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Mechanic’s Lien Coverage Requires Underwriter Approval.
Title Insurance Considerations in regard to Mechanic's Liens Coverage
Mechanic’s/Materialman’s lien coverage is a contract of indemnity insuring the lender against loss or damage due to the lack of priority of its mortgage lien over mechanic's liens. This kind of coverage has become a source of enormous loss for title insurance companies. Extreme care must be exercised when deleting the mechanic's lien exception from any title insurance policy.
Mechanic’s/Materialman’s liens can exist as real property liens although unrecorded in the public records. Once a mechanic's lien is perfected, the lien relates back in time to the commencement of work on the improvement. If the mechanic’s/materialman’s lien exception is deleted from the title policy, the unpaid lien claimant is entitled under the policy to file a claim and receive the amount of the lien plus attorneys' fees spent to collect it.
1) Can the Construction Loan Mortgage have initial priority over mechanic’s or materialman’s liens?
To hold priority, a construction loan mortgage must be filed prior to the commencement of work or delivery of materials giving rise to the Mechanic’s/Materialman’s Lien. 42 O.S.A. § 141.
2) Will initial priority as to future disbursements be retained only if certain procedures are followed?
Initial priority will be maintained as to subsequent disbursements only to the extent disbursement is obligatory or is made prior to commencement of work or delivery of materials giving rise to the M&M Lien. Liberty National Bank v. Kaibab Industries, Inc. 591 P.2d. 692 (1978). 42 O.S.A. § 141.
3) If priority is lost, can it be regained?
Where a construction loan mortgage does not have initial priority, it may be regained only through failure of the lien claimant to properly record a Mechanic’s Lien Claim; failure to timely prosecute the Lien Claim, or by obtaining lien waivers from every contractor or sub-contractor who performed work on the property and from any materialmen who delivered construction materials to the site.
4) Is there a difference between on-site and off-site work?
No distinction between on-site and off-site work is made by statute.
5) Is priority the same for all contractors and subcontractors on the same project?
Priority as to contractors and sub-contractors is not distinguished. 42 O.S.A. § 143.
1) What are the time periods for recording lien claims by original contractors and subcontractors?
Original contractors must file claim within 4 months of the day work was last performed or material last furnished. Sub-contractors must file claim within 90 days of the day work was last performed or material last furnished. 42 O.S.A. §§ 142 and 143.
2) After what period of time can you disregard a mechanic's lien if no suit is filed?
Mechanic’s and Materialman’s Liens of record in excess of one year can be waived unless filed prior to 10/1/77 with a promissory note attached, in which case it may be disregarded one year after the maturity of the note. 42 O.S.A. §§ 147.1, 172 and 177.
Removing or Waiving Liens:
1) Is there a statutory procedure for affidavits of completion or notices of completion?
No statutory procedure for affidavits or notices of completion.
2) Can a statutory bond be filed to terminate the mechanic's liens as an encumbrance on title?
A Mechanic’s or Materialman’s Lien may be discharged by depositing with the county clerk cash or bond equal to 125% of the lien claim. 42 O.S.A. § 147.1.
3) Can the original, general or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?
The right to claim a Mechanic’s or Materialman’s Lien can be voluntarily waived by contractors or subcontractors where supported by adequate consideration. Waiver is not statutory in nature, but is based on Oklahoma case law. Eason Oil Co. v MA Swatek and Co., 169 Okla. 170, 36 P.2d. 504, (1934). Antrim Lumber Co. v Neal, 172 Okla. 292, 44 P.2d. 939 (1935).
4) Can a bona fide purchaser or a bona fide lender take free of mechanic's liens later filed for earlier work?
No. 42 O.S.A. §§ 141 and 143.
Title Company Requirements:
1) What are the customary requirements for issuing Loan Policies on Construction Loan Mortgages?
In Oklahoma, it is customary to rely on Pre-Construction Inspection Report that does not reveal the commencement of work or delivery of materials. In the event that the “Pre-Con” reveals that construction has commenced or that materials have been delivered to the work site, it is customary to require that construction be discontinued until the construction mortgage has been recorded, and that documentation is provided to evidence that anyone who has performed work or supplied materials has been paid; or that satisfactory lien waivers be obtained from each contractor or sub-contractor that has performed work and from each materialman that has delivered materials to the worksite.
2) Is it customary to add a "pending disbursement" clause or mechanic’s/materialman’s liens exception in the Loan Policy insuring a Construction Loan Mortgage?
It is customary to add a pending disbursement clause on Schedule B of the policy. It is not customary to except liens unless a Pre-Construction Inspection Report is not made.
Also subject to any bulletins relating to mechanic’s liens.