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MECHANIC’S LIEN
UPDATE
John Rothermel Stewart Title Guaranty Company
Sr VP, SW States Regional Underwriting Counsel, Associate
Senior Underwriter January 20, 2011
TEXAS CONSTITUTION
The Texas constitution recognizes that people will need to borrow money to build improvements
• From the 1876 constitution, the money to improve a homestead was recognized as one of the initial 3 reasons to have a valid lien against a homestead
CONTRACT REQUIRED
For a loan secured by HS property, a written contract is required:
• Signed by both spouses,
• Signed by contractor
• Recorded in land records where the property is
• Note that signing before work begins is mandatory; recording before is strongly preferred
MLC REQUIREMENTS
Names of owners/borrowers
• If non-qualifying spouse lives there, (s)he must sign to encumber HS even if property is separate property of other spouse
Name of Contractor
• Make sure signs in proper capacity if an entity
Description of the Property
MLC REQUIREMENTS
Scope of the work
• Build house is probably technically enough but should be more specific
Really can’t have change orders for extras unless there is new stuff being done, and how do you know if the contract is too broad?
• Size, number of rooms, outbuildings, roof type, pool, etc. for new construction
• Reasonably detailed for remodeling
NON-HOMESTEAD PROPERTY
What is this kind of property anyway?
• Non-owner occupied 1-4 family residential • Commercial (beware of motels and
penthouses) • Rental property • Apartments (again beware of owner suites)
MLC not required (but usually can’t hurt)
Basics though don’t change
Early Start
Once the negotiations as to the scope of the work and the price are negotiated, builders and owners are desperate to start • And sometimes they do start before the MLC is
signed and recorded • Since we insured priority and validity of liens,
this presents a major problem HS: both are at risk Non-HS: priority is at risk
EARLY START
There is only one reasonably sure cure for the early start:
• Pay the contractor and all subs; pull all equipment, materials and workers off the job; file an affidavit of completion and do nothing more for more than 4 months (unless retainage is held by title company, then 30 days). Do a new contract for the remainder of the work and start the process over.
EARLY START
Wow, that is a lot of stuff and a lot of time!
Indeed. But that covers the bases for almost all risks, including missing an unpaid subcontractor or supplier.
Is there anything less than can be done?
Call your favorite underwriter.
• We can work with you to reduce the time, perhaps waive the completion affidavit. But pulling off the job for some period of time is always required.
• You can see the problem with paying for the work done when the MLC is too vague– what was done and what is left?
LIEN FILING PERIODS
Residential construction: 15th day of 3rd month after the day on which indebtedness accrues
All other construction: 15th day of 4th month after the day on which indebtedness accrues
Prop code: 53.052
ACCRUAL DATES
Original Contractor:
• Last day of month in which contract is terminated
• Or last day of month in which original contract finished, settled or abandoned (same for retainage)
Subcontractor:
• Last day of month in which work was done or supplies furnished
ACCRUAL DATES
Specially fabricated material
• Last day of month when materials delivered
• Last day of month when material would normally be required at the job site
• Last day of month of any material breach or termination of original contract
LIEN CLAIMS
A contractor or supplier must file a claim within the time required or they have no lien
• The MLA must contain certain information (see 53.054)
• Our problem is (c) which says that the affidavit doesn’t have to set forth specific items of work done or material furnished and can use abbreviations customarily used in the trade
LIEN CLAIMS
The claimant must file the MLA and send notices to owner and general contractor no later than the 5th day after the MLA is recorded
• And how do we know this from the record?
Can’t until suit is filed and we are defending!
RETAINAGE
The beauty of retainage is that by withholding 10% of the value of the work done, the lien claimants are limited to the 10% retained and don’t have a claim on the property.
• Not common because many contractors don’t have much more than 10% profit in the job and waiting will just cause liens to be filed.
• Banks compete on not requiring retainage.
AFFIDAVITS
Affidavit of commencement: provides notice to all lien claimants as to the inception date of the contract
Affidavit of completion: provides notice to all lien claimants as to the cessation of work and starts the running of the lien filing periods
• Only been around for 18 years and title companies are not used to asking for them!
