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?

Because of the existence of the "First Spade Rule," the priority of the deeds of trust, with respect to mechanic's liens, generally depends upon the time when the respective liens attach (429.060). Section 429.060 notes that the lien for work and materials shall be preferred to all other encumbrances which may be attached to or upon such buildings, improvements on the ground, subsequent to the commencement of such buildings or improvements. However, there are both statutory and common law exceptions to this general rule.

Section 429.050 provides that a mechanic's lien attaches to the buildings and improvements, but not the land, with preference over pre-existing liens or encumbrances. Section 429.050 applies, however, only to new construction and not to improvements or repairs of existing structures. Consequently, if a mechanic's lien is asserted for repairs or renovations to an existing building, the mechanic's lien is inferior for both land and improvements to a pre-existing deed of trust unless the holder of the deed of trust waived its priority.

In Missouri, the holder of an otherwise superior deed of trust may nevertheless be deemed to have waived its priority and estopped from asserting priority to subsequent mechanic's liens. Construction lenders are often deemed to have waived priority, if by agreeing to fund the construction they induced contractors and suppliers to improve the value of their collateral.

Additionally, if the court finds that the construction lender induced the performance of the labor and supplying of the materials which give rise to mechanic's liens, the construction lender will be deemed to have waived priority with respect to both the construction loan and any purchase money loan made by the lender. Also, the waiver extends to both the land and improvements.

A construction lender does not automatically waive the priority of its lien by merely entering into a construction loan. Active participation by the construction lender is required, which usually occurs in large construction loan projects. Caselaw notes that "active participation" includes such matters as writing checks, making payments to the contractor directly, signing an escrow agreement and obtaining policy endorsements for mechanic's lien coverage.

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

Priority, as to future disbursements, is not contained in the mechanic's lien statutes, but instead, is set forth in section 443.055 of the Missouri statutes pertaining to Mortgages, Deeds of Trust and Mortgage Brokers.

Section 443.055 3(2) states that future advances made or future obligations incurred under a construction loan are secured by the security instrument and shall have the priority specified by subsection 5 of this section even though the future advances or future obligations cause the total indebtedness to exceed the face amount stated in the security instrument.

Section 443.055 5 sets forth the priority of a future advance instrument. It notes that the priority of the lien of a security instrument securing future advances or future obligations shall date from the time the security instrument is recorded, whether or not any third party has actual notice of any such advances or obligations and whether or not such advances or obligations are optional or obligatory with the lender. If an amendment to a mortgage, deed of trust, or other real property security instrument securing the repayment of any obligation has been recorded which causes the instrument to become a security instrument or if an amendment to a security instrument has been recorded which increases the total amount of the obligations which may be secured thereby, the priority of advances made or additional obligations incurred thereafter which exceed the original face amount shall date from the date the amendment was recorded, as to any third party who may require any rights in or lien upon the encumbered real property, whether or not any third party has actual notice thereof and whether or not the advances or additional obligations are optional or obligatory with the lender.

In order to gain such priority, the loan must be a "construction loan" as defined in section 443.055 1(3)(a), (b), and (c); and must also "state clearly within the security instrument" that the security instrument or amendment secures future advances or future obligations, and must state the total or face amount.

If priority is lost, can it be regained?

Some Missouri courts have held that a purchase money deed of trust may, in some cases, be granted priority over previously attaching mechanic's liens. Essentially, to the extent that the lender holds a purchase money deed of trust to secure the repayment of funds used to purchase the land upon which the improvement was constructed, the deed of trust has priority.

Another exception is when the mechanic's lien claimant delivers a waiver of its lien rights. In such cases, the lien claimant is estopped to claim for its lien the statutory preference over the first and second deeds of trust it would otherwise have been entitled to under 429.050.

Additionally, when, subsequent to the attachment of mechanic's liens, a lender advances funds for the payment of a pre-existing deed of trust that had priority over the mechanic's liens. In such cases, the subsequent lender may be subrogated to the rights of the pre-existing first deed of trust.

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

Section 429.015 gives certain "registered" design professionals a lien for their work. The lien granted by section 429.015 is not available to just any practicing architect, engineer or surveyor. The individual or corporation asserting the lien must have been "registered" at the time the services were provided.

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

Under section 429.260, all mechanic's liens related to a project attach with equal priority upon commencement of the work.

Caselaw notes that work is deemed to commence upon the visible commencement of actual operations on the ground for the erection of the building or the making of the improvement. The following acts do not constitute commencement of construction: (1) driving pegs into the ground to mark the building's location; (2) clearing the ground of stumps or other obstructions; (3) preliminary "on-site" inspection; (4) the presence of steam shovels on the property; (5) grading and leveling of the lot, and; (6) preparatory work.

Time Limits

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

Under section 429.080, anyone seeking to enforce a mechanic's lien must file a lien statement within six (6) months after the indebtedness shall have "accrued." The term "accrued" has been interpreted to mean when the lien claimant last performed labor or furnished materials, rather than when payment becomes due under the terms of the contract.

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

Under section 429.170, all mechanic's lien actions shall be commenced within six (6) months after filing the lien, and presented without undue delay to final judgment; and no lien shall continue to exist by virtue of the provisions of said sections, for more than six (6) months after the lien shall be filed, unless within that time an action shall be instituted.

If an amended lien statement has been properly filed, this six (6) month period begins to run from the date of filing the amended statement.

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 lien as an encumbrance on the title?

No.

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 this. However, in some cases, an original contractor will condition payment on its contracts with its subcontractors and suppliers upon the original contractor's receipt of payment from the owner. If done correctly, the general contractor's obligation to pay may be indefinitely postponed until the owner pays. In such cases, the subcontractor's or supplier's right to claim a mechanic's lien arguably would be postponed or waived as well.

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

No.

Title Company Requirements

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

Inspection

Recordation of mortgage

Indemnities from general contractor and owner

Possible review of financials

If giving mechanic's lien coverage:

Pending disbursement clause

Date Down

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. See the following.

PENDING DISBURSEMENT CLAUSE-MISSOURI

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 , but said coverage is limited to mechanic's liens relating to those amounts actually paid and only to mechanic's liens by those persons or entities receiving said payments directly from the Insured pursuant to written disbursement authorization approved by the Insured herein; 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, 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 provisions are the sole provisions applicable to the extension of coverage for loss or damage resulting from mechanic's liens or claims of such liens not of record.

 

Updated 3/16/15