The Title Tip of the Week this week explains what mechanics lien coverage means and why you want it when purchasing or making loans on new construction.
Mechanics Lien Coverage on New Construction
The owners policy of title insurance is subject to certain exceptions -- one of those being unrecorded mechanics liens. Why do we care about unrecorded mechanics liens at the time of closing? Doesn't the recording of my deed or mortgage before a mechanics lien is filed put me in a superior position to that lien holder? Not necessarily! A mechanics lien can be valid against third parties (ie. those not in privity of contract with the lien holder), and trump the interest of third parties, if filed within four (4) months of the work completion date. In many cases the work in new construction is completed just days before closing, giving the general contractor or subcontractors plenty of time to file liens affecting the interest of the new buyer or lender. For this reason, a purchaser of new construction will want to make sure that any title policy issued will not be subject to possible unrecorded mechanics liens.
In order to grant extended coverage, waiving the general exception for mechanics liens the title company will require copies of various documents:
(1) General Conractor's Statement - Section 5 of the Mechanics Lien Act imposes a duty on the general contractor to provide the owner with a statement of all parties performing work on the land or supplying materials to the land. This statement, called a general contractor's statement, is essentially a listing of all contracts the general contractor has made with his subcontractors.
(2) Owner's Statement - This is a statement listing all contracts the owner made with third parties. This will often just list the contract he or she made with the general contractor, though occassionally there will be more.
(3) Lien Waivers - The title company will want final lien waivers from all parties listed on these two statements. The lien waiver is a contractor's acknowledgement of payment and a release of any potential mechanics lien rights for the materials or services they provided.
The title company will review the provided materials and when satisfied that it has lien waivers from all the proper parties, it will approve the issuance of extended coverage over unrecorded mechanics liens.
The additional coverage comes at an additional price, and most title companies will also charge a fee for the examination of the lien waiver package. The added cost for a title company's examination of the lien waiver package, along with the cost to the general contractor or owner for the time spent tracking down the lien waivers is, in many cases, more costly than engaging the title company to disburse on the construction loan from the beginning.
When Benchmark Title provides construction disbursing services, the fee for examining the lien waiver package is eliminated because our construction escrow agents collect all lien waivers in the process of disbursing. But the greatest benefit of Benchmark handling the disbursement of the construction loan is the protection provided to the owner/borrower and lender against fraud by the general or subcontractors. With each request for payment to the contractors Benchmark sends and inspector to visit the property and verify the items for which they are requesting payment have actually been delivered or completed. Additionally Benchmark performs an update to the title search to verify that no judgments or liens have gone on record before disbursing any funds.
Any questions can be directed to Benchmark Title at 618-239-3750. Please feel free to call or email:
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Karen Rachels, Construction Escrow Officer for Benchmark Title, began her career as a teller for a local bank thirty years ago. She worked her way into the mortgage department as a processor and loan closer, spending eleven years at the bank. Karen then spent the next twelve years with a mortgage banker where she worked as a processor, loan closer and assistant office supervisor at branches in St. Louis, MO and Columbia, IL. She joined Benchmark Title as a construction escrow officer in November 2003. Karen describes her position as working "with the Owners, General Contractors and Subcontractors from the beginning of construction, monitoring, and evaluating to see that the draw requests are processed in an accurate and timely manner to the conclusion of construction." Karen lives in Columbia with her husband and has two children and five grandchildren. She can be reached at 618-239-3750 or by email at firstname.lastname@example.org.
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