SUIT TO FORECLOSE
Residential construction: later of 1 year after last day to file MLA or 1 year after completion, termination or abandonment of the work under original contract
Other projects: later of 2 years under 53.052 or within 1 year after completion, termination or abandonment of the work under original contract
REMOVABLES
Long Series of cases beginning with Whirlpool case in 1975: removable items are not subject to being cut off by foreclosure, but rather the remedy is to repossess the items
• Long laundry list of items • Removable if can be removed without harm to
the item or the property AT THE TIME OF REMOVAL
• Appliances, carpet, doors and window, finished plumbing
• Not: paint, framing, foundation, rough plumbing, some electrical
REMOVABLES
Post foreclosure:
• Lenders want all MLA claims removed • Some MLA’s are for removables • Some you just can’t tell • Lender wants them all removed • While it is true that an MLA on a removable
isn’t a lien against the property, a buyer might find it disconcerting to find that all interior doors, carpet, H/vac and appliances have been removed
REMOVABLES
Legislation dealing with identifying removables is likely this session
Exact form of law will be decided in the next several days
Balancing act required of competing interests
May include the list of what courts have determined to be removables
AVOIDING MLA’s
Bond to indemnify 53.172
• Filed with clerk
• Describe the property
• Refer to each filed lien
• Double the amount (150% if more than $40,000)
• Signed by owner and surety company admitted in Texas
• Notice sent to named obligees by clerk
AVOIDING MLA’s
Bond to Pay Liens or Claims 53.201
• Original contractor can obtain
• Must be in at least amount of contract
• Follows basic formalities of the Bond to Indemnify
PERFORMANCE BONDS
These may be in the nature of a bond to pay liens but also may simply be a guaranty to the owner that the contractor will indeed do the work in a proper fashion.
If asked to accept such a bond to remove MLAs, contact a Texas underwriter and provide a copy of the bond.
PRIORITY OF LIENS
In Texas, all persons doing work or providing materials for a job share in ONE mechanics lien. They do not each have a separate lien.
That lien is created by the earlier of
• A signed contract or • The first person to do work on the site
And extends to all persons providing materials or doing work.
PRIORITY OF LIENS
Early site preparation or delivery of materials can prime the later signed contract or deed of trust
• In other words, create the lien which then has priority over the deed of trust we insured
• Getting lien waivers from the first laborers/ suppliers doesn’t help since they can’t waive the entire lien, only their right to participate in the lien
SWITCHPLATE MAN
If the foundation company starts the forms and groundwork two days before closing of our contraction instruments but gets paid and signs a lien waiver, but the switchplate man doesn’t get paid, his lien has priority over our construction deed of trust.
Why? Because they all share one lien and one company can’t waive for everyone.
TITLE INSURANCE
Binders: P-16. Mortgagee Title Policy Binder on Interim
Construction Loan (Interim Binder)---The Mortgagee Title Policy Binder on Interim Construction Loan (Interim Binder) shall be used only with respect to interim construction loans in which it is contemplated in good faith that the Company issuing the Interim binder shall be asked to issue its Mortgagee Policy or Policies; issued simultaneously with Owner Policy or Policies of Title Insurance or at the basic rate, on a permanent loan or loans covering the identical property (in one or more parcels) when improvements are completed, but which permanent loan or loans may be made by a mortgagee or mortgagees other than the mortgagee named in the Interim binder. The use of such Interim Binder shall be limited solely to interim construction loans and pledges of the interim construction notes and liens wherein: (i) the obligor on the indebtedness is an original contractor who is also the record owner of the land upon which improvements are to be constructed; and, (ii) the security document for the indebtedness is not in the form of a Mechanic's Lien Contract. • This means that only a builder who owns the property can
obtain a binder for his construction lender. All others must pay for a policy.
P-16 (continued)
Construction loans may include sums advanced for acquisition of land and/or to take up, renew or satisfy prior existing liens on land upon which construction is to occur. Interim Binder shall not be issued on vacant lots or tracts, except in connection with the immediate construction of improvements thereon, nor shall such Interim Binder be issued after completion of improvements to which it relates, but this does not prohibit the issuance of Extensions after completion of improvements. In all cases not specifically enumerated in this rule, a Mortgagee Policy shall be used. The Company shall be required to show all subordinate liens in Schedule B-Part 2 of the Interim Binder, but a statement may be made therein that such lien(s) is subordinate. (Go to Rate Rule R-13 and EndorsementInstruction I)
R-18
R-18. Refinance of Construction Loan---- A. When a Mortgagee Policy has been issued insuring the
lien of a construction loan to be fully taken up, renewed, extended or satisfied by a new loan, the premium on the Mortgagee Policy insuring the lien of the new loan shall be at the currently promulgated minimum Basic Premium Rate;
B. Provided however, if the Mortgagee Policy insuring the lien of the new loan is in an amount in excess of the amount of the Mortgagee Policy insuring the lien of the construction loan, the premium shall be equal to the greater of
1. The currently promulgated minimum Basic Premium Rate, or
2. The excess of the currently promulgated Basic Premium Rate on the amount of the Mortgagee Policy insuring the lien of the new loan less the currently promulgated Basic Premium Rate on the amount of the Mortgagee Policy insuring the lien of the construction loan.
