Mechanic’s Lien Coverage Requires Underwriter Approval.

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

Yes.  Arkansas Code Annotated § 18-44-110 provides that construction mortgages will have priority over mechanic's and materialmen's liens provided the construction mortgage was filed prior to commencement of work and provided that any advances made for the purposes of purchasing the land is adequately disclosed on the face of the mortgage. Also, the construction loan mortgage must contain language that advances are obligatory and not optional on the part of the lender.  The construction mortgage lender or lienholder may conclusively rely on an affidavit of non-commencement filed within four (4) days before or four (4) days after the filing of the mortgage to establish priority for the construction mortgage.  If the property is or will be used commercially, then the affidavit must be completed by a licensed appraiser, architect, surveyor, or engineer who has inspected the property at a specific time and specify that no visible commencement of work or supply has commenced at the time of inspection.  If the property is or will be used as a single one-to-four family residential structure, then the affidavit may also be completed by an employee or designee of the lender on the construction mortgage or by a licensed Arkansas title agent.

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

Priority of future disbursements or advances is generally set by judicial determination in the event of a priority dispute.  Case law in Arkansas holds that future disbursements or advances should be specified as obligatory in the mortgage itself.  Any other disbursements or advances would be viewed as optional and not retaining priority over a known mechanic’s or materialmen’s lien unless the disbursement or advance was determined by the court to have been contemplated by the purposes of the mortgage.  Union National Bank of Little Rock v. First State Bank & Trust Co. of Conway, 16 Ark. App. 116, 697 S.W.2d 940 (1985); Alston v. Bitely, 477 S.W.2d 446 (Ark. 1972).

If priority is lost, can it be regained?

Yes.  If there are lien claimants as to the work provided prior to the filing of the mortgage, those liens may be paid off and released.  As an alternative, the liens may be bonded off of the title to the real property by a statutory bond process under Arkansas Code Annotated § 18-44-118.  It is important to note that all contractors, subcontractors, and suppliers with prior lien rights would have to be addressed as each would have equal priority based on the first date of visible commencement of construction.  Arkansas Code Annotated § 18-44-110(a)(1).

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

The statute does not distinguish between on-site and off-site work, but Arkansas Code Annotated § 18-44-105 allows for mechanic’s and materialmen’s liens claimed by architects, engineers, surveyors, appraisers, landscapers, abstractors, and title agents who shall do or perform any of their services upon any land, or who shall issue a title insurance policy under or by virtue of any written agreement for the performance of the work with the owner thereof, or his or her agent.   The lien does not attach to the land, building, erection or improvement upon land unless and until the lien is duly filed of record with the circuit clerk and recorder of the county in which the land, building, erection, or improvement is located.

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

Yes. Arkansas Code Annotated § 18-44-110(a)(1).

What is the time period for recording lien claims by original contractors and subcontractors?

Arkansas Code Annotated § 18-44-117 provides that a lien must be filed within one hundred twenty (120) days after the last day that work, labor, service, or supply is done or performed.

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

Arkansas Code Annotated § 18-44-119 provides that all actions to enforce the filed lien shall be commenced within 15 months after the date of filing of the lien or the lien expires by law.

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 bond with surety may be filed with the circuit clerk with whom the lien is filed.  The bond should be conditioned for the payment of the amount of the claimed lien together with any interest and costs of the action.  The circuit clerk must approve the surety before giving the lien claimant three (3) days’ notice of the filing of the bond.  Within the three (3) days’ notice the lien claimant may appear and question the sufficiency of the surety or form of the bond.  At the expiration of three (3) days without contest and with approval by the circuit clerk of the bond, the clerk will not the filing of the bond upon the margin of the lien record and the lien shall then be discharged from the land. Arkansas Code Annotated § 18-44-118(b).

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 authority for the waiver or subordination of lien rights in the initial contract with the original, general, or subcontractor.  Case law in Arkansas recognizes the ability to enter into subordination agreements with such parties and there is favorable case law regarding the ability to waive or affect lien rights by contract.  Travelers Cas. & Sur. Co. of Am. v. Cummins Mid-South, LLC, 2015 Ark. App. 229, 460 S.W.3d 308 (2015).

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

Not in the case of a purchaser.  A construction mortgage lender or lienholder may if they relied on a filed affidavit of non-commencement under Arkansas Code Annotated § 18-44-110(b)(1)(B)(ii).

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

Where work or supply has not visibly commenced:

(1)   Execution of owner’s title affidavit reflecting that no work, labor, or supply of materials/equipment has taken place within one hundred twenty (120) days that would lead to lien rights on the property;

(2)   Execution of a non-commencement affidavit acceptable to STG and pursuant to Arkansas Code Annotated § 18-44-110 by a licensed appraiser, architect, surveyor, or engineer as to the date of their inspection and the absence of any visible commencement of work or supply to the property as of that date.  A non-commencement affidavit for a residential construction project may alternatively be executed by an employee or designee of the construction mortgage lender or by a licensed Arkansas title agent.  The affidavit must be filed within four (4) business days before or after the filing of the construction mortgage; and

(3)   Photograph of the property if vacant or undeveloped at the time of closing.

If work or supply has commenced, then we have broken priority as to lienable work that has taken place prior to the filing of the construction mortgage.  Require the following:

(1)   Obtain STG Indemnity Agreement for Construction from owner and general contractor naming all parties that have performed work or supply during the lien period prior to closing;

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

(3)   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?

The custom has been to revise the standard exception for mechanic’s and materialmen’s liens to read as follows if coverage can be provided: “Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records, except such coverage as provided within the attached ALTA 32 series endorsement and any subsequently issued ALTA 33 endorsement.”

Incremental coverage is provided by issuance of an ALTA 32 series endorsement to the loan policy.  

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