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?

Yes, as long as work has not commenced and no Claim of Lien(s) is recorded or suit commenced prior to the closing on the construction mortgage. See O.C.G.A. §44-14-2 and 3 and Hinkel, Georgia Construction Mechanic's & Materialmen’s Liens, Chapter 9.

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

Yes. See Hinkel-Chapter 9 and O.C.G.A. §44-14-2.

If priority is lost, can it be regained?

No. In order to establish the initial priority of a mortgage or security deed over mechanic's liens, the insured security deed must be recorded prior to the date when materials are first delivered or work commences under a contract upon the land. The date of the recording of an insured security deed or mortgage and the date of the furnishing of materials by a materialman control the determination of the priority between the security deed and the materialman's lien. The lien in favor of the mechanic or materialman is said to attach and be created at the time of the initial contribution of the labor or materials that is the subject of the lien, though the action to perfect and enforce the lien may be brought within 395 days of filing a Claim of Lien. Once the Claim of Lien is properly and timely filed for record under OCGA Section 44-14-361 and all other steps are taken to perfect and enforce the lien, the lien is said to relate back and have priority over all subsequently created liens.

However, mechanic's lien rights created under OCGA Section 44-14-361 can be extinguished and cut off for work done on the land within 95 days prior to the closing of a transaction. In those instances where no Claim of Lien has been filed for record and no actual notice of a mechanic's lien or commencement of work on the date of closing, the Georgia Code Section OCGA 44-14-366 specifically provides the circumstances and means by which inchoate lien rights may be dissolved by the acts of the owner, contractor or lower tier lien claimants. In order to establish and maintain the priority of an insured security deed over a subsequently filed Claim of Lien, the Closing Agent must carefully and completely follow all of the guidelines and requirements set forth in the title insurance requirements section below. Once priority of the insured security deed is properly established pursuant to the statutory requirements, it cannot be lost even if a Claim of Lien is filed after the date of closing. This is true for any security deed including construction and permanent loans. The security deed will not be superior to a mechanic's lien where the closing agent or parties to a transaction have actual knowledge of a mechanic's lien claim even before a Claim of Lien has been recorded or actual knowledge of work done on the land within 95 days prior to the date of closing. These mechanic's lien claims must be properly cleared at the closing of a transaction. Please see the specific title insurance requirements set forth below or contact your local Stewart Underwriter.

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

No.

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

Yes. Mechanic's liens created by statute as to each other do not have priority fixed by the date when the materials are delivered or the work commences. Instead, they are ranked according to the date the Claim of Lien is properly and timely filed for record. O.C.G.A. §44-14-361.1(b) and Hinkel Chapter 9.

TIME LIMITS

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

A mechanic's lien attaches as a lien when material is first delivered or work commences on real property under a contract and is valid for 90 days without recording. See O.C.G.A.§44-14-361. In order to perfect a lien right, a lien claimant has 90 days after completion of work or furnishing the last item of material to file his Claim of Lien with the Clerk of the Superior Court in the county where the property is located. O.C.G.A. §44-14-361.1(a)(2). The computation of time is determined pursuant to O.C.G.A. §1-3-1(d)(3) and O.C.G.A. §44-14-369. All necessary statutory procedures for recording of a Claim of Lien must be strictly complied with to assure proper perfection. O.C.G.A. §44-14-361.1(a)(2); O.C.G.A. §44-14-367, O.C.G.A. §44-14-368. If the lien claimant fails to file a Claim of Lien as required by statute, the lien is extinguished and rendered unenforceable. Id.

See title insurance requirements set forth below.

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

A Claim of Lien filed for record may be waived if no notice of suit is filed within 395days from the date the lien is filed for record. See O.C.G.A. §44-14-367. A lien claimant must file to commence an action for recovery against the person with whom the lien claimant has contracted for recovery of the amount of the Claim of Lien within 365 days from the date of recording of the Claim of Lien. O.C.G.A. §44-14-361.1(a)(3). Failure to commence a suit on the lien within 365 days from the date of filing of the lien renders the Claim of Lien unenforceable under O.C.G.A. Section 44-14-367 subject to the exceptions set forth under O.C.G.A. Section 44-14-361.1(a)(4). Within 30 days after commencement of the foreclosure action, the lien claimant must file for record a Notice of Suit with the Clerk of Court in the county where the Claim of Lien is filed. O.C.G.A. §44-14-361.1(a)(3) and (4).

