Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

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

Yes. Mississippi Code Annotated §85-7-405 provides that deeds of trust filed before the date and time of the filing of the notice of construction lien (mechanic’s lien) shall have priority over the construction lien, whether the work secured by the lien was performed before or after the filing of the deed of trust.  This priority will extend to amendments or restatements and assignments of the deed of trust. A construction deed of trust will also have priority over construction liens if the lender acquired either: an affidavit from the owner stating no work performed on or materials supplied to the property; or an affidavit from the contractor, or owner if there is no contractor, that all payments for work, services, and materials have been made.  A deed of trust is a construction deed of trust if it secures a loan for the purpose of financing the repair or construction of an improvement on the real property, which may also include the acquisition cost of the real property.

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

Construction deeds of trust with priority will continue to have priority for all loan advances secured by it, regardless of the timing of the advance in relation to the filing of notice of construction lien, and that priority will extend to amendments, restatements, and refinancings of the construction deed of trust. Mississippi Code Annotated §85-7-405.

If priority is lost, can it be regained?

If the construction deed of trust never had priority over a previously filed notice of construction lien, then priority can be regained by the construction deed of trust by the lien claimant subordinating their interest to the construction deed of trust as allowed in Mississippi Code Annotated §85-7-419, or by the expiration of the notice of construction lien by the failure to commence a payment action within the earliest of 180 days from the date of the lien filing or 90 days from the date of the filing of a contest of lien. Mississippi Code Annotated §85-7-423. A construction lien may also be discharged from the property by payment in full of the claimed lien amount to the claimant or by approval of a bond by the clerk of the chancery court for the county in which the land is located. Mississippi Code Annotated §85-7-415.

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

The statute does not distinguish between on-site and off-site work, but it allows for construction liens claimed by contractors, subcontractors, materialmen, registered land surveyors, registered architects, and registered engineers who furnish labor, services, equipment, or materials in connection with improving the property.

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

Yes. All construction liens properly filed and enforced have equal priority.  If proceeds from a sale or payment by the owner are insufficient to fully satisfy  all construction liens, then the proceeds are distributed pro rata among the claimants unless otherwise ordered by the court overseeing the enforcement or foreclosure action. Mississippi Code Annotated §85-7-405.

Time Limits

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

The filing of record of the notice of claim of lien must be within ninety (90) days after the claimant’s last work performed, labor, services or materials provided, the furnishing of architectural services, or the furnishing or performing of surveying or engineering services. Mississippi Code Annotated §85-7-405.

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

The expiration of the notice of claim of lien by the failure to commence a payment action within the earliest of 180 days from the date of the lien filing or 90 days from the date of the filing of a contest of lien. Mississippi Code Annotated §85-7-423.

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, a statutory bond procedure exists for the owner of the property, or the contractor/subcontractor on the project to discharge a notice of claim of lien from the property by filing a bond either before or after a payment action has commenced.  The bond must be filed with and approved by the clerk of the chancery court of the county in which the notice of the claim of lien is filed. The bond shall be one hundred ten percent (110%) of the amount claimed under that lien and shall be either a cash bond or a bond with good security approved by the clerk of the chancery court and issued by any surety company authorized to do business in the State of Mississippi. Upon approval by the clerk of the bond, the real estate shall be discharged from the lien. Mississippi Code Annotated §85-7-415.

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

The right to claim a construction lien cannot be waived in advance of furnishing labor, services, equipment or materials. Any such agreement of waiver or release is null, void, and unenforceable.  However, there is a statutory provision that allows for subordination of lien rights even prior to the commencement of any work or supply of materials and equipment. Mississippi Code Annotated §85-7-419.

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

Yes, but only if the purchaser takes title to the property without actual or constructive notice of the construction lien prior to the date of purchase.  Lender must win the race to file in order to have priority. Mississippi Code Annotated §85-7-405.

Title Company Requirements

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

If no work has commenced on the property and there are filed notices of claims of lien, require the following:

(1)    Title examination to verify that there are no filed liens;

(2)    Execution of owner’s title affidavit reflecting that no work, labor, or supply of materials/equipment has taken place that would lead to lien rights on the property; and

(3)    Execution of a non-commencement affidavit by any contractor involved in the project stating that no work, labor, or supply of materials/equipment has taken place that would lead to lien rights on the property.

If work has commenced, then we have a concern regarding the potential for notices of claims of liens filed in the gap between the last date of the commitment and the date of filing of the deed of trust.  Require the following:

(1)    Shorten the gap as much as possible with a pre-closing title update;

(2)    Obtain STG Indemnity Agreement for Construction from owner naming all parties that have performed work or supply during the lien period;

(3)    Obtain final lien waivers as to any completed work or supply of materials and equipment;

(4)    Obtain interim lien waivers and subordination agreements from parties identified as to any ongoing work or supply of materials and equipment.

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

There has been a shift due to lender requests to use the ALTA 32 endorsement to provide coverage to the construction deed of trust lender for mechanic’s lien coverage with subsequently issued ALTA 33 endorsements for bring that coverage forward with each draw.  However, some agents continue to use a pending disbursements clause in place of the endorsement approach.  The customary language used is below.

PENDING DISBURSEMENT LANGUAGE

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 for improvements, but increases as each such disbursement is made in good faith and without Knowledge of any defects, liens or encumbrances on the Title, up to the face amount of the Policy. At the time of each such disbursement of the proceeds of the loan, the Title must be continued in writing by the Company for defects, liens or encumbrances on the Title intervening or filed between Date of Policy and the date of the disbursement.

Also subject to any bulletins relating to mechanic’s liens.