Mechanic’s Lien Coverage Requires Underwriter Approval.
Can the Construction Loan have initial priority over mechanic's liens?
A mortgage does not have priority over mechanic's liens subsequently filed, unless the mortgage was recorded and the obligation it secures was actually created before the beginning of the work of improvement to which the lien claimants furnished labor or materials. Even if the trust deed or mortgage is recorded before the beginning of any work on the property, a lien claimant may obtain priority as a result of (a) off-site work begun previously, (b) advances by the lender in violation of the building loan agreement, or (c) lack of a valid obligation at the time work began.
The mechanic's lien law speaks of "the scheme of improvement as a whole." Nevada Revised Statutes ("NRS") 108.221. To ensure priority, the mortgage must be recorded-and the obligation incurred-before inception of work on any part of the improvement. NRS 108.225. When an owner begins improvement of a group of unimproved, noncontiguous lots in the same area), intending to build on each lot, at the same time or progressively, the whole project may be viewed as "the scheme of improvement as a whole." If each unit is financed separately, the mortgage on each unit should be recorded and the loan commitments concluded before the beginning of work on any unit, including tract improvements such as street grading, lot leveling, or installation of public utilities, to ensure priority over liens for labor or material furnished any part of the program of improvement.
Commencement of a work of improvement means, according to a much quoted definition, "some work and labor on the ground, the effects of which are apparent-easily seen by everybody; such as beginning to dig the foundations, or work of like description, which everyone can readily see and recognize as the commencement of a building."
What constitutes commencement of work is a mixed question of law and fact, to be determined by the circumstances of each case. Commencement may be evidenced by the deposit of materials on or in close proximity to the building site or by visual operations on the ground, e.g., excavating for a foundation. Commencement must, however, consist of some work on or in the vicinity of the building site that a person making an inspection of the site could "readily see and recognize" as commencement; hence, facts such as the following, generally, should not be regarded as commencement: architect's services in preparing plans and specifications; prefabrication of materials in a factory at some remote point; assembling or stockpiling of materials destined for the proposed improvement, at some point not close enough to the building site to give notice of their intended use.
The most difficult commencement problems concern operations that are preparatory to actual construction. Assume that the work performed consists of clearing, leveling, or filling the building site; connecting power lines to a pole on the building site for prospective use of equipment; installing a water meter; marking the location of proposed improvements by stakes; digging test holes; or removing or demolishing buildings.
Examples of whether or not commencement began include:
Are the operations sufficiently apparent and of a character that would notify any interest person (e.g., a lender) making an inspection of the building site that the work of improvement has begun? Digging test holes to determine the land's suitability for an improvement may not necessarily evidence commencement to an inspector. On the other hand, a test hole of considerable size, afterwards used as a part of the excavation for a building, has been regarded as commencement of the building. Installation of a water meter in the area between sidewalk and curb of the adjoining street may be affected with the present intent of building, but may still be insufficient to give notice of commencement of actual work.
Were the operations performed by the owner himself, by the general contractors, or under a separate contract? Under present law, mechanic's liens generally attach as of commencement of the work of improvement as a whole, however, if there are separate works of improvements under separate contracts, commencement thereof, does not constitute the commencement of the building or other structure.
The foregoing statements about what the rule should be are merely rationalizations that cannot be accepted until judicially supported. As a general rule of title practice, priority of a construction loan trust deed over mechanic's liens is not insured when work of any kind, even though seemingly preparatory in nature, has been done (e.g. deposit of materials or equipment on or near the building site, setting of foundation stakes (but not boundary stakes), setting of surveying monuments, digging of test holes, removal of trees or shrubs, water meter set in parking place by contractor, deposit of dirt on site, demolition or removal of old buildings).
Will initial priority as to future disbursements be retained only if certain procedures are followed?
To the extent that a mortgage secures future advances, it takes the priority of its recording date (as against liens and interests arising between that date and the dates of respective subsequent advances) whether or not:
Future advances are obligatory or at the option of the lender; or
Lender has notice of an interviewing lien. NRS -106.370.
If priority is lost, can it be replaced?
A claim of lien filed after the date set for expiration of the lien period is not enforceable. The period within which a claim must be filed after the right to file accrues varies according to whether or not the owner has elected to file a notice of completion, or if there is a notice of cessation of labor. If priority is lost it may be regained if the mechanics do not file their liens timely.
Under NRS 108.226, every person wanting to enforce a lien must record his notice of lien after:
- the completion of the work of improvement;
- within 90 days after the last delivery of material by the lien claimant;
- within 90 days after the last performance of labor by the lien claimant, whichever is later.
