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?

A construction loan mortgage may have initial priority over mechanic's liens. Section 29-5-70 provides that the mechanic's liens is not enforceable against any mortgage recorded before the filing of the notice of mechanic's liens pursuant to Section 29-5-90, subject to the limitations in Section 29-3-50. Section 29-3-50 provides for the priority of future advances, whether or not the advances are obligatory, from the recordation of the mortgage as though the advances are made on the recording date of the mortgage, as against subsequent lien creditors. A mechanic's liens may obtain priority over a mortgage or future advances under a mortgage only from the filing of the Notice of Mechanic's liens. In summary, mechanic's liens would be subject to the priority of a previously filed mortgage and all advances made under the mortgage; EXCEPT, that a mechanic's lien does take priority over disbursements made AFTER the filing of the Notice of Mechanic's liens and the service thereon on the recorded mortgage holder. Service on the mortgage holder must be in accordance with Rule 4 of the SCRCP.

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

Future advances or disbursements made under a mortgage filed previous to a mechanic's liens that are made prior the mechanic's liens retain priority. Disbursements made subsequent to the filing of the mechanic's liens and the service of notice thereof on the mortgage holder are made subject to the mechanic's liens. There are no further requirements of the mortagee to retain priority for advances made before the filing of the lien. The disbursements need not be obligatory. (29-3-50)

If priority is lost, can it be regained?

Once the mortgage or advances under the mortgage have lost priority to a mechanic' liens, there is no way the mortgage can regain priority over the mechanic's liens except by expiration of the lien due to passage of time.

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

The Code does note distinguish between on-site and off-site work except to specifically provide for a lien for the preparation of plans and design drawings. (29-5-10)

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

Section 29-5-360 provides that where there are several "attaching creditors", they shall be paid in order of their attachments. It is unclear as to whether as between themselves, the priority of the mechanic's liens claimants is based upon the order of filing of the notice of mechanic's liens or successful prosecution of the suit to enforce a mechanic's liens. The same statute goes on to provide that where several creditors have equal rights as between themselves and the fund is insufficient to pay the whole, the lien claimants share equally in proportion to their respective debts. Section 29-5-50 provides that a lienor shall be preferred in payment to the contractor.

Time Limits

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

Section 29-5-90 provides that the provider of labor or materials must file and serve a notice of lien on the owner of the property within 90 days of the last furnishing of labor and materials by that provider.

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

The lien claimant, to enforce the lien, must commence a suit for enforcing the lien within six months after the last furnishing of labor and materials by the claimant. (29-5-120)

Removing or Waiving Liens

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

There is no statutory provisions for affidavits of completion or notices of completion.

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

Section 29-5-110 provides that the owner or anyone having an interest in the property may secure a discharge of the property from the lien by filing with the office of the clerk of court a written undertaking in the amount of one and one-third time the amount claimed. Such amount must be secured by a surety bond or pledge of securities of the United States or State of South Carolina. Upon compliance with this statute, the lien ceases to be an encumbrance and the title insurance may be issued without exception as to the mechanic's liens.

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

There is no statutory provision for the waiver of mechanic's liens by the original contract or waiver agreement.

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

Under Section 29-5-70 a mechanic's liens is not enforceable against any mortgage filed before the filing of the mechanic's liens. Therefore a mortgagee may take free of a mechanic's liens later filed for earlier work if the mortgage is filed prior to the lien. There is no such statutory protection for bona fide purchasers.

Title Company Requirements

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

Due to protection given mortgagees under Section 29-5-70, a loan policy may be issued without exception for mechanic's liens if a search of the records reveals no filed mechanic's liens as of the time of the recording of the construction loan mortgage.

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

A construction loan policy must have a pending disbursements clause as follows:

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 recorded between Date of Policy and the date of the disbursement.

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