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Disappearing Coverage for Mechanics Liens

Purchasers of newly constructed or renovated residential or commercial properties, as well their lenders, must more cautious about mechanics lien issues than in the past.

As a result of the economic recession (prompting concerns about contractors’ solvency) as well as amendments to Pennsylvania’s Mechanics Lien Law that broadened mechanics lien rights in significant ways, and eliminated the ability to have contractors waive their mechanics’ lien rights in many situations, many title insurance companies are refusing to insure against the possibility of mechanics liens or are imposing additional and sometimes onerous requirements on the seller or builder in order to do so.

Mechanics liens are liens –clouds on title — that may be filed by general contractors, subcontractors and sub subcontractors for work done and materials furnished in constructing residential or commercial improvements. The lien can be filed up to six months after the contractor’s work concluded, and if properly and timely filed is effective retroactively to the date that contractor’s work began. If a buyer purchases new construction before the expiration of the time limit for filing, it is therefore possible that a contractor or subcontractor who is not paid could file a lien after the buyer takes title and that lien will encumber the buyer’s title as if it had been filed before settlement.

Historically, title insurance companies would often insure buyers’ and lenders’ title against the possibility of mechanics liens without too much difficulty, especially in situations where the title company had a long standing relationship with the builder, seller or lender. The state of the economy and the real estate market, and the financial difficulties of many builders, has caused title insurance companies to reconsider underwriting such risks and it may know be much more difficult or even impossible to obtain title insurance coverage against mechanics liens, even when there is no reason to believe that the particular contractor is having financially difficulties.

This poses a problem and potentially significant risk for sellers, contractors, buyers, tenants and lenders alike.

Builders should take additional steps to help protect themselves and their purchasers against mechanics liens claims. Waivers of liens should be filed where still permissible. Builders should take extra precautions to make sure they know what subcontractors and sub subcontractors are working on the project and require that subcontractors provide evidence of payment of their subcontractors. Buyers, tenants and lenders should also seek to protect themselves upfront by provisions in the agreement requiring indemnities from the seller and/or builder, requiring evidence of payment of contractors and similar protections, although as a practical matter, it is often impossible for a builder to prove full payment at the time of settlement.

Buyer should consider contacting title insurance company in well in advance of settlement, and perhaps even in advance of signing a contract to purchase, to determine whether or not – and on what terms – mechanics lien coverage will be available, and then address whatever the title insurance company’s requirements will be in the contract.

People who own their own lot and are contracting with a builder for construction likewise need to draft appropriate protections in the building contract.

Please call us if you would like additional information on how this issue may affect you, and how to protect yourself from the risks of mechanics liens.

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