R-18 continued
R-18. Refinance of Construction Loan---- C. On Mortgagee Policies issued on multiple
loans to fully take up , renew, and extend or satisfy a mortgage securing a construction loan insured by a single Mortgagee Policy, the new policies being in the amount of the new mortgages, the premium for the larger Mortgagee Policy shall be as set out in section A or B of this rule, using the total of the new mortgages as the amount on which to calculate the premium. The additional policy(ies) shall be issued at the minimum Basic Premium Rate.
R-20
R-20. Owner Policy After Construction Period-----When an Owner Policy has been issued in the manner provided in Rule P-8.A. with a face amount of $5,000,000 or more and the premium for said Owner Policy has been paid in full, upon completion of the improvements on the property covered thereby, the owner's acceptance thereof, and satisfactory evidence to the Company that all bills for labor and materials have been paid in full, an Owner Policy may be issued by the Company which issued the previously issued Owner Policy, at any time up to one year after such completion of improvements, covering the same land, or a portion thereof, covered by said Owner Policy and covering no other land, and the premium for the new Owner Policy shall be the currently promulgated minimum policy Basic Premium Rate. Should the amount of the new Owner Policy exceed the amount of the previously issued Owner Policy, the premium for the new Owner Policy shall be at (i) the Basic Rate plus (ii) the currently promulgated minimum policy Basic Premium Rate less (iii) the currently promulgated premium for the previously issued Owner Policy, or in the event the previously issued Owner Policy was issued for a simultaneous issue rate under Rule R-5B, the currently promulgated premium for the Mortgagee Policy referred to in said Rule R-5B.
Rarely used because after the lien filing period the P-8 exceptions can be removed at no charge. Arguably could be provided to a new owner though.
OTHER TITLE ISSUES
Area and boundary or T-19 series when no improvements
• The area and boundary exception P-2 and the T-19 series of endorsements both assume the existence of improvements.
While not impossible to issue, the coverage provided before any improvements are added is somewhat illusory.
T-19
P-50. Restrictions, Encroachments, Minerals Endorsement (T-19) and, Restrictions, Encroachments, Minerals Endorsement - Owner Policy (T-19.1),
A. Any insured matter covered in the Restrictions, Encroachments, Minerals Endorsement T-19 or T-19.1 may be insured only by the use of these endorsements, except that coverage regarding minerals may be insured by the use of the T-19.2 or T-19.3 endorsements as provided in P-50.1.
B. A Company may issue its Restrictions, Encroachments, Minerals Endorsement (T-19) to a Loan Policy (T-2), if its underwriting requirements are met. The Company shall delete any insuring provision if it does not consider that risk acceptable.
C. A Company may issue its Restrictions, Encroachments, Minerals Endorsement - Owner Policy (T-19.1) to an Owner Policy if its underwriting requirements are met. The Company shall delete any insuring provision if it does not consider that risk acceptable.
T-19.1
The Company insures against loss or damage sustained by the Insured by reason of: 1. The existence, at Date of Policy, of any of the following unless expressly excepted in Schedule B:
a. Present violations on the Land of any enforceable covenants, conditions, or restrictions, or any existing improvements on the Land that violate any building setback lines shown on a plat of subdivision recorded or filed in the Public Records.
b. Any instrument referred to in Schedule B as containing covenants, conditions, or restrictions on the Land that, in addition, (i) establishes an easement on the Land, (ii) provides for an option to purchase, a right of first refusal, or the prior approval of a future purchaser or occupant, or (iii) provides a right or reentry, possibility of reverter, or right of forfeiture because of violations on the Land of any enforceable covenants, conditions, or restrictions.
c. Any encroachment of existing improvements located on the Land onto adjoining land, or any encroachment onto the Land of existing improvements located on adjoining land.
d. Any encroachment of existing improvements located on the Land onto that portion of the Land subject to any easement excepted in Schedule B.
T-19.1
2. Damage to existing buildings that are located on or encroach upon that portion of the Land subject to any easement excepted in Schedule B, which damage results from the exercise of the right to maintain the easement for the purpose for which it was granted or reserved.
