Mechanic’s Lien Coverage Requires Underwriter Approval.
Can the Construction Loan Mortgage have initial priority over mechanics' liens?
Mortgage has priority unless recorded after the commencement of work or materials furnished. § 48-2-5 NMSA 1978. Valley Federal Sav. & Loan Ass’n v. T-Bird Home Centers, Inc., 741 P.2d 826, 106 N.M. 223 (1987) (articulating principle that subsequent mechanics’ lien claimants have priority back to the time of initial work done by any laborer or supplier).
Will initial priority as to future disbursements be retained only if certain procedures are followed?
No, additional procedures are not required per § 48-7-9 NMSA 1978. Priority will be retained if (1) the insured mortgage contains a future advance clause, (2) future advances are made in reliance upon and consistent with the future advance clause, and (3) the loan amount, including future advances, does not exceed the maximum amount stated in the mortgage.
If priority is lost, can it be regained?
No; there is no statutory procedure for regaining lost priority.
Is there a difference between on-site and off-site work?
Yes. Registered surveyors have equal lien rights and priority, but survey work does not "commence" construction. § 48-2-5(B) NMSA 1978. Architects are entitled to lien by case law. Gaastra, Gladding & Johnson v. Bishop’s Lodge Co. 35 NM 396, 299 P. 347 (1931). This lien may be enforced, even if the designed improvements are not constructed. Cubit Corp. v. Hausler, 114 N.M. 602, 845 P.2d 125 (1992).
Is priority the same for all contractors and subcontractors on the same project?
Yes. There is no provision for separate priority.
What are the time periods for recording lien claims by original contractors and subcontractors?
Original contractor (i.e., general contractor) has 120 days after completion of contract and everyone else (including subcontractors, laborers, materials suppliers) has 90 days. § 48-2-6 NMSA 1978.
After what period of time can you waive a mechanics' lien if no suit is filed?
Two years after recordation of the claim of lien, if no foreclosure action is brought within such two-year period. § 48-2-10 NMSA 1978.
Removing or Waiving Liens
Is there a statutory procedure for affidavits of completion or notices of completion?
Can a statutory bond terminate the mechanics' liens as an encumbrance on the title?
Owner or contractor may petition the district court to cancel liens upon deposit of appropriate security with the district court. § 48-2-9 NMSA 1978.
Can the original, general, or subcontractor's contract or waiver agreement subordinate or waive mechanics' liens by general contractor and/or subcontractors?
There is no statutory or case law expressly on point.
Can a bona fide purchaser or bona fide lender take free of mechanics' liens later filed for earlier work?
No, provided that the lien is filed within the applicable 90 or 120 day filing period. New Mexico has adopted a "Stop Notice Act", §§48-2(A)1 through 12 NMSA 1978, to protect owners or buyers of 1-4 family dwelling units, but the notice and bond requirements are burdensome, so very few persons rely on the Act.
Title Company Requirements
In accordance with standard Stewart policy, mechanic’s lien coverage on loan policies insuring construction loans always requires underwriter approval.
If the loan policy is insuring a true construction loan, not a combined construction/permanent loan, the title commitment must contain the following language prescribed by regulation:
The construction loan policy or a loan policy containing a two-year (2) claims made limitation will contain an exception limiting its coverage to two (2) years duration pursuant to 22.214.171.124 NMAC.
The corresponding loan policy insuring a construction loan must include the following language prescribed by regulation:
Notwithstanding any other provision of this policy, the company shall be liable only for such loss or damage insured against by this policy which is actually sustained by the insured and reported to the company as provided in the conditions and stipulations on or before two years after the recording of the mortgage described in Schedule A. (Upon payment to the Company of the required full Loan Policy premium prior to the expiration of said policy, the term limitation may be deleted from this policy.)
A loan policy with the two-year claims made limitation costs $30 plus $1/thousand of coverage. The policy may be extended for up to four successive six-month periods at a cost of $25 per extension. This policy cannot be the basis for any subsequent discount.
Lenders almost always require mechanic’s lien coverage in policies insuring a construction loan. In order to provide mechanic’s lien coverage, we require physical inspection of the insured land for non-commencement of construction before recording the insured mortgage and owner affidavits. If there is no evidence of commencement, mechanic’s lien coverage is provided by deleting standard exception 4 at a charge of $25 and including a pending disbursement clause. If inspection reveals commencement of construction, the mortgage is not recorded or insured until issues of broken priority are addressed. The loan policy has to be re-underwritten as broken priority, in which case we require the STG Indemnity Agreement: Construction from the borrower and general contractor and acceptable financial statements from same. If mechanic’s lien coverage is provided in a broken priority situation, it is provided only through one of the NM 83 Construction Loan Endorsements, depending on the circumstances. The cost of mechanic’s lien coverage where there is broken priority is $5/thousand.
Downdate coverage is provided in one of two ways: (1) if there is no broken priority and the standard exception 4 was deleted, downdate coverage is provided by the NM 22; (2) if there is broken priority and one of the NM 83 forms has been issued, downdate coverage is provided by the NM 84.
Is it customary to add a "pending disbursement" clause or mechanics' liens exception in the Loan Policy insuring a construction loan mortgage?
Stewart requires a pending disbursement clause in all loan policies insuring a construction loan where there is mechanic’s lien coverage.
Construction loan policies cannot be issued after August 1, 2014, so a construction lender is issued a standard loan policy, either with or without a two-year claims made limitation. Effective March 1, 2016, rule 126.96.36.199 NMAC confirms that an underwriter may require a pending disbursement clause when insuring a construction mortgage. The pending disbursement clause may be in a form specified by the underwriter or it may be in the form established by the rule. The promulgated rule language is:
Pending disbursement of the full proceeds of the loan secured by the mortgage or deed of trust 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 defect in, or objections to, the title, up to the face amount of the policy. Prior to each disbursement of the proceeds of the loan, the title must be continued down to such time for possible liens or objections intervening between the date hereof and the date of such disbursement.
§ 188.8.131.52(A) NMAC.
The foregoing pending disbursement clause may be used in cases where we have provided mechanic’s lien coverage and there is NO broken priority.
If we have agreed to provide mechanic’s lien coverage in a broken priority situation, you must use one of the Stewart forms of pending disbursement clause, specifically PDCX06 or PDCX07, or NM Form 83, 83.1, or 83.2, as approved by a Stewart underwriter. See Underwriting Manual Section 15.32.
Also subject to any bulletins relating to mechanic’s liens.