An owner or contractor against whom a lien has been filed may record a “Notice of Contest to Lien” in the statutory form in order to reduce the time period in which the lien claimant has to file suit. See O.C.G.A. §44-14-368. Where a Notice of Contest is filed of record, a Claim of Lien may be waived without release or discharge as a matter of law if no action is commenced within 60 days and no notice of suit is recorded within 90 days of recording of the Notice.

REMOVING OR WAIVING LIENS

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

No. See O.C.G.A. §44-14-361.3 (Preliminary notice of lien form; notice to contractor) and O.C.G.A §44-14-361.5. (Liens of Persons without privity of contract).

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

Yes. After a Claim of Lien has been filed and either before or after a suit on the lien is instituted, the owner of the property or the contractor may discharge a specific lien by filing a surety bond with the Clerk of the Superior Court in the county where the real estate is located. All necessary statutory procedures must be strictly complied with to assure proper release of the lien upon filing of a dissolution bond. See O.C.G.A. §44-14-364 and Hinkel, Chapter 8.

Company Policy: We require a file stamped copy of the statutory bond in the proper form as filed with the Clerk of the Superior Court in the county where the real estate is located in order to insure over a Claim of Lien upon a dissolution bond.

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

A potential lien claimant may execute a subordination of lien rights to any other party which may have or acquire an interest in all or part of the real estate and the subordination may be given even though the lien claimant has not actually received payment in full for its claim. O.C.G.A. 44-14-366(e)(1).

The right to claim a lien cannot be waived in advance of the furnishing of labor or materials. Any purported waiver or release of lien in advance is void and unenforceable. See O.C.G.A. §44-14-366. However, OCGA Section 44-14-366 provides specific means by which and circumstances under which lien rights may be waived and released by potential lien claimants where work has commenced on the land within 95 days of the closing. In order to obtain protection from liens, the property owner must obtain a sworn Final Contractor’s Affidavit from their general contractor (e.g. person who entered into an agreement with the owner for improvements to real estate). The property owner must have a direct contractual relationship with the general contractor. The Affidavit must state that the contractor has paid all the subcontractors, materialmen, and supplies the agreed contract price or reasonable value of the labor, supplies and materials furnished at his request. Language in the Affidavit which states that “as far as I know all bills for labor and materials have been paid” is not sufficient to dissolve a lien. Saye v. Athens Lumber Co., 93 S.E.2d 806 (1956). A sworn statement by the property owner will meet this requirement only when the Property Owner Contractor is conveying title in a bona fide sale or loan transaction. In addition, if work is ongoing or if amounts for unpaid work must be paid at closing, the lien claimant must execute one of two Lien Waiver Upon Payment forms supplied by the statute. An Interim Waiver and Release Upon Payment, in compliance with the statute, is used for interim or progress payments. Upon execution of an Interim Waiver, the lien claimant’s rights run from the date following the date specified in the executed Interim Waiver for all purposes, subject only to the condition that there is payment of the sum stated in the Interim Waiver. Id. An Unconditional Waiver and Release Upon Final Payment, in compliance with the statute, is used for final waivers upon final payment. Upon execution of an Unconditional Waiver, the lien claimant has no further lien rights against the property for all purposes, subject only to the condition that there must be payment in full of the claimed amount set forth in the Waiver. Id. Such amounts are conclusively deemed to be paid in full upon the earliest to occur of (1) actual receipt of funds; (2) execution by the claimant of a separate written acknowledgement of payment in full; or (3) 60 days after the date of execution of the waiver and release unless prior to this date the claimant has filed either a Claim of Lien or an Affidavit of Nonpayment. Id.

When the Affidavit and Lien Waivers Upon Payment are executed in connection with the final payment of the contract price, the property owner is protected from liens which might subsequently be filed by the general contractor, subcontractor, materialmen, and suppliers. O.C.G.A. §44-14-361.2. A lender, who has taken an interest in the improved property, is also entitled to rely on this Affidavit and Waivers as protection against subsequently filed liens. As long as these specific procedures are followed, a mortgage will have priority over the lien claimant who later files a Claim of Lien. See Hinkel, Chapter 6. Please see the specific title insurance requirements set forth below or contact your local Stewart Underwriter.

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

Yes, subject to certain requirements. See O.C.G.A. §44-14-361.2 and O.C.G.A. §44-14-366 and Hinkel, Chapter 6. See also title insurance requirements set forth below.