3. Damage to improvements (excluding lawns, shrubbery, or trees) located on the Land on or after Date of Policy resulting from the future exercise of any right existing at Date of Policy to use the surface of the Land for the extraction or development of minerals excepted from the description of the Land or excepted in Schedule B. This one does cover future buildings
T-19.1
4. Any final court order or judgment requiring the removal from any land adjoining the Land of any encroachment, other than fences, landscaping, or driveways, excepted in Schedule B. (this one wouldn’t be for future improvements since encroachment would be unknown at policy date because there were no improvements)
5. Any final court order or judgment denying the right to maintain any existing building on the Land because of any violation of covenants, conditions, or restrictions, or building setback lines shown on a plat of subdivision recorded or filed in the Public Records.
CONSTRUCTION INCREASES IN POLICY
AMOUNT
(3) When an Owner Policy is issued in the manner provided in Rule P-8.a, and the coverage thereunder increases as provided in Rule R-2, Rule P-8 or otherwise as provided in these Rules, upon request and compliance with Rule R-15, the title insurance company which issued the Owner Policy may extend the effective date of the said Owner Policy and state the amount then existing under such Policy by issuing the endorsement provided for in Form T-3,Instruction VIII, Items (a) 1, 2 and 3 of the endorsement may not be deleted.
CONSTRUCTION INCREASE IN VALUE
Endorsement instruction VIII.USE ONLY IN CONNECTION WITH INCREASE IN COVERAGE SUBSEQUENT TO ISSUANCE OF FORM T-1 OWNER TITLE POLICY IN THE MANNER PROVIDED IN RULE P-8.a.
When a Company is called upon to endorse its Owner Title Policy to evidence increase in coverage thereunder, and upon compliance with Rule P-9.a.(3), said Company may issue the Endorsement by inserting the following applicable provisions therein: (a) Said Policy is hereby amended so that its coverage shall relate to the date of this Endorsement instead of the date of the Policy, subject to: 1.The exceptions shown in Schedule B of said Policy and any prior Endorsement to said Policy, 2.Matters which would be shown by a correct survey and inspection of the premises subsequent to the date of said Policy, 3.Any an all liens arising by reason of unpaid bills or claims ion with the improvements being placed upon the subject land. The Company does, however, insure the insured against loss, if any, sustained by the insured under the terms of the policy, if any such liens have been filed with the County Clerk of the County in which such property is located prior to the date of this Endorsement except those liens set forth in Schedule B of said Policy or in any prior Endorsement to said Policy, and except: (Specify or delete the words "and except" immediately preceding.), 4.The following additional to Schedule B of said Policy: (Specify or delete this paragraph) (b) The coverage under said Policy as of the date hereof is $____________.
DOWN DATE ENDORSEMENTS
4) Down Date Endorsement - When a Mortgagee Title Policy is issued in the manner provided in Rule P-8.b. and construction advances are being made subsequent to such issue, upon request and compliance with Rule R-11.c, the title insurance company which issued the Mortgagee Title Policy may extend the effective date of the said Mortgagee Title Policy and state the amount of coverage then existing under the policy, by issuing the Endorsement provided for in Form T-3, Instruction V. Items (a) 1, 2 and 3 of the Endorsement may not be deleted.
EXTENSION OF BINDER TERM
Endorsement Instruction VII When a Mortgagee Title Policy Binder on Interim Construction Loan is issued as provided in Procedural Rule P-16, and construction advances are being made subsequent to such issue, upon request and compliance with Rule R-11.c, the title insurance company which issued the Mortgagee Title Policy Binder on Interim Construction Loan may extend the effective date of the said Mortgagee Title Policy Binder on Interim Construction Loan by issuing the Endorsement provided for in Form T-3, Instruction VIII. Items (a) 1 and 2 of the Endorsement may not be deleted.
P-8 EXCEPTIONS
P-8. Issuance of Policies Prior to Completion of Improvements a. Owner Policy (1) When an Owner Policy is issued in an amount to include the cost of immediately contemplated improvements, the Policy must contain the following exception in Schedule B: "Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the Insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of __________County, Texas, prior to the date hereof." AND THE FOLLOWING "LIABILITY" PARAGRAPH: "Liability hereunder at the date hereof is limited to $_________. Liability shall increase as contemplated improvements are made, so that any loss payable hereunder shall be limited to said sum plus the amount actually expended by the Insured in improvements at the time the loss occurs. Any expenditures made for improvements, subsequent to the date of this policy, will be deemed made as of the date of this policy. In no event shall the liability of the Company hereunder exceed the face amount of this policy. Nothing contained in this paragraph shall be construed as limiting any exception or any printed provision of this policy."
