Mechanic's liens are a significant source of claims. This bulletin advises you of required procedures relating to mechanic's liens and mechanic's liens coverage only on Loan Policies during construction (including rehabilitation, renovation, and the like). It should be read in conjunction with other National and state-specific Bulletins relating to mechanic's liens.
(A). Unless the mortgage to be insured is recorded prior to the Notice of Commencement, do not delete the general mechanic's liens exception from the Loan Policy during construction without underwriter approval.
(B). Record the Mortgage before the Notice of Commencement to establish priority of the Mortgage over mechanic's liens.
(C). If a Notice of Commencement is recorded prior to the mortgage follow the requirements in paragraph C below to reestablish the priority of the mortgage.
(D). Require Mechanic's Liens Documentation described in paragraph D below if priority has been lost and cannot be reestablished.
(E).Include our Pending Disbursement Clause as described in paragraph E below if the Loan Policy is issued during construction.
(F). An acceptable Down Date Endorsement is described in Paragraph F below.
(G). Any Revolving Credit or Future Advance Endorsement must contain a mechanic's lien exception if priority is lost as described in Paragraph G below.
A. The General Mechanic's Liens Exception
All commitments and policies should contain a general mechanic's liens exception for "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."
Before or during construction, unless the mortgage to be insured is recorded prior to a Notice of Commencement, you may not delete the general mechanic's liens exception from a Loan Policy without underwriter approval.
B. Recording the Mortgage before the Notice of Commencement Establishes Priority of the Mortgage Over Construction Liens.
Pursuant to F.S. Section 713.13 a mortgage recorded prior to the Notice of Commencement establishes the priority of the mortgage - including the priority of future advances - over subsequently-filed mechanic's liens. This should be accomplished by the following:
- Notice of Commencement: Require filing of instruments documenting construction commencement after recording of the mortgage (e.g., a "Notice of Commencement")
C. Requirements to Reestablish Priority of Mortgage if Mortgage is Recorded After A Notice of Commencement
If approved by an Underwriter, we will rely on execution of the procedures set forth in Sec. 713.07 (4), F.S., relating to payment in full or pro rata under Sec. 713.06 (4), F.S., plus execution of the procedures set out below for restoring the priority of the interest to be insured over the notice of commencement.
- All construction on the project must cease and the Underwriter must receive documentary evidence that construction has ceased, including affidavits from the owner and the contractor, and an inspection report.
- The property owner must make diligent inquiry to obtain the identity of the persons who haveprovided labor, services or materials for the construction described in the applicable notice ofcommencement. This may be accomplished by 1) identifying all subcontractors and suppliers ofeach contractor who has a direct contract with the owner by obtaining the list described in Sec. 713.165, F.S., and 2) identifying the persons who gave notice to owner on the owner or contractor.
- The owner must pay each party described in paragraph 2 above in full for services rendered up tothe time construction ceased, and obtain a Waiver and Release of Lien Upon Final Payment from each. Each Waiver and Release of Lien Upon Final Payment must also state that the lienor recognizes that the notice of commencement in O.R. book _____, Page _____ became null and void as of the date construction under the notice of commencement ceased.
- The owner must then record an affidavit reciting the facts that establish of record the date that construction ceased, and that all parties described in paragraph 2 above have been paid in full. See Sec. 713.07 (4), F.S., and Torres - V - MacIntyre, 334 So.2d 59 (Fla. 3dDCA 1976).
- Before construction resumes, the mortgage, mortgage modification, deed or other interest sought to be restored to priority must be recorded.
- The original notice of commencement posted on the property should be removed and replaced at the appropriate time by the notice of commencement on the recommenced construction. Thenotice of commencement for the recommenced construction should be recorded in the OfficialRecords subsequent to any re-recorded mortgages or mortgage modification agreements or otherdocumented interests sought to be restored to priority.
- The owner will be required to execute an indemnity agreement or "personal undertaking" in favorof Stewart Title Guaranty Company. A financial statement by a certified public accountant will be required of the owner in connection with the indemnity agreement in order to determine the indemnity is secured by sufficient assets, unless waived by Stewart Title Guaranty Company underwriting counsel.
- When the Stewart Title Guaranty Company is satisfied that all of the above requirements have been met, the owner will be required to re-execute the prior contract with the general contractor.
Note: forms for use in this procedure may be obtained from Florida Underwriting Counsel. An Underwriter must approve issuance without a general mechanic's lien exception after furnished with evidence of compliance with these requirements.
D. Mechanic's Liens Documentation if No Priority or Loss of Priority/Lost Priority and Priority Cannot be Reestablished.
As noted above, priority of the mortgage can be established by recording the mortgage prior to the notice of commencement. However, the failure to record the mortgage before the notice of commencement can jeopardize such priority ("loss of priority" / "lost priority"). These "no priority" or "lost priority" situations present the potential for substantial claims.
In such cases, the Mechanic's Liens Documentation, all in a form acceptable to the Company, are required as a condition to providing mechanic's liens coverage, unless otherwise approved by an underwriter (Exhibit 1 below ). You also should determine that the mortgage complies with state law for future advances.
Approval: An underwriter must approve issuance of the Loan Policy
You must retain these documents and approval in your file.
E. Pending Disbursement Clauses/Endorsements
A pending disbursement clause, either inserted as an exception or added as an endorsement, must appear in all Loan Policies issued prior to and during construction. This requirement applies whether the insured mortgage has priority or not.
If the insured mortgage has priority over any construction liens, you should use the following Pending disbursements clause (PDCX10 FL STGC):
Liability under this policy is limited to the amount of the proceeds of the mortgage identified in Schedule A hereof actually disbursed in good faith without knowledge of any objection to the title.
If the insured mortgage does not have priority, then you must use PDCX06 or PDCX07 if approved by an Underwriter. You may not modify the clause and an Underwriter must approve the clause.
PDCX06 provides limited coverage for mechanic's liens arising from non-payment of bills for labor performed or material furnished prior to a specific date, which date may be the date of the current disbursement. PDCX07 provides limited coverage for mechanic's liens by those persons or entities receiving payments directly from the Insured pursuant to written disbursement authorization approved by the Insured.
F. Other Forms
Down Date Endorsement. During construction, upon satisfaction of the requirements stated in the pending disbursement clause, you may issue an endorsement dating down the Date of Policy and increasing the Amount of Insurance. You should use Florida Construction Loan Update Endorsement or a substantially similar endorsement. Any other form of Down Date must be approved by an Underwriter.
G. Future and Future Advance/Revolving Credit Endorsements
You may not issue a Revolving Credit or Future Advance Endorsement on a Loan Policy insuring a construction loan mortgage where priority is lost unless the endorsement includes a mechanic's liens exception, such as the general mechanic's lien exception.
If you have questions relating to this bulletin or any of the referenced bulletins, please contact Stewart Legal Services or your local underwriting personnel.
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