Mechanic’s Lien Coverage Requires Underwriter Approval.
Can the Construction Loan Mortgage have initial priority over mechanic's liens?
A construction loan mortgage may be able to attain initial priority over mechanic's liens if the construction loan mortgage is recorded prior to the commencement of the furnishing of labor, equipment, material or supplies at the site of the property (see Kansas Statutes Annotated Section 60-1101).
Will initial priority, as to future disbursements, be retained only if certain procedures are followed?
There are no such procedures contained in the mechanic's lien statutes. However, section 58-2336 states that every mortgage or other instrument securing a loan upon real estate and constituting a lien or the full equivalent thereof upon the real estate securing such loan, according to any lawful or well recognized practice, which is best suited to the transaction, may secure future advances and the lien of such mortgage shall attach upon its execution and have priority from time of recording as to all advances made thereunder until such mortgage is released of record: Provided, that the lien of such mortgage shall not exceed at any one time the maximum amount stated in the mortgage.
Under case law, the future advance can be either optional or obligatory.
If priority is lost, can it be regained?
If any person who furnishes labor, equipment, material, or supplies used or consumed for the improvement of real property and is under a "contract with the owner," fails to file a lien statement within four (4) months after the date material, equipment or supplies, used or consumed was last furnished or last labor performed, then the construction loan mortgage may regain priority (see 60-1102).
Also, if a subcontractor furnishing labor, equipment, material or supplies under contract with the contractor, subcontractor or owner contractor, fails to file a lien statement within three (3) months after the date supplies, material or equipment was last furnished, then the construction loan mortgage may regain priority (see 60-1103).
Also, if an action to foreclose is not brought within one (1) year from the time of filing the lien statement, then the construction loan mortgage may regain priority (see 60-1105).
Is there a difference between on-site and off-site work?
There are no statutory liens provided for architects, surveyors or engineers.
Is priority the same for all contractors and subcontractors on the same project?
Section 60-1101 notes that when two or more contracts are entered into applicable to the same improvement, the liens of all claimants shall be similarly preferred to the date of the earliest unsatisfied lien of any of them.
This creates a piggyback effect so that all claimants enjoy the priority date of the earliest unsatisfied lien.
What are the time periods for recording lien claims by the original contractors and subcontractors?
The original contractors have four (4) months from furnishing their last labor, equipment or supplies to file their lien statement (see 60-1102).
Subcontractors have three (3) months from furnishing their last labor, equipment or supplies to file their lien statement (see 60-1103).
After what period of time can you waive a mechanic's lien if no suit is filed?
Under 60-1105, an action to foreclose a lien shall be brought within one (1) year from the time of filing the lien statement, but if a promissory note has been attached to the lien statement or lien of an itemized statement, the action shall be commenced within one year from the maturity of said note.
Removing or Waiving Liens
Is there a statutory procedure for affidavits of completion or notices of completion?
There is no statutory procedure for affidavits of completion or notices of completion.
However, subcontractors can potentially waive their lien if they fail to supply an owner with a "warning statement" regarding improvements of residential property as required under (60-1103a).
Also, subcontractors can potentially waive their lien if they fail to file a "notice of intent to perform" prior to the recording of a deed of new residential property to a good faith purchaser for value (see 60-11036).
Can a statutory bond terminate the mechanic's lien as an encumbrance on the title?
Under section 60-1110, a contractor or owner may execute a bond to the state of Kansas for the use of all persons in whose favor liens might accrue by virtue of this act, conditioned for the payment of all claims which might be the basis of liens in a sum not less than the contract price, with good and sufficient sureties, to be approved by a judge of the district court and filed with the clerk of the district court. When bond is approved and filed, no lien shall attach under this act and if, when such bond is filed liens have already been filed, such liens are discharged.
Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic' s liens by general contractor and/or subcontractor?
There is no statutory authority for such a procedure.
Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?
Under 60.1103b regarding new residential property, a good faith purchaser for value who receives a deed prior to a subcontractor filing a notice of intent to perform, may take free of that mechanic's lien.
Title Company Requirements
What are the customary requirements for issuing Loan Policies on Construction Loan Mortgages?
- Inspection of property plus affidavit concerning no work done on property;
- Recordation of Deed of Trust
- Indemnities from general contractor and owner
- Possible review of financials
- If giving mechanic's lien coverage:
- Pending disbursement clause
Review of lien waivers
- Note in owner's policy if insuring for amount of anticipated improvement.
Is it customary to add a "pending disbursement" clause or mechanic's lien exception in the Loan Policy insuring a construction loan mortgage?
Yes. Sample Pending Disbursement Clause:
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. At the time of each disbursement of proceeds of the loan, an endorsement to this policy must be secured 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) the company is furnished evidence from the insured certifying that the disbursement has been made in good faith and without knowledge of any defect in, or objection to the title, (b) a title search by the Company reveals no liens, objections or any other adverse changes in the title, (c) 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 (d) the Owner and Contractor furnish the Company satisfactory Affidavit and Indemnity Agreement(s) as to the matters referred to in (c) above.
This policy does not insure against mechanic's liens for labor performed and materials furnished subsequent to the last date to which mechanic's lien coverage has been extended, nor does this policy 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.
Notwithstanding any other language contained in the insuring provisions of this policy, the above previsions are the sole provision applicable to the extension of coverage for loss or damage resulting from mechanic's liens or claims of such liens not of record.
NOTE: Section 15.32 of the Underwriting Manual also contains a sample Pending Disbursement Clause.