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?

If no Notices of Contract pursuant to M.G.L. ch. 254, Sec. 2 and/or 4 are on record at the time the Construction Loan Mortgage is recorded, then the Mortgage will have priority over subsequently recorded notices.

However, if a Mechanics Lien pursuant to M.G.L. ch. 254, Sec. 1 is recorded after the Construction Loan Mortgage, it could, indeed, have priority over the Mortgage, but only to the extent of thirty (30) days' work performed during the ninety (90) days prior to the recording of a Statement of Account.  One distinction between a Section 1 lien and a Section 2 or a Section 4 lien is that there is no Contract between the parties with respect to a Section 1 lien.  Another distinction is that a Section 1 lien only covers personal labor whereas a Section 4 lien covers both labor and materials.  As a result, Section 1 liens rarely arise in commercial transactions. 

M.G.L. ch. 254, Sec. 7 provides more guidance to this area of concern.

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

Priority of mortgages and mechanic's liens as to future disbursements is governed by M.G.L. ch.254, Sec. 7. Section 7 provides that mortgages take priority over a mechanic's liens (except for a Section 1 lien) only "to the extent of the amount actually advanced or unconditionally committed" prior to the recording of a Notice of Contract at the Registry of Deeds.

If priority is lost, can it be regained?

Yes.  If the lien is properly bonded off (see M.G.L. ch. 254, §14) or the lienor records a proper Dissolution of Lien (see M.G.L. ch. 254, §10), priority will be regained.

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

No. Anybody who has provided labor and/or materials performed in the erection, alteration, repair or removal of a building is entitled to the lien protection provided by M.G.L.  254. These persons would include, for example, general contractors, sub-contractors and supplies; it would also include, to some extent, architects and engineers and design professionals.

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

Yes. So long as either the general contractor or sub-contractor complies with the applicable Notice of Contract provision, then it is simply a question as to who recorded first in order to establish priority.

Time Limits

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

General Contractors:

A Notice of Contract may be filed at any time after execution of the written contract whether or not the date for performance stated in such written contract has passed and whether or not the work under such written contract has been performed, but not later than the earliest of: (i) sixty (60) days after filing or recording of the notice of substantial completion under M.G.L. ch. 254, §2A; or (ii) ninety (90) days after filing or recording of the notice of termination under M.G.L. ch. 254, §2B; or (iii) ninety (90) days after such person or any person by, through or under him last performed or furnished labor or materials or both labor and materials.

A sworn Statement of Account must be filed no later than the earliest of: (i) ninety (90) days after the filing or recording of the notice of substantial completion under M.G.L. ch. 254, §2A; (ii) one hundred and twenty (120) days after the filing or recording of the notice of termination under M.G.L. ch. 254, §2B; or (iii) one hundred and twenty (120) days after the last day a person, entitled to enforce a lien under M.G.L. ch. 254, §2 or anyone claiming by, through or under him, performed or furnished labor or material or both labor and materials or furnished rental equipment, appliances or tools.

A civil complaint must be filed within ninety (90) days after the filing of the Statement of Account (M.G.L. ch. 254, Sec, 11). An attested copy must then be recorded within thirty (30) days of commencement of the action (M.G.L. ch. 254, Sec. 5).

Sub-Contractors:

A Notice of Contract may be filed at any time after execution of the written contract whether or not the date for performance stated in such written contract has passed and whether or not the work under such written contract has been performed, but not later than the earliest of: (i) sixty (60) days after filing or recording of the notice of substantial completion under M.G.L. ch. 254, §2A; or (ii) ninety (90) days after filing or recording of the notice of termination under M.G.L. ch. 254, §2B; or (iii) ninety (90) days after the last day a person entitled to enforce a lien under M.G.L. ch. 254, §2 or anyone claiming by, through or under him performed or furnished labor or materials or both labor and materials to the project or furnished rental equipment, appliances or tools, or performed professional services.

A sworn Statement of Account must be filed no later than the earliest of: (i) ninety (90) days after the filing or recording of the notice of substantial completion under M.G.L. ch. 254, §2A; (ii) one hundred and twenty (120) days after the filing or recording of the notice of termination under M.G.L. ch. 254, §2B; or (iii) one hundred and twenty (120) days after the last day a person, entitled to enforce a lien under M.G.L. ch. 254, §2 or anyone claiming by, through or under him, performed or furnished labor or material or both labor and materials or furnished rental equipment, appliances or tools.

A civil complaint must be filed within ninety (90) days after the filing of the Statement of Account (M.G.L. ch. 254, Sec. 11). An attested copy must then be recorded within thirty (30) days of commencement of the action (M.G.L. ch. 254, Sec. 5).

Design Professionals

A design professional may file or record a Notice of Contract at any time after the execution of the written contract whether or not the professional services under such written contract have been commenced or completed, and whether or not the erection, alteration, repair or removal of the building, structure, or other improvement to which such professional services relate has been, or is ever, commenced or completed, but not later than the earlier of: (i) 60 days after filing or recording of the notice of substantial completion under M.G.L. ch. 254, §2A; or (ii) 90 days after such design professional or any person by, through or under him, last performed professional services.  (M.G.L. ch. 254, §2C).

