12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan Mortgage have initial priority over mechanic's liens?

A Construction Loan Mortgage has initial priority over any Mechanic's or Materialman's lien filed for construction commenced after the mortgage is recorded. Kentucky Revised Statutes ("KRS") 376.080. KRS 376.010(2)

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Priority of future disbursements under a Construction Loan Mortgage can only be obtained if a title search is obtained which continues title from the recordation of the mortgage to the present and there are no intervening liens.

If priority is lost, can it be regained?

Once priority is lost it may be regained only on release by the claimant or the lien being statutorily dissolved. Any lien provided for in KRS 376.010 is dissolved unless the claimant, within six (6) months after he ceases to labor or furnish materials, files a lien statement in the county clerk's records. KRS 376.080. Further, any lien provided for in KRS 376.010 shall be deemed dissolved unless an action is brought within twelve (12) months from the date of filing the statement unless the debtor is deceased. (See #7). KRS 376.090

Is there a difference between on-site and off-site work?

There is no statutory difference in priority between on site or off site work. KRS 376.010 and 376.075

Is priority the same for all contractors and subcontractors on the same project?

Mechanic's and materialmen contracting directly with the owner have liens of equal dignity. Those contracting with a sole contractor have liens of equal dignity as between themselves. Unless asserted with an "Intent to File" as provided in KRS 376.010(2) each lien has priority as of the date of lien recordation in the clerks office. KRS 376.010

Time Limits

What are the time periods for recording lien claims by original contractors and subcontractors?

The time period to record any lien under KRS 376.010 is six (6) months after labor ceases or materials furnished. KRS 376.080(1)

After what period of time can you waive a mechanic's lien if no suit is filed?

A mechanic's liens may be waived if suit is not filed within one (1) year. There is a possible extension of six (6) months if the debtor were to die prior the elapse of the one (1) year period. KRS 376.090

Removing or Waiving Liens

Is there a statutory procedure for affidavits of completion or notices of completion?

There is no statutory procedure for affidavits of completion or notices of completion.

Can a statutory bond terminate the mechanic's lien as an encumbrance on the title?

A lien may be released by execution of a bond for double the amount of the lien claimed. KRS 376.100

Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanic's liens by the general contractor and/or subcontractors?

There is no statutory authority for an original, general or subcontractor's contract or waiver agreement to subordinate or waive mechanics lien rights of others.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?

A bona fide purchaser and lender will take free of any mechanic's liens later filed for earlier work if there is no intent statement filed as prescribed in KRS 376.010(2). KRS 376.010

Title Company Requirements

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

Inspection of property plus affidavit concerning no work done on property;

Recordation of mortgage

Possible indemnities from general contractor and owner

Possible review of financials

If giving mechanic's lien coverage:

Pending disbursement clause

Date down

Review of lien waivers

Note in owner's policy if insuring for amount of anticipated improvement.

Is it customary to add a "pending disbursement" clause or mechanic's lien exception in the Loan Policy insuring a construction loan mortgage?

Yes. Priority of future disbursements under a Construction Loan Mortgage can only be obtained if the title search is continued from the recordation of the mortgage. The policy, when issued, should contain a pending disbursement clause substantially as follows:

"Liability under this Policy is limited to the amount of the proceeds of the mortgage which are actually disbursed. Prior to any disbursement of funds, the title search must be continued from the effective date of this Policy and each disbursement made only if such search reveals no intervening liens or other encumbrances or objections to title."

See also Section 15.32 of the Underwriting Manual for a sample clause.

At the time of each disbursement or advance, the mortgagee requests a title update and issuance of an endorsement changing the effective date, an acknowledgment that a disbursement of dollars was made, and the amount disbursed to date to reflect the liability under the policy. KRS 376.010 and 376.010 (2).

Also subject to any bulletins relating to mechanic’s liens.