MECHANIC’S LIEN UPDATE John Rothermel Stewart Title Guaranty Company Sr VP, SW States Regional Underwriting Counsel, Associate Senior Underwriter January 20, 2011
TEXAS CONSTITUTION The Texas constitution recognizes that people will need to borrow money to build improvements • From the 1876 constitution, the money to improve a homestead was recognized as one of the initial 3 reasons to have a valid lien against a homestead
CONTRACT REQUIRED For a loan secured by HS property, a written contract is required: • Signed by both spouses, • Signed by contractor • Recorded in land records where the property is • Note that signing before work begins is mandatory; recording before is strongly preferred
MLC REQUIREMENTS Names of owners/borrowers • If non-qualifying spouse lives there, (s)he must sign to encumber HS even if property is separate property of other spouse Name of Contractor • Make sure signs in proper capacity if an entity Description of the Property
MLC REQUIREMENTS Scope of the work • Build house is probably technically enough but should be more specific Really can’t have change orders for extras unless there is new stuff being done, and how do you know if the contract is too broad? • Size, number of rooms, outbuildings, roof type, pool, etc. for new construction • Reasonably detailed for remodeling
NON-HOMESTEAD PROPERTY What is this kind of property anyway? • Non-owner occupied 1-4 family residential • Commercial (beware of motels and penthouses) • Rental property • Apartments (again beware of owner suites) MLC not required (but usually can’t hurt) Basics though don’t change
Early Start Once the negotiations as to the scope of the work and the price are negotiated, builders and owners are desperate to start • And sometimes they do start before the MLC is signed and recorded • Since we insured priority and validity of liens, this presents a major problem HS: both are at risk Non-HS: priority is at risk
EARLY START There is only one reasonably sure cure for the early start: • Pay the contractor and all subs; pull all equipment, materials and workers off the job; file an affidavit of completion and do nothing more for more than 4 months (unless retainage is held by title company, then 30 days). Do a new contract for the remainder of the work and start the process over.
EARLY START Wow, that is a lot of stuff and a lot of time! Indeed. But that covers the bases for almost all risks, including missing an unpaid subcontractor or supplier. Is there anything less than can be done? Call your favorite underwriter. • We can work with you to reduce the time, perhaps waive the completion affidavit. But pulling off the job for some period of time is always required. • You can see the problem with paying for the work done when the MLC is too vague – what was done and what is left?
LIEN FILING PERIODS Residential construction: 15 th day of 3 rd month after the day on which indebtedness accrues All other construction: 15 th day of 4 th month after the day on which indebtedness accrues Prop code: 53.052
ACCRUAL DATES Original Contractor: • Last day of month in which contract is terminated • Or last day of month in which original contract finished, settled or abandoned (same for retainage) Subcontractor: • Last day of month in which work was done or supplies furnished
ACCRUAL DATES Specially fabricated material • Last day of month when materials delivered • Last day of month when material would normally be required at the job site • Last day of month of any material breach or termination of original contract
LIEN CLAIMS A contractor or supplier must file a claim within the time required or they have no lien • The MLA must contain certain information (see 53.054) • Our problem is (c) which says that the affidavit doesn’t have to set forth specific items of work done or material furnished and can use abbreviations customarily used in the trade
LIEN CLAIMS The claimant must file the MLA and send notices to owner and general contractor no later than the 5 th day after the MLA is recorded • And how do we know this from the record? Can’t until suit is filed and we are defending!
RETAINAGE The beauty of retainage is that by withholding 10% of the value of the work done, the lien claimants are limited to the 10% retained and don’t have a claim on the property. • Not common because many contractors don’t have much more than 10% profit in the job and waiting will just cause liens to be filed. • Banks compete on not requiring retainage.
AFFIDAVITS Affidavit of commencement: provides notice to all lien claimants as to the inception date of the contract Affidavit of completion: provides notice to all lien claimants as to the cessation of work and starts the running of the lien filing periods • Only been around for 18 years and title companies are not used to asking for them!
SUIT TO FORECLOSE Residential construction: later of 1 year after last day to file MLA or 1 year after completion, termination or abandonment of the work under original contract Other projects: later of 2 years under 53.052 or within 1 year after completion, termination or abandonment of the work under original contract
REMOVABLES Long Series of cases beginning with Whirlpool case in 1975: removable items are not subject to being cut off by foreclosure, but rather the remedy is to repossess the items • Long laundry list of items • Removable if can be removed without harm to the item or the property AT THE TIME OF REMOVAL • Appliances, carpet, doors and window, finished plumbing • Not: paint, framing, foundation, rough plumbing, some electrical
REMOVABLES Post foreclosure: • Lenders want all MLA claims removed • Some MLA’s are for removables • Some you just can’t tell • Lender wants them all removed • While it is true that an MLA on a removable isn’t a lien against the property, a buyer might find it disconcerting to find that all interior doors, carpet, H/vac and appliances have been removed
REMOVABLES Legislation dealing with identifying removables is likely this session Exact form of law will be decided in the next several days Balancing act required of competing interests May include the list of what courts have determined to be removables
AVOIDING MLA’s Bond to indemnify 53.172 • Filed with clerk • Describe the property • Refer to each filed lien • Double the amount (150% if more than $40,000) • Signed by owner and surety company admitted in Texas • Notice sent to named obligees by clerk
AVOIDING MLA’s Bond to Pay Liens or Claims 53.201 • Original contractor can obtain • Must be in at least amount of contract • Follows basic formalities of the Bond to Indemnify
PERFORMANCE BONDS These may be in the nature of a bond to pay liens but also may simply be a guaranty to the owner that the contractor will indeed do the work in a proper fashion. If asked to accept such a bond to remove MLAs, contact a Texas underwriter and provide a copy of the bond.
PRIORITY OF LIENS In Texas, all persons doing work or providing materials for a job share in ONE mechanics lien. They do not each have a separate lien. That lien is created by the earlier of • A signed contract or • The first person to do work on the site And extends to all persons providing materials or doing work.
PRIORITY OF LIENS Early site preparation or delivery of materials can prime the later signed contract or deed of trust • In other words, create the lien which then has priority over the deed of trust we insured • Getting lien waivers from the first laborers/ suppliers doesn’t help since they can’t waive the entire lien, only their right to participate in the lien
SWITCHPLATE MAN If the foundation company starts the forms and groundwork two days before closing of our contraction instruments but gets paid and signs a lien waiver, but the switchplate man doesn’t get paid, his lien has priority over our construction deed of trust. Why? Because they all share one lien and one company can’t waive for everyone.
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