A sworn Statement of Account must be filed within 30 days after the last day that a Notice of Contract may be filed under M.G.L. ch. 254, §2C.

A civil complaint must be filed within ninety (90) days after the filing of the Statement of Account (M.G.L. ch. 254, §11). An attested copy must then be recorded within thirty (30) days of commencement of the action (M.G.L. ch. 254, §5).

Subcontractors of Design Professionals

Any subcontractor of a design professional may file or record a Notice of Contract at any time after the execution of the written contract whether or not the professional services under such written contract have been commenced or completed, and whether or not the erection, alteration, repair or removal of the building, structure, or other improvement to which such professional services relate has been, or is ever, commenced or completed, but not later than the earlier of: (i) 60 days after filing or recording of the notice of substantial completion under M.G.L. ch. 254, §2A; or (ii) 90 days after the last day a design professional who is entitled to enforce a lien under M.G.L. ch. 254, § 2 or M.G.L. ch. 254, § 2C or any person claiming by, through or under him performed professional services for the project. (M.G.L. ch. 254, §2D).

A sworn Statement of Account must be filed within 30 days after the last day that a Notice of Contract may be filed under M.G.L. ch. 254, §2D.

A civil complaint must be filed within ninety (90) days after the filing of the Statement of Account (M.G.L. ch. 254, §11). An attested copy must then be recorded within thirty (30) days of commencement of the action (M.G.L. ch. 254, §5).

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

A civil complaint must be filed within ninety (90) days after the filing of the statement of account (M.G.L. ch. 254, Section 11).

Removing or Waiving Liens

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

Yes. M.G.L. ch. 254, Sec. 2A provides the procedure by which upon or after substantial completion of any contract subject to the provisions of M.G.L. ch. 254, Sec. 2, the Owner and Contractor shall execute and record a Notice of Substantial Completion with the Registry of Deeds and provide notice of the same.

M.G.L. ch. 254 Sec. 10 also provides a process by which a mechanic's liens may be dissolved (i.e., the lienholder would simply execute, and record a notice stating that the lien is dissolved).

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

Yes. See M.G.L. ch. 254, Sec. 12 and 14.

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

Yes. Per M.G.L. ch. 254, §32, a general contractor (note:  not the sub-contractor) may provide a partial waiver and subordination for amounts paid for work done in the twenty-five (25) days following the date that payment is made with the partial waiver and subordination.

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

Yes. M.G.L. ch. 254, Sec. 7 applies to purchasers as well and provides that no lien (except a section 1 lien) shall avail against a mortgage actually existing and duly registered or recorded to the extent of the amount actually advanced or unconditionally committed or against a purchaser (other than the Owner who entered the written contract) whose deed is duly registered or recorded prior to the filing or recording of the notice of contract.

Title Company Requirements

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

An initial title search of the insured premises must be made to determine that no Notices of Contract are on record. If any are found, absent a Notice of Dissolution or a bond, they should be included on Schedule B of any title insurance policy(ies) or discussed with local underwriting counsel to determine if they maybe deleted from or insured over on Schedule B.

An affidavit from the seller and/or borrower is required before any policy of title insurance is issued which states, among other things, that no labor, services or materials have been furnished in connection with the construction or repair of any building or improvement located on the insured premises within the last ninety (90) days.

If such an affidavit cannot be given, local underwriting counsel should be contacted to discuss the transaction and the possible need to obtain indemnities and affidavits from contractors, subcontractors, sellers, etc.

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

Yes. Two options are available:

(1) "Pending disbursements of the full proceeds of the loan secured by the mortgage covered by the policy, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without any actual knowledge of any defects in, or objections to the title, 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, or objections intervening between the date of this policy and the date of such disbursement. Each title continuation must be evidenced by an endorsement to the policy, which endorsement will set forth all matters of record since the date of the preceding endorsement, but said endorsement will exclude coverage for matters of survey. This policy does not guarantee the completion of the improvements nor the sufficiency of funds for the completion thereof."

or

(2) "Pending disbursement of the full proceeds of the loan secured by the Insured Mortgage, this policy insures only to the extent of the amount actually disbursed but increases, as each disbursement is made within the time frame set forth in M.G.L. c. 254, § 7(b), in good faith and without knowledge of any defects in, or objections to, the Title 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 or objections intervening between the date hereof and the date of such disbursement and a valid and accurately completed partial waiver and subordination of lien must be executed by any party who has recorded a notice of contract pursuant to M.G.L. c. 254, § 2. This policy does not insure the priority of disbursements made by the Insured over any statutory lien securing the right to retainage held by any party who has recorded a notice of contract pursuant to M.G.L. c.254, § 2."

Finally, the standard mechanics’ lien exception should always remain in an owner's policy. It should only be deleted with the approval of local underwriting counsel.