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Mechanic’s Lien Coverage Requires Underwriter Approval.
Can the Construction Loan Mortgage have initial priority over mechanic's liens?
Yes. Under Revised Statutes Annotated (hereinafter "RSA") 447:2, any person, by himself or others, performing labor or providing materials for erecting or repairing a house or other buildings or appurtenances, by virtue of a contract with the owner thereof (i.e., a contractor), shall have a lien on the materials, the structure and on any right of the owner in the land.
Similarly, under RSA 447:5, a subcontractor obtains an automatic lien under the same circumstances, except that the subcontractor must provide notice in writing to the owner, or to the person having charge of the property, prior to the commencement of labor or the furnishing of materials. As to a subcontractor, RSA 447:6 provides, however, that the notice required under RSA 447:5 may be provided after the labor is performed or the material furnished but the lien shall apply only to the extent of the amount then due or that may thereafter become due to the contractor.
Under RSA 447:9, the liens established by RSA 447:2 and RSA 447:5 continue for 120 days after the services are performed or the materials supplied and such liens take precedence over all prior claims except liens on account of taxes. This inchoate lien may be perfected under RSA 447:10 by filing an attachment anytime during the 120-day period during which the lien exists.
RSA 447:12-a provides that the attachment under RSA 447:10 shall have precedence and priority over any construction mortgage. However, RSA 447:12-a provides a couple of methods by which the Construction Lender may be able to obtain, or maintain, as the case may be, lien priority. First, the mechanic's liens attachment may lose priority to the Construction Mortgage to the extent that the Mortgagee shows that the proceeds of the mortgage loan were disbursed either toward payment of invoices from, or claims due, subcontractors and suppliers of materials or labor. Second, the Construction Mortgagee may be able to maintain priority for its disbursements by obtaining from the Mortgagor or his agent (i.e., the contractor) an Affidavit that the work on the mortgaged premises for which the subject disbursement is to be made has been completed and that the subcontractors and suppliers have been paid for their share of the work, or will be paid out of such disbursement.
Will initial priority as to future disbursements be retained only if certain procedures are followed?
Yes. In addition to the two methods described above under RSA 447:12-a, the Lender must follow some additional requirements under RSA 447:12-b. First, within 10 business days of the execution of the Construction Mortgage, the Mortgagor or his agent must post in a conspicuous place on the jobsite a notice listing the name, address and telephone number of the Construction Lender. Second, the Mortgagor or his agent must, at least 48 hours prior to requesting a Construction Mortgage disbursement, post in a conspicuous place on the jobsite a notice of the anticipated funding date for the disbursement and the Construction Mortgagee must obtain a copy of the notice from the Mortgagor or his agent.
There is also a requirement that the contractor or subcontractor, as the case may be, provide the Construction Lender with written notice, within 15 days of the posting referred to above, that such person is furnishing services, materials or supplies. Unfortunately, the statute provides that the failure of the contractor or subcontractor to provide such notice will not invalidate the lien established under RSA 447:2 or RSA 447:5. Note that the statute uses the word "invalidate" rather than speaking in terms of "lien priority." It is unclear whether the failure to provide the appropriate notice to the Lender would have any effect on the mechanic's liens priority. It is the general consensus, however, that priority is also unaffected by the failure to provide the notice.
If priority is lost, can it be regained?
Generally, no. There is no statutory provision relating to the regaining of priority once lost. It would appear, given the statutory scheme established in New Hampshire, that priority might only be regained by payments in full for work or materials provided to the date of payment together with a subordination agreement with the contractor or subcontractor.
Is there a difference between on-site and off-site work?
Generally, yes. There are no statutory provisions in New Hampshire providing off-site professionals with the ability to obtain mechanic's liens under the statutes referred to above. Indeed, the wording of the statutes, RSA 447:2 and RSA 447:5, would indicate that the only persons entitled to the extraordinary protection of the mechanics lien statutes are those who contribute to the physical improvement of the premises on site.
Is priority the same for all contractors and subcontractors on the same project?
