Policy where work has commenced before recording of the construction mortgage. In such cases, the Mechanic's Liens Documentation, all in a form acceptable to the Company, are required as a condition to providing mechanic's liens coverage, unless otherwise approved by an underwriter (Exhibit 1 below ). You must retain these documents and approval in your file.

C. Pending Disbursement Clause/ Endorsements (See Exhibit 2 below).

A pending disbursement clause, either inserted as an exception or added as an endorsement in the form of the ALTA 32-06, must appear in all construction loan policies issued prior to and during construction. This requirement applies whether the insured mortgage has priority or not. You must use the pending disbursement clauses (PDCX06, PDCX07, PDCX08) as written in Exhibit 2 below, pursuant to the guidelines and comments set forth therein. Do not use any other form of pending disbursement clause, or any other endorsement providing mechanic's liens coverage, or issue a "clean" policy (i.e., where the general mechanic's liens exception is deleted but no suitable pending disbursement clause has been inserted).

COMPANY APPROVAL:  An underwriter must approve the use of any other form of pending disbursement clause or any other endorsement providing mechanic's liens coverage other than those referenced below. Please contact an Underwriter if you are asked to remove the pending disbursement clause from the loan policy. 

REQUIREMENTS FOR FUTURE ADVANCE/REVOLVING CREDIT, MODIFICATION OR DATE DOWN ENDORSEMENT

Issuing Agents should review the security deed or mortgage to verify that it complies with Georgia law with regards to future advances before issuing any endorsement insuring these advances. Georgia law may not provide priority to future advances made by the lender by modification agreement or not contemplated under the original loan agreement. 

Future Advance/Revolving Credit Endorsement. You may not issue a Revolving Credit or Future Advance Endorsement (such as ALTA Endorsement 14-06, 14.1-06, or 14.2-06), on a Loan Policy insuring a construction loan mortgage where priority is lost unless the endorsement includes a mechanic's liens exception or you secure Underwriter approval.

Down Date Endorsement. During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of Policy and increasing the Amount of Insurance. You should use the STG Construction Loan Endorsement 1, subject to the guidelines for that endorsement. Any other form of Down Date must be approved by an Underwriter. Where the ALTA 32-06 series endorsement is requested by the construction lender, you should use the ATLA 33-06 (Disbursement) endorsement to date down the Date of Policy and increase the Amount of Insurance, subject to the guidelines for that endorsement. Any other form of Down Date must be approved by an Underwriter.

Modification Endorsement on a Construction Loan Policy. You may not issue a Modification Endorsement (such as ALTA Endorsement 11-06 or the CLTA Endorsement 110.10) on a Loan Policy insuring a construction loan mortgage where the modification agreement contains additional optional advances unless the endorsement includes a mechanic's liens exception, or you secure Underwriter approval.

If you have any questions relating to this or other bulletins, please contact a Stewart Title Guaranty Company underwriter.

For on-line viewing of this and other bulletins, please log onto www.vuwriter.com.

THIS BULLETIN IS FURNISHED TO INFORM YOU OF CURRENT DEVELOPMENTS. AS A REMINDER, YOU ARE CHARGED WITH KNOWLEDGE OF THE CONTENT ON VIRTUAL UNDERWRITER  AS IT EXISTS FROM TIME TO TIME AS IT APPLIES TO YOU, AS WELL AS ANY OTHER INSTRUCTIONS. OUR UNDERWRITING AGREEMENTS DO NOT AUTHORIZE OUR ISSUING AGENTS TO ENGAGE IN SETTLEMENTS OR CLOSINGS ON BEHALF OF STEWART TITLE GUARANTY COMPANY. THIS BULLETIN IS NOT INTENDED TO DIRECT YOUR ESCROW OR SETTLEMENT PRACTICES OR TO CHANGE PROVISIONS OF APPLICABLE UNDERWRITING AGREEMENTS. CONFIDENTIAL, PROPRIETARY, OR NONPUBLIC PERSONAL INFORMATION SHOULD NEVER BE SHARED OR DISSEMINATED EXCEPT AS ALLOWED BY LAW. IF APPLICABLE STATE LAW OR REGULATION IMPOSES ADDITIONAL REQUIREMENTS, YOU SHOULD CONTINUE TO COMPLY WITH THOSE REQUIREMENTS.