12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over mechanic's liens?

Under Indiana Code ("I.C.") 32-28-3-5, a construction loan to one of five types of lenders has priority over mechanic's liens for most commercial projects. The five types of lenders are: 1) individual; 2) supervised financial organization (See I.C. 24-4.5-1-301); 3) an insurance company; 4) pension fund; and 5) any other entity that has the authority to make loans. The construction loan and mechanic's lien must be related to the same project. However, a construction mortgage has parity (equal priority) with properly perfected mechanic's liens, ONLY to the extent of fund actually expended for improvements and if lienholders had knowledge of purpose of the lien for the following property: 1) residential; and 2) public utilities. I.C. 32-28-3-5.

Exceptions: (1) A residential or public utility construction loan may have priority over subsequent mechanic's liens if a NO-LIEN CONTRACT is properly executed and recorded within five (5) days after execution (I.C. 32-28-3-1; 32-28-3-16). (2) A lien claimant is unable to assert a mechanic's lien attaches against an innocent purchaser with original construction on a 1-4 family residence when a purchase deed is recorded prior to the recording of any mechanic's liens. A no lien contract is void with commercial construction. I.C. 32-28-3-16.

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Initial priority is available for commercial construction mortgages as to the extent of funds actually owed to the lender

Parity can be retained on future draws if the funds are actually expended on residential or public utility improvements and/or exceptions 1.b. (1) and (2) above are applicable.

If priority is lost, can it be regained?

Priority can be regained ONLY if:

  • All prior lien claimants release their Notice of Intention to hold Mechanic's liens by filing a release in the County Recorder's Office where the real estate is located; or

  • Passage of time-If lien claimant fails to file a suit to foreclose within one (1) year from date of notice, the lien is null and void according to I.C. 32-28-6; or

  • Notice is filed by owner, pursuant to I.C. 32-28-3-10, and lien claimant fails to file suite to enforce within thirty (30) days and owner records proper Affidavit of same in Office of the County Recorder; or

  • All prior liens are satisfied; or

  • All prior liens are defeated in Court or bonded off the subject real estate as provided in I.C. 32-28-3-11.

Is there a difference between on-site and off-site work?

Labor and materials must actually be used on or for the benefit of the encumbered premises and cannot be diverted to or for other real estate.

However, work performed off-site, but for the benefit of the encumbered premises, such as by engineers, architects, attorneys, etc. is lienable (I.C. 32-28-3-1).

Is priority the same for all contractors and subcontractors on the same project?

Yes. All lien claimants on the same project share the same priority, provided they file notice of intention to hold lien in compliance with the requirements of I.C. 32-28-3-3 within sixty (60) days for residential property or ninety (90) days for commercial property after completion of each claimants' work (I.C. 32-28-3-53). Priority relates back to the time when work commenced or materials furnished. I.C. 32-28-3-5.

Time Limits

What are the time periods for recording lien claims by original contractors and subcontractors?

Notice of Intention to hold Mechanic's liens must be filed within sixty (60) days for residential property or ninety (90) days for commercial property after last day of performing labor or furnishing materials or machinery. (I.C. 32-28-3-3).

After what time period can you waive a mechanic's liens if no suit is filed?

Waive if no Foreclosure Complaint is filed within one (1) year from the time the Notice of Intention is filed of record.

Title Practice: Plus, any gap period (one year). Beware of any tolling of the one year time period when the property owner files bankruptcy, which triggers the automatic stay of proceeding order by the Bankruptcy Court.

Removing Or Waiving Liens

Is there a statutory procedure for affidavits of completion or notices of completion?

No.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

Yes, pursuant to I.C. 32-28-3-11, a defendant or other interested party in a proceeding to enforce a lien may file a written undertaking and post a bond agreeing to pay any judgment and costs if awarded by the Court.

Upon the filing of the undertaking, the Court shall order release of the property from the lien and attachment to bond.

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by the general contractor and/or subcontractors?

Yes, for residential property and public utilities only, the right to file mechanic's liens may be waived by: No-Lien Contract recorded pursuant to I.C. 32-28-3-1 and 32-28-3-16. Execution of Partial and/or Final Lien Waivers by subcontractors and materialmen are available for all types of construction property.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later recorded for earlier work?

Yes, I.C. 32-28-3-1 provides that " no-lien for material or labor in original construction shall attach to real estate purchased by an innocent purchaser for value without notice, provided said purchase is of a single or double family dwelling for occupancy by the purchaser, unless notice of intention to hold such lien is recorded ...prior to the recording of the deed."

Title Company Requirements

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

Standard Exception:

Schedule B, 2 (d) (Mechanic's liens Exception):

"Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, improved by law and not shown by the public record."

Deleted only if:

  • Not new construction; or,
  • If new 1) residential or public utility construction or 2) commercial property mortgage where funds are disbursed to acquire property with new or contemplated construction, require:
  • Synopsis of project
  • List of contractors
  • Audited Financials
  • Hard and soft cost breakdown
  • Minimum Standard Survey
  • Indemnity

Require disbursing agent/lender to obtain Lien Waivers and title update.

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage.

Yes. Both a pending disbursement clause and the mechanic's liens exception are included in the title commitment.

A title commitment is endorsed at the time of each draw to reflect the total amount disbursed to date and the status of recorded liens, if any.

"Pending Disbursement" Endorsement Language

Pending disbursement of the full proceeds of the loan secured by the Mortgage or Deed of Trust described in Schedule "A" hereof, this policy insures only to the extent of the amount actually disbursed. This policy insures against any loss or damage which might result from claims of mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to ______________, except any such liens or notices thereof as may be recited under Schedule B hereof. Each Disbursement must be made by the insured in Good Faith and without knowledge of any defect in or objection to the title. At the time of each disbursement of proceeds of the loan, an endorsement to this policy must be secured, extending the lien coverage date through the date of disbursement and increasing the amount insured hereunder up to the face amount of the policy, subject to the following requirements being met before issuance of such endorsement that: (a) a title search by the Company reveals no liens, objections or any other adverse changes in the title, (b) the contractor and owner furnish this company satisfactory paid bills, lien waiver, or other evidence that all items from which a lien might arise, have been paid or otherwise satisfied, and (c) the Owner and Contractor furnish the Company satisfactory Affidavit and Indemnity Agreement(s) as to the matters referred to in (b) above.

This policy does not guarantee completion of the improvements in progress, or their compliance with plans and specifications. The Company in no way guarantees the sufficiency of the mortgage proceeds as adequate to complete said improvements.

Not withstanding any other language contained in the insuring provisions of this policy, the above provisions are to the sole provision applicable to the extension of coverage for loss or damage resulting from mechanic's liens claims of such liens not of record.