No. As stated above, there are some additional notice requirements imposed upon subcontractor that are not likewise imposed on contractors. In addition, as you would expect, New Hampshire law is clear that the relative priority of the mechanic's liens established under the statutes as between persons entitled thereto is established in order of their accrual and, if they accrue simultaneously, their priority is established in the order of the attachments made to secure them. Kendall v. Pickard, 67 NH 470, 32 A 763 (1893). An exception to this rule, however, is made by the provisions of RSA 447:11, which provides that the attachment priority may be subject to later-provided labor or materials if provided pursuant to a contract existing when the attachment was made, or if the same were "necessary for the preservation of the property attached."
What are the time periods for recording lien claims by original contractors and subcontractors?
As stated above, RSA 447:9 provides for a 120-day recording period. Under the New Hampshire statutes, the perfection document to be recorded is an "attachment" obtained through a court rather than a "notice of contract" or some similar device that may be available in other states. The attachment may be used by a contractor or subcontractor not only to secure their lien for materials or services provided up to that date, but it also may be used in conjunction with the notice required by RSA 447:12-b to better ensure prompt payment relative to materials or services provided after that date.
After what period of time can you waive a mechanic's liens if no suit is filed?
There is no statutory provision for lien waivers. Under RSA 447: 9 and 10, the lien priority is lost if not perfected within 120 days of the performance of labor or the provision of materials. Thus, no waiver would be necessary for a lien whose priority has been lost in this manner.
Removing or Waiving Liens
Is there a statutory procedure for affidavits of completion or notices of completion?
See the discussion of RSA 447:12-a in the fourth paragraph, under the first bulleted item.
Can a statutory bond terminate the mechanic's liens as an encumbrance on title?
No. There is no statutory provision for such a method in New Hampshire.
Can the original, general or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?
No. There is no statutory authorization for such a procedure.
Can a bona fide purchaser or a bona fide lender take free of mechanic's liens later filed for earlier work?
Only a Construction Lender upon compliance with the provisions of RSA 447:12-a and -b as described in the first bulleted item, above. Of course, if the lienholder fails to perfect its lien in accordance with RSA 447:9 and 10, its lien priority is lost and the intervening bona fide purchaser or lender will gain title priority.
Title Company Requirements
What are the customary requirements for issuing Loan Policies on Construction Loan Mortgages?
An initial title search of the insured premises must be made to determine that no Notices of Contract have, in fact, been recorded. If any are found, absent a Notice of Dissolution or other.
Release from the contractor or subcontractor, they should be included on Schedule B of any title insurance policy(ies) or discussed with local underwriting counsel to determine if there is any other basis upon which may be deleted from Schedule B or insured over.
An Affidavit from the seller and/or borrower is required before any policy of title insurance is issued either deleting the standard Mechanic's liens Exception or insuring over mechanic's liens in any other manner. The Affidavit may be as simple as the standard form residential affidavit used by Stewart Title and most other title insurance underwriters. On the other hand, a more elaborate Affidavit and Indemnity Agreement may be required for Construction Loan or Commercial Loan situations. Examples of an Affidavit and Indemnity Agreement which may be required of an owner and/or a contractor or subcontractor are provided in Exhibits A and B attached hereto.
In addition, it is customary to accompany the sometimes self-serving affidavits with a mortgage inspection plan (a/k/a plot plan) in the residential context and a more detailed survey or title insurance plan for the typical commercial loan situation.
Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a Construction Loan Mortgage?
Yes. The following is a version of the customary clause used in New England:
Pending disbursements of the full proceeds of the loan secured by the mortgage covered by the policy, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without any actual knowledge of any defects in, or objections to the title, up to the face amount of this policy. At the time of each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens, or objections intervening between the date of this policy and the date of such disbursement. Each title continuation must be evidenced by an endorsement to the policy, which endorsement will set forth all matters of record arising since the date of the preceding endorsement and such endorsement will exclude coverage for matters of survey arising since the date when survey coverage was last provided, if any. This policy does not guarantee the completion of the improvements nor the sufficiency of funds for the completion thereof.
Finally, General Exception No. 2 (i.e., the mechanic's liens exception) should always remain intact in an owner's policy unless specific authority is obtained from local underwriting counsel to delete the exception.
Also subject to any bulletins relating to mechanic’s liens.