Mechanic’s Lien Coverage Requires Underwriter Approval.
Can the Construction Loan Mortgage have initial priority over mechanic's liens?
Yes. Mississippi Code Annotated §85-7-131 (1972 & cum. supp. 1991) provides that construction liens take effect as to purchasers and encumbrancers for value and without notice only from the time of filing the lien or suit to enforce the lien. Accordingly, if no lien has been filed, no suit to enforce a lien has been filed, and the lender has no actual knowledge of a lien, the Construction Loan Mortgage will have initial priority over subsequently created construction liens.
Will initial priority as to future disbursements be retained only if certain procedures are followed?
Yes. Under the rule enunciated by the Mississippi Supreme Court in several cases, construction mortgage priority is maintained only to the extent that "(a) the funds disbursed actually went into the construction, or (b) to the extent that the construction lender used reasonable diligence in disbursing the construction loan." Guaranty Mortgage Co. of Nashville v. Seitz, 367 So.2d 438, 441 (Miss. 1979) (citations omitted). In at least one case, the court has indicated that obtaining an owners' and contractors' affidavit, along with updating title prior to disbursement, constituted "reasonable diligence". Wortman & Mann, Inc. v. Frierson Building Supply Co., 184 So.2d 857 (Miss. 1966). What constitutes "reasonable diligence," however, may vary from case to case. In certain transactions, "reasonable diligence" may require the lender to inspect the premises and/or to obtain lien waivers from the contractors, materialmen, and suppliers.
If notice of a construction lien has been filed, or if suit to enforce a construction lien has been filed, or if the lienholder has given actual notice to the lender, the lien should be satisfied prior to or contemporaneous with any advances under the construction loan.
If priority is lost, can it be regained?
Only if the construction lien becomes unenforceable through operation of the statute of limitations. Mississippi Code Annotated section 85-7-141 (1972 & cum. supp. 1991) provides that a suit to enforce a construction lien must be filed within 12 months from the time the money owed became due and payable. If a construction lien becomes barred by this statute of limitations, the construction loan would regain its priority as to that construction lien.
Is there a difference between on-site and off-site work?
We are aware of no such difference. The statute creates a lien in favor of laborers, materialmen, contractors, architects, engineers, and others. Mississippi Code Annotated §85-7-131 (1972 & cum. supp. 1991). The statute does not distinguish between on-site and off-site work.
Is priority the same for all contractors and subcontractors on the same project?
No. Under Mississippi Code Annotated §85-7-135 (1972 & cum.supp 1991), the lien created by section 85-7-131 is limited to those employed by the owner of the property. Cases interpreting this statute have specifically held that laborers employed by a contractor have no such lien. See e.g. Wenger v. First National Bank, 174 Miss. 311, 164 So. 229 (1935). Accordingly, materialmen and subcontractors who deal with a general contractor rather than the owner of the property have no lien.
Under Mississippi Code Annotated §85-7-181 et. seq. (1972 & cum. supp. 1991), subcontractors, materialmen, and laborers have a right to file a "stop notice" if they are not paid. Once served upon the owner of the property and filed as required by the statute, the stop notice binds any money in the hands of the owner which is still owed to the contractor. The statute specifically provides that the owner shall not be liable for an amount greater than the amount owed to the general contractor.
What are the time periods for recording lien claims by original contractors and subcontractors?
As discussed above, section 85-7-141 requires that suit to enforce liens created by 85-7-131 be filed no later than 12 months after the money owed became due and payable.
After what period of time can you waive a mechanic's liens if no suit is filed?
See answer to bulleted item 6, above.
Removing or Waiving Liens
Is there a statutory procedure for affidavits of completion or notices of completion?
Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?
Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?
There is no statutory procedure for waiver of a lien.
Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?
Yes. Under Mississippi Code Annotated §85-7-131 (1972 & cum. supp. 1991), such liens "shall take effect as to purchasers or encumbrancers for a valuable consideration without notice thereof, only from the time of commencing suit to enforce the lien, or from the time of filing the contract under which the lien arose, or notice thereof, in the office of the chancery court,..."
Title Company Requirements
What are the customary requirements for issuing Loan Policies on construction loan mortgages?
Prior to making an original advance or an additional advance under a construction mortgage, the customary requirements are (1) title examination to verify that there are no recorded liens, and (2) execution of owners and contractors affidavit reflecting no unpaid contractors, subcontractors, materialmen, laborers, etc.
Is it customary to add a "pending disbursement" clause or mechanic's lien exception in the Loan Policy insuring a construction loan mortgage?
Yes. See Pending Disbursement language below.
PENDING DISBURSEMENT LANGUAGE
NOTE: Total amount disbursed to date is $______________
NOTE: Pending disbursement of the full proceeds of the loan secured by the deed of trust insured, this policy insures only to the extent of the amount actually disbursed without knowledge of any intervening lien or interest, but increases as each disbursement is made, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens, including mechanic's liens and other objections, intervening between the date hereof and the date of such disbursement and evidence of same be furnished the insurer together with affidavit of the owners and contractors as to any known liens.
NOTE: If any of the proceeds of the insured deed of trust are being used in construction of improvements on the insured property, this policy does not insure against loss or damage due to a loss of priority or a claim of a loss of priority of the insured deed of trust if the mortgagor in the insured deed of trust is obligated to convey the insured property to a former owner of the insured property.