TITLE COMPANY REQUIREMENTS

The standard mechanic's lien exception may be deleted from any policy of title insurance only upon strict compliance with the statutory requirements and underwriting guidelines contained herein.

What are the requirements for deletion of the standard mechanic's lien exception from the Owner and/or Loan policy of title insurance?

If there has been no work done or materials provided to the property within 95 days preceding the closing and the Seller provides a fully executed Owner/Seller Affidavit properly attesting to the fact that no labor, materials or supplies have been provided to the property within 95 days proceeding the closing, the standard mechanics lien exception may be removed from the owner and/or Loan policy of title insurance as along as the transaction qualifies under O.C.G.A. §44-14-361.2(B)(i)(ii)(iii).

If a Claim of Lien(s) appears of record or if the Issuing Agent has actual notice of a lien recorded in the gap, these liens must be cleared either by full payment and cancellation of the lien or discharged by statutory bond properly filed with the Clerk of Superior Court, unless they are deemed expired under O.C.G.A. §44-14-361.1.

What are the requirements for (a) issuing a loan policy on construction loan mortgage and (b) issuing an Owner and/or Loan Policies on construction to permanent financing?

The Owner/Borrower must provide a fully executed Affidavit attesting to the fact that no labor or materials have been provided within 95 days preceding the closing. The Policy must contain a “pending disbursement” clause in Schedule B or the general mechanics lien exception if the policy will insure a construction loan mortgage.

If work has been done or materials furnished within 95 days prior to closing and the work was done by a general contractor or owner contractor, the Issuing Agent must obtain a sworn Final Contractor’s Affidavit, in the proper form, stating that the contractor has paid all the subcontractors, materialmen, and suppliers the agreed price or reasonable value for the labor, supplies and materials furnished at the request of the general contractor, through the date of closing. In addition, if all amounts for work or materials are paid in full, the Issuing Agent must obtain an Unconditional Waiver and Release Upon Final Payment, in the statutory form, from all subcontractors, materialmen, and suppliers who preformed work on the property prior to closing. If amounts remain unpaid for work or materials or if work is still in progress, then these amounts must be paid at closing and the Issuing Agent must obtain an Interim Waiver and Release Upon Payment from all subcontractors, materialmen, and suppliers who preformed work on the property prior to closing.

All liens, which are disclosed by the search of the public record or where the Issuing Agent has actual notice of a lien recorded in the gap, must be cleared either by full payment and cancellation of the lien or discharged by statutory bond, unless they are deemed expired under O.C.G.A. §44-14-361.1.

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

Yes. "Pending disbursement of the full proceeds of the loan secured by the Mortgage herein insured, this policy insures only to the extent of the amount actually disbursed but increases as each disbursement is made, up to the face amount of the policy. At the time of each disbursement of the proceeds of the loan the title must be continued down to such time for possible liens, including mechanic's liens, and other objections, intervening between the date hereof and the date of such disbursement."

What are the requirements for issuing Owner and/or Loan Policies on Builder/Owner Sales?

The Builder/Owner must provide a fully executed Affidavit attesting to the fact that no labor or materials have been provided within 95 days preceding the closing. Issuing Agents should update title prior to closing to determine if there are any liens recorded since the date of examination of title. All liens, which are disclosed by the search of the public record or where the Issuing Agent has actual notice of a lien recorded in the gap, must be cleared either by full payment and cancellation of the lien or discharged by statutory bond, unless they are deemed expired under O.C.G.A. §44-14-361.1.

If work has been done or materials furnished within 95 days prior to closing, the Issuing Agent must obtain a sworn Final Contractor’s Affidavit, in the proper form, stating that the contractor has paid all the subcontractors, materialmen, and suppliers the agreed price or reasonable value for the labor, supplies and materials furnished at the request of the general contractor, through the date of closing. In addition, if all amounts for work or materials are paid in full, the Issuing Agent must obtain an Unconditional Waiver and Release Upon Final Payment, in the statutory form, from all subcontractors, materialmen, and suppliers who preformed work on the property prior to closing. If amounts remain unpaid for work or materials or if work is still in progress, then these amounts must be paid at closing and the Issuing Agent must obtain an Interim Waiver and Release Upon Payment from all subcontractors, materialmen, and suppliers who preformed work on the property prior to closing.

BE SURE TO CONSULT YOUR LOCAL STEWART UNDERWRITER IF YOU HAVE ANY QUESTIONS.

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