The time within which to perfect the lien by recording the notice of lien is shortened if a notice of completion is recorded in a timely manner pursuant to NRS 108.228, in which event the notice of the lien must be recorded within 40 days after the recording of the notice of completion.
Completion of a work of improvement (i.e., the event that marks the beginning of the lien period) ordinarily refers to completion of the work as defined in NRS 108.226(3).
Because completion of a building or other work of improvement starts running the period within which claimants must file liens, determination of this date is a major consideration to various interested parties: the claimants, who may lose their lien rights by tardy filing of claims.
In ascertaining whether a building or other improvement is complete, consider the following:
The term "completion" may mean either actual or constructive completion. NRS 108.226(3). In actual completion, all work has been performed and all materials have been furnished to complete the improvement in accordance with the plans and specifications; the fact of completion is apparent to everyone, an the lien period begins to run. Constructive completion, on the other hand, results from a factual situation the law considers the equivalent of completion for the purpose of starting the lien period running, even though actual completion has not occurred. Thus, the following are regarded as the equivalent of completion: (a) occupation or use of the improvement, (b) acceptance of the improvement, (c) cessation of labor for a specified period., or (d) the recording of the notice of completion.
The problem of fixing the exact date of actual completion of a work of improvement is frequently complicated by imperfections in the construction work that require repair or replacement of materials, or by furnishing of additional items of labor or material after apparent completion, to meet specifications.
What constitutes actual completion, however, is still a question of fact to be determined in each case, and actual completion could be found in the fact of some minor imperfection in the work. Unfortunately, the authorities do not furnish a satisfactory formula for determining when an improvement is actually completed; however, cases deciding what is not completion may be indicative. NRS 108.228 provides that the "the owner may record a Notice of Completion after: (a) the completion of any work of improvement; or (b) there has been a cessation from labor thereon for a period of 30 days."
A notice filed before the completion date is defective. Filing of a premature or tardy notices is not the equivalent of completion so as to start the lien period running; all claimants in such a situation have 90 days after the true completion date within which to file claims, just as if no notice had been filed.
Is there a difference of on-site and off-site work?
Yes. NRS 108.225(3). "If any improvement at the site is provided for as a contract that is separate from any contract for the construction of a building or other structure, the improvement at the site shall be deemed to be a separate work of improvement...As used...improvement at the site means:
demolition or the removal of improvements (b) drilling of test holes, (c) grading, filling or otherwise improving, (d) construction or installing sewers or other public utilities on any later track of land in front of or adjoining..."
Is priority the same for all contractors/subcontractors on the same project?
In every case, in which different liens are asserted against any property, the court, must declare the rank of each lien, or class of liens pursuant to NRS 108.236.
What are the time periods for recording lien claims by original contractors and subcontractors?
See the third bulleted item.
After what period of time can a waiver of a mechanic's lienor rights be considered, if no suit has been filed?
The code provides that no mechanic's lien binds any property for a period longer than 6 months after filing of the lien , unless foreclosure proceedings are brought in a proper court within that time. NRS 108.233. The period is computed by excluding the day on which the lien is filed for record and including the last day, unless the last day is a Sunday or a holiday, in which case it also is excluded. Also, the time to commence the action is extended by a written, recorded instrument signed by the lienor and the person subject to the lien, but it must be executed and recorded within the six month period. No extension shall be given for more than one (1) year beyond the recording date. NRS 108.233(4).
Is there a statutory procedure for affidavits of completion or Notices of Completion?
See the third bulleted item.
Can a statutory bond terminate the mechanic's lien as an encumbrance on the title?
Yes. NRS 108.2413-108.2425 defines the procedures.
Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractors?
There is no statute controlling, however, as a matter of contract law, there seems to be no reason, with adequate consideration, why the parties couldn't agree to subordinate their own lien rights. The general cannot subordinate the subcontractors lien. They would only be able to subordinate their own lien rights.
Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?
Yes, if the lien period had already terminated or if there was no actions to enforce a lien beyond the 6 month statute of limitations.
(See the third and seventh bulleted item).
What are the customary requirements for issuing Loan Policies on constructions loan mortgages?
Generally, an inspection is performed prior to recordation. If no loss of priority is evidenced the loan will be recorded. If there is work in progress, an indemnification review and cost of construction review will be made. If the site is an office building, hotel or other commercial structure and the loan is for Acquisitions and Development (tenant improvements) a floor by floor inspection is made.
Is it customary to add a "pending disbursement" clause or mechanic's lien exception in the Loan Policy insuring a construction loan mortgage?