Mechanics' Liens: learn & quiz · Title in a Minute

The minute version

How mechanics' liens work

Contractors, subcontractors, suppliers and laborers who improve real estate can generally record a lien against it if unpaid. Who qualifies and what notices are required varies by state.
Inchoate risk: most states allow a filing period after completion, so a lien for unpaid pre-closing work can be recorded after closing.
Some states require preliminary notices early in the job to preserve rights.
A lien must usually be enforced by suit within a set period, or it becomes unenforceable. Filing, notice and enforcement deadlines vary by state.

In many states, a lien's priority relates back to when work first started (or to a contract or notice-of-commencement date), so it can prime a mortgage recorded before the lien. Lenders often confirm no work has commenced before recording. Rules vary by state.
2021 Loan Policy, Covered Risk 11.a: priority over liens for work (i) furnished before the Date of Policy, or (ii) financed with loan proceeds the Insured advanced or is obligated to advance. Covered Risk 11.b covers street-improvement assessments.
Owner's policy: no Covered Risk 11.a; unfiled lien rights are typically handled by a Schedule B exception.

The company removes the exception only on evidence satisfactory to the Company (Commitment, Schedule B). Common tools:
- an owner's affidavit on recent work and payment;
- lien waivers/releases: conditional