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?

No. Laborers and suppliers have priority over a construction loan deed of trust lien from the date of their first work on the site until they are paid. A deed of trust securing both acquisition and construction monies will retain priority for the acquisition funds but only as to work not yet performed. Va. Code sec. 43-21.

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

Not applicable. There is no initial priority.

If priority is lost, can it be regained?

No.

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

Pursuant to Va. Code sec. 43-3.B., infrastructure services (called "site development improvements" in the statute), although performed off-site, can be the subject of a proportional lien. Such site development improvements are particularly trouble-some because they may be liens on adjacent, completely constructed lots. On the other hand, the obligation to apportion such liens to the adjacent lots tends to minimize their impact and provides additional defenses against their enforcement (for example, overburdening).

Va. Code sec. 43-2 specifically names surveying as a lienable labor tending to improve the property. Case law has extended to architects the right to claim a lien. Cain v. Rea, 159 Va. 446, 166 S.E. 478 (1932).

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

Although subcontractors have a derivative lien from the general contractor (Va. Code sec. 43-7) and the sub-subcontractors from the subcontractor (Va. Code sec 43-9), Va. Code sec. 43-23 gives "preference" (not priority) to the subcontractor over the general and the sub-subcontractor over the subcontractor (and common laborers over suppliers as to the last thirty [30] days of work).

Time Limits

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

A memorandum of lien must be filed within ninety (90) days of the last day of the month in which in which labor was last performed or materials were last supplied, but, in no event, later than ninety (90) days from termination of the project. Va. Code sec. 43-4. The filed lien memorandum may only claim a lien for work performed within 150 days prior to the last day of work. Id.

Moreover, a suit to enforce the mechanic's liens must be filed within six (6) months of filing the memorandum or within two (2) months of the termination of all work, whichever date is later. Va. Code sec. 43-17.

There is no statutory definition of termination or completion of the project, although Dominion Trust Co. v. Kenbridge Construction Company, 248 Va. 393, 448 S.E.2d 659 makes it clear that it is not the time that an architect certifies substantial completion. For residential construction, the weight of professional opinion seems to define completion of the project as issuance of an occupancy permit, but there is no confirmatory court decision on the point.

A recent addition to Virginia law is the concept of the mechanic's liens agent. Va. Code sec. 43-4.01.C. provides that a contractor or supplier will lose all rights to a lien if it should fail to give a written notice to the mechanic's liens agent within thirty (30) days of the first day of work that it is working on or providing materials to the site. [There are exceptions to this rule and the procedures of Va. Code sec. 43-4.01 are too extensive to develop fully here.]

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

A lien may be waived in whole or in part at any time. Va. Code sec. 43-3.C.

Removing or Waiving Liens

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

No.

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

Yes. Va. Code sec. 43-70 and sec. 43-71, respectively, provide for the posting of a bond or paying money into court to effect a release of a lien after suit (-70) and prior to suit (-71). Upon such bond or escrow, the court will order the release of the recorded mechanic's liens and the lien is transferred to the bond or the fund. Litigation proceeds in the same manner as if no bond or escrow were established, statutes of limitation, procedural requirements, matters of defense to the lien, etc. are still applicable.

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

A waiver by a superior party does not release or subordinate the lien rights of a subcontractor or lower tier. Payment to the higher tier, however, limits the extent of the lower tier's claim to no more than the amount owed to the higher tier. Va. Code sec. 43-7.A.

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

No.

Title Company Requirements

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

A list of documents are required before authority to grant affirmative mechanic's liens coverage is given. The required documents e.g., loan commitment, financials, cost breakdown, subs and suppliers and phone numbers, etc. are designed to prove the credibility of the project and the creditworthiness of the builder. An indemnity is required from the borrower, general contractor and any guarantor on the loan. The agent is required to bring title forward to the date of each draw and to collect waivers of lien from all parties providing labor or materials to the site. Also, with each draw, the agent collects an interim affidavit from the borrower and general contractor as to payment of accounts.

For a project that qualifies for appointment of a mechanic's liens agent, most of the required documents are waived. Bringdowns, affidavits and indemnities are still required. Based upon certificates from the mechanic's liens agent, the title agent is required to obtain waivers of lien only from those parties giving the written notice to the mechanic's liens agent.

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

Yes, a pending disbursement clause is customary. The usual form for a residential "MLA-posted" project is designated "STEWPEND." More restricted language, "RESTPEND," is used in most other cases. Both forms of pending disbursement clause have parallel bringdown endorsements and specific monitoring requirements.

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