Mechanic’s Lien Coverage Requires Underwriter Approval.
(As of August 1, 2009, “Mechanic’s Liens” in North Dakota became “Construction Liens”)
Can the construction loan have initial priority over construction liens?
Yes. A construction loan mortgage given in good faith for the purpose of providing funds for the payment of materials or labor for improvements has priority over lien claims regardless of whether construction has commenced or materials have been furnished unless a lien claimant records a construction lien before the recording of the mortgage. North Dakota Century Code (“N.D.C.C.”) 35-27-04.
Will initial priority as to future disbursements be retained only if certain procedures are followed?
There is not a North Dakota statute that addresses procedures required to retain priority. However N.D.C.C. 35-27-04 (2009) suggests a legislative preference for a recorded mortgage given in good faith even if materials or labor have been furnished or even if there is actual commencement of construction so long as a construction lien has not been filed before the mortgage.
N.D.C.C. 35-27-04 (2009) reads: “As against a mortgage given in good faith for the purpose of providing funds for the payment of materials or labor for the improvement, a construction lien may not be preferred even though such mortgage is recorded after the time the first item of material or labor is furnished upon the premises or after the actual visible beginning of the improvement unless the person furnishing such labor, skill, or material files for record a construction lien before the recording of such construction loan mortgage.”
If priority is lost, can it be regained?
There is not a North Dakota statute that addresses the regaining of lost priority.
Is there a difference between on-site and off-site work?
There is no statutory difference between on-site and off-site work.
Is priority the same for all contractors and subcontractors on the same project?
There is an order of priority for classes of construction liens perfected under Chapter 35-27. They are as follows:
1. Liens for manual labor.
2. Liens for materials.
3. Subcontractors other than manual laborers.
4. Original contractors.
See N.D.C.C. 35-27-22.
What are the time periods for recording lien claims by original contractors and subcontractors?
Written notice that a lien will be claimed must be given to the owner of the real estate by certified mail at least ten days before the recording of the construction lien. N.D.C.C. 35-27-02.
Every person, including original contractors and subcontractors, must record their lien claim with the recorder of the county in which the property to be charged with the lien is situated, within 90 days after the last work or contribution to the property is done. N.D.C.C. 35-27-13.
However, failure to file the lien within the 90 days prescribed in N.D.C.C. 35-27-13 does not defeat the lien except as against purchasers or lienholders in good faith and for value whose rights accrue before the lien claim is filed. N.D.C.C. 35-27-14 (2009)
A lien may not be filed more than three years after the date the first item of material is furnished. N.D.C.C. 35-27-14.
After what period of time can you waive a construction lien if no suit is filed?
No lien is effective or valid unless a lawsuit is commenced to enforce the lien within three years of the filing of the lien. If a summons and complaint asserting the validity of the lien is not filed within three years of the filing of the lien claim, the lien is deemed satisfied and the clerk of court of the county in which the lien is recorded, upon request of any interested person, shall certify to the recorder that no summons and complaint has been filed and the lien is deemed satisfied under this section, and the recorder shall record the verified certificate. N.D.C.C. 35-27-25 (2009)
Additionally, N.D. 35-27-25 contains a provision that allows the owner, the owner's agent or contractor to make demand upon a lien claimant that a suit be filed within thirty days or the lien is forfeited.
Removing or Waiving Liens
Is there a statutory procedure for affidavits of completion or notices of completion?
There is not a North Dakota statute that provides a procedure for affidavits or notices of completion of construction.
Can a statutory bond terminate construction liens as an encumbrance on the title?
Yes, if a lien is filed against property owned by a resident of North Dakota. Chapter 35-21 of the N.D.C.C. entitled RELEASE OF LIEN BY UNDERTAKING provides: “When any construction lien,… is filed against the property of a resident of this state, the property affected may be released by an undertaking in the manner provided in this chapter.” N.D.C.C. 35-21-01.
Can the original, general, or subcontractors by contract or waiver agreement subordinate or waive construction liens by the general contractor and/or subcontractors?
Yes. According to N.D.C.C. 35-27-02, if the owner or an agent of the owner has received a waiver of lien signed by the person that improves the real estate, a lien is not allowed.
Can a bona fide purchaser or bona fide lender take free of construction liens later filed for earlier work?
Yes. According to N.D.C.C. 35-27-04, as against a mortgage given in good faith for the purpose of providing funds for the payment of materials or labor for improvements, a construction lien may not be preferred even though such mortgage is recorded after the first item or material or labor is furnished upon the premises, or after the actual visible beginning of the improvement unless the person furnishing such labor, skill, or material files for record a construction lien before the recording of such mortgage.
Additionally, N.D.C.C. 35-27-14 provides that lien claims are defeated as against purchasers or encumbrancers in good faith and for value whose rights accrue before a construction lien is filed.
Title Company Requirements
What are the customary requirements for issuing Loan Policies on construction loan mortgages?
* Generally, an exception to a construction lien filed for record within three years before the construction loan mortgage must be included in any commitment or policy for the subject land unless removal is approved by Stewart underwriting personnel;
* If a lender requires that a construction loan be insured without exceptions for construction liens, Stewart requires that no construction liens have been filed for record against the subject land within the three years before the subject construction loan mortgage is filed for record. N.D.C.C. 35-27-14
* If a construction lien has been filed for record before the subject construction loan mortgage is filed, the owner may require that suit be commenced by the lien claimant pursuant to and in compliance with N.D.C.C. 35-27-25 (2009). If suit is not filed within 30 days, the lien is forfeit. Upon request, the clerk of court will issue a verified certificate to the recorder that the lien is satisfied and the recorder shall record the verified certificate. Stewart underwriting personnel must approve reliance upon this procedure.
* If a construction lien was filed for record before the subject construction loan mortgage, but more than three years have passed since the date of recording of the lien, and a complaint to enforce the lien has not been filed, then an exception for such construction lien need not be included in the commitment or policy for the subject land provided that the clerk of court’s verified certificate is requested and recorded. See N.D.C.C. 35-27-25 (2009). Stewart underwriting personnel must approve reliance upon this procedure.
Is it customary to add a "pending disbursement" clause or mechanics/construction lien exception in the loan policy insuring a construction loan mortgage?
A "pending disbursement" clause or a construction lien exception is required in a loan policy insuring a construction loan mortgage. The following “pending disbursement” clause has been approved for North Dakota:
PDCX16 ND STGC
Loan Policy – Construction – North Dakota
Consult the current Stewart Bulletin for additional details concerning construction lien coverage during construction (as of 9/27/10, the current bulletin was ND2010001)
If there is a construction lien filed against the subject land, then an exception for the construction lien must be included in the loan policy (See above).
A general construction lien exception is required if the coverage is not being provided.
Please contact Stewart underwriting personnel if you have any questions.
Also subject to any bulletins relating to mechanic’s liens.