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Mechanic’s Lien Coverage Requires Underwriter Approval.
Mechanic's Lien Coverage Requires Underwriter Approval.
Can the Construction Loan Mortgage have initial priority over mechanic's liens?
Under Indiana Code ("I.C.") 32-28-3-5, a construction loan has priority over mechanic's liens for most commercial projects if the mortgage is recorded prior to the recording of any mechanics’ liens to the extent the loan proceeds are utilized in the construction project. The construction loan and mechanic's lien must be related to the same project. In residential construction and public utility projects a construction mortgage has parity (equal priority) with properly perfected mechanic's liens, to the extent of funds actually expended for improvements and if lienholders had knowledge of the purpose of the mortgage. I.C. 32-28-3-5.
Exceptions: (1) A1 to 4 family residential or public utility construction loan may have priority over subsequent mechanic's liens if a NO-LIEN CONTRACT is properly executed and recorded within five (5) days after execution (I.C. 32-28-3-1; 32-28-3-16). (2) A lien claimant is unable to assert a mechanic's lien attaches against an innocent purchaser with original construction on a 1-4 family residence when a purchase deed is recorded prior to the recording of any mechanic's liens. A no lien contract is void with commercial construction. I.C. 32-28-3-16.
Will initial priority as to future disbursements be retained only if certain procedures are followed?
Initial priority is available for commercial construction mortgages as to the extent of funds actually owed to the lender and utilized in the project.
Parity can be retained on future draws if the funds are actually expended on residential or public utility improvements and/or exceptions 1 or 2 above are applicable.
If priority is lost, can it be regained?
Priority cannot be regained once the construction mortgage has been primed by the recording of mechanics’ liens prior to the mortgage in commercial projects or work has commenced in residential construction or public utility projects prior to the recording of the mortgage.
Is there a difference between on-site and off-site work?
Labor and materials must be used on or for the benefit of the encumbered premises and cannot be diverted to or for other real estate.
However, work performed off-site, but for the benefit of the encumbered premises, such as by engineers, architects, attorneys, etc. may create lien rights. (I.C. 32-28-3-1).
Is priority the same for all contractors and subcontractors on the same project?
Yes. All lien claimants on the same project share the same priority, provided theyrecord notice of intention to hold lien in compliance with the requirements of I.C. 32-28-3-3 within sixty (60) days for residential property or ninety (90) days for commercial property after completion of each claimants' work (I.C. 32-28-3-5). Priority relates back to the time when work commenced, or materials furnished. I.C. 32-28-3-5.
What are the time periods for recording lien claims by original contractors and subcontractors?
Notice of Intention to hold Mechanic's liens must be recorded within sixty (60) days for residential property or ninety (90) days for commercial property after last day of performing labor or furnishing materials or machinery. (I.C. 32-28-3-3).
After what time period can you waive a mechanic's liens if no suit is filed?
Waive if no Foreclosure Complaint is filed within one (1) year from the time the Notice of Intention to Hold Lien is filed of record.
Title Practice: Plus, any gap period (one year). Beware of any tolling of the one-year time period when the property owner files bankruptcy, which triggers the automatic stay order of the Bankruptcy Court.
Removing Or Waiving Liens
Is there a statutory procedure for affidavits of completion or notices of completion?
Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?
Yes, pursuant to I.C. 32-28-3-11, a defendant or other interested party in a proceeding to enforce a lien may file a written undertaking and post a bond agreeing to pay any judgment and costs if awarded by the Court.
Upon the filing of the undertaking, the Court shall order release of the property from the lien and attachment to the bond.
Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by the general contractor and/or subcontractors?
Yes, for residential property and public utilities only, the right to record mechanic's liens may be waived by: No-Lien Contract recorded pursuant to I.C. 32-28-3-1 and 32-28-3-16. Execution of Partial and/or Final Lien Waivers by subcontractors and materialmen are available for all types of construction property. Indiana law does not support the use of subordination agreements as to potential lien rights. Conditional lien waivers are acceptable and utilized customarily.
Can a bona fide purchaser or bona fide lender take free of mechanic's liens later recorded for earlier work?
Yes, I.C. 32-28-3-1 provides that "no-lien for material or labor in original construction shall attach to real estate purchased by an innocent purchaser for value without notice, provided said purchase is of a single or double family dwelling for occupancy by the purchaser, unless notice of intention to hold such lien is recorded ...prior to the recording of the deed."
Title Company Requirements
What are the customary requirements for issuing Loan Policies on construction loan mortgages?
Schedule B, 2 (d) (Mechanic's liens Exception):
"Any lien, or right to a lien, for services, labor, material or equipment heretofore or hereafter furnished, improved by law and not shown by the public record."
Deleted only if:
Require disbursing agent/lender to obtain Lien Waivers and title update.
Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage.
Yes. Both a pending disbursement clause and the mechanic's liens exception are included in the title commitment and subsequent policy or by issuance of one of the ALTA 32 series endorsements with ALTA 33 endorsements for draw updates.
A title commitment is endorsed at the time of each draw to reflect the total amount disbursed to date and the status of recorded liens, if any.
"Pending Disbursement" Endorsement Language
Pending disbursement of the full proceeds of the loan secured by the Mortgage or Deed of Trust described in Schedule A, this Policy insures only to the extent of the amount actually disbursed for improvements by the Insured in good faith and without Knowledge of any defects, liens, or encumbrances on the Title. This Policy insures against loss or damage which results from claims of mechanic's or materialmen's liens arising from non-payment of bills for labor performed or material furnished prior to ____________________, except any such liens or notices thereof as may be recited under Schedule B hereof and except as otherwise provided herein. At the time of each such disbursement of proceeds of the loan, an endorsement to this Policy must be secured increasing the amount insured hereunder up to the face amount of the Policy, subject to the following requirements being met before issuance of such endorsement: (a) a title search is made by the Company that reveals no liens, objections or any adverse changes in the title, (b) the contractor and owner furnish the Company satisfactory paid bills, lien waivers, estoppel certificates and other evidence that all items, from which a lien might arise, have been paid or otherwise satisfied, and (c) the Owner and Contractor furnish the Company satisfactory Affidavit and Indemnity Agreement(s) as to the matters referred to in (b) above. This Policy does not insure against mechanic's and materialmen's liens for labor performed and materials furnished subsequent to the last date to which mechanic's liens coverage has been extended or against mechanic's or materialmen's liens for any improvement or work that is not financed in whole or in part by proceeds of the indebtedness secured by the Insured mortgage, nor does this Policy insure completion of the improvements in progress, or their compliance with plans and specifications. The Company in no way guarantees the sufficiency of the mortgage proceeds as adequate to complete improvements, or against loss because of the failure of the Insured to disburse the entire amount of proceeds of the loan secured by the lien of the Insured Mortgage. Notwithstanding any other language contained in the insuring provisions of this Policy, the above provisions are the sole provision applicable to coverage for loss or damage resulting from mechanic's or materialmen's liens or claims not of record.
Also subject to any bulletins relating to mechanic's liens.