12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

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

A construction loan mortgage may obtain initial priority over mechanic's liens if the mortgage is properly filed before commencement of construction. All M&M liens attach from the time the first item of material or labor is furnished upon the premises for the beginning of the improvement. Minn. State. Sec. 514.05.

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

A mortgage to secure future advances which the mortgagee obligates himself to make has priority over mechanic's liens attaching after mortgage is given but before money is paid out by mortgagee for the construction. Erickson v. Ireland, 134 Minn. 156, 158 N.W. 918 (1916). A Morgagee has priority over a mechanic's lien claimant for its optional advances only for amounts advanced up to the time of attachement of the liens. R.B. Thompson, Jr. Lumber Co. v. Windsor Development Corp., 383 N.W. 2d 362 (Minn.App. 1986).

If priority is lost, can it be regained?

No. Only by payment or withdrawal of the lien claimant or invalidation of the lien by a court.

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

Minn. Stat. Sec. 514.01 sets out that liens may be claimed by anyone performing engineering, land surveying services, or contributes to the improvement of real estate by performing labor, or furnishing skill, material or machinery to the land or upon the adjoining half of any highway, street, or alley upon which the land abuts. Therefore, the statutes do not seem to differentiate between on-site and off-site work.

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

All liens shall attach and take effect from the time of the first item of material or labor is furnished upon the premises for the beginning of the improvement. Minn. Stat. Sec. 514.05. As for priority among and between the various lienholders, there is no statutory priority set out for contractors and subcontractors except in instances of foreclosure. Minn. Stat. 514.15. However, Minn. Stat. Sec. 514.07 sets out that the owner can refuse to pay the general contractor as much of the contract price as may be necessary to meet the demands of all persons other than the contractor having a lien upon the property and for which the contractor is liable. The owner may pay and discharge all these liens and deduct the cost of them from the contract price.

Time Limits

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

No mechanic's lien claim can be asserted by an original contractor or subcontractor unless, within 120 days of the last of the work or furnishing the last skill, material, or machinery, a statement of the claim is filed in the county where the property is located and a copy of the statement is served personally or by certified mail on the owner or owner's agent. Minn. Stat. Sec. 514.08.

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

The mechanic's lien claimant must file a suit to enforce the claim within one year after the date of the last item of the claim as set forth in the recorded lien statement. Minn. Stat. Sec. 514.12.

Removing or Waiving Liens

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

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

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

There is no provision for a statutory bond. However, Minn. Stat. Sec. 514.10, sets out a procedure whereby funds may be deposited into the court where an action to enforce a lien claim is being pursued against the property.

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

New provisions instituted in 1997 make all prospective lien waivers by subcontractors in commercial contracts void. See Minn. Stat. Sec. 337.10.

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

A lender becomes bona fide by inspecting the property and affirming that there has been no visible improvement at the time that the mortgage is closed and recorded. If there is no visible improvement, the mechanic's lien claimant does not have priority. The question of "visible improvement" will be one of law and fact for the court to determine. If there has been visible improvement, there can be no bona fide lender or purchaser, the mechanic's liens filed later would attach.

Title Company Requirements

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

Verify priority by requiring affidavits, priority pictures and a property inspection at the time of or immediately after the closing.

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

It is recommended to add a "pending disbursement clause" to limit exposure. Construction lenders will not usually accept a coverage exception for mechanic's liens.

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