P-8 EXCEPTIONS
b. Mortgagee Policy (1) When a Mortgagee Policy is issued prior to completion of improvements made under a mortgage given in whole, or in part, for the cost of improvements, the policy must contain the following exception under Schedule B: "Any and all liens arising by reason of unpaid bills or claims for work performed or materials furnished in connection with improvements placed, or to be placed, upon the subject land. However, the Company does insure the Insured against loss, if any, sustained by the Insured under this Policy if such liens have been filed with the County Clerk of __________County, Texas, prior to the date hereof." AND THE FOLLOWING "PENDING DISBURSEMENT" PARAGRAPH: "Pending disbursement of the full proceeds of the loan secured by the lien instrument set forth under Schedule A hereof, this policy insures only to the extent of the amount actually disbursed, but increases as each disbursement is made in good faith and without knowledge of any defects in, or objections to, the title up to the face amount of the policy. Nothing contained in this paragraph shall be construed as limiting any exception under Schedule B, or any printed provision of this policy."
AFTER CONSTRUCTION OTP
Upon the completion of the improvements on said property, the owner's acceptance thereof, and satisfactory evidence to the Company that all bills for labor and materials have been paid in full, the "Liability" paragraph and the exception in Schedule B set out in "a(1)" of this rule may be eliminated from the policy by the issuance of the promulgated Endorsement form containing the applicable promulgated language covering said elimination. In addition to the above elimination, if a satisfactory survey made after the completion of improvements is furnished to the Company, survey coverage may be provided as set out in Rules R-16 and P-2, using the promulgated Endorsement form and containing the applicable promulgated language. In addition, if the Company's underwriting requirements have been met, the T-19.1 Endorsement may be issued or coverage affirmed as set out in Rules R-29 and P-50, using the promulgated Endorsement form and containing the applicable promulgated language
AFTER CONSTRUCTION LP
(2) Upon the completion of the improvements on said property, the owner's acceptance thereof, and satisfactory evidence to the Company that all bills for labor and materials have been paid in full, the exception plus the "Pending Disbursement" paragraph in "b(1)" above may be eliminated from the policy and mechanic's and materialmen's lien coverage amended by issuance of the promulgated Endorsement form containing the applicable promulgated language covering said elimination and amendment. In addition to the above elimination, if a satisfactory survey made after the completion of improvements is furnished to the Company, survey coverage may be provided as set out in Rules R-16 and P-2, using the promulgated Endorsement form and containing the applicable promulgated language. In addition, if the Company's underwriting requirements have been met, the T-19 Endorsement may be issued or coverage affirmed as set out in Rules R-29 and P-50, using the promulgated Endorsement form and containing the applicable promulgated language.
T-34 INCREASED VALUE
Form T-34: Increased Value) INCREASED VALUE ENDORSEMENT Issued By____________________
TITLE INSURANCE COMPANY This Endorsement is made a part of Owner Policy Number _____________, dated ____________. As of the date of this endorsement, the "Amount" on Schedule A is deleted and the following amount is substituted:$ _______________________. Under this endorsement, we do not cover title risks or insure against matters: a. created, suffered, assumed, or agreed to by you (the insured), or b. known to you (the insured) but not to us (the company) at the date of this endorsement unless they appear in the Public Records on the Policy Date. This endorsement does not change the Policy Date. The terms of the Policy apply to this endorsement. Endorsement Premium: $__________________________ Endorsement Date: _______________________, 20____
ATTEST:__________________________________________
__________________________Title Insurance Co. By: ______________________________________ President
(Form T-34: Increased Value)
INCREASED VALUE
P-9b(2) When an insured under an Owner Policy shall have satisfied the Company as to the current value of the estate or interest insured by such Owner Policy, and shall have paid the premium provided for in Rule R-3.c, the Company shall attach to the said Owner Policy endorsement form T-34.
R-15. Owner Policy Endorsement a. Increased Value - When requested by the Insured, and upon compliance with Rule P-9a(2), endorsement form T-34 shall be attached to the Owner Policy upon payment of a premium for such endorsement which shall be the Basic Rate computed on the new amount less the premium paid for the Owner Policy and any form T-34 endorsements previously attached thereto, but in no event less than the then applicable minimum policy Basic Premium Rate. b. Increase in Coverage During Construction - A premium of $50.00 shall be charged for each T-3 Endorsement issued according to Instruction VIII, as provided in Rule P-9a(3).
THANK YOU!
For Escrow Officer Credit please email password and attendees names to [email protected] for your certificate (Please do this as soon as possible).
Attorneys email bar card number to Ken Wrider for CLE credit.
Next Texas TIPS Online Webinar is February 17, 2011 and the topic is “Federal Law Update (RESPA & Credit Agency)”.
Questions/Comments? Email [email protected]
Visit www.stewarttexas.com for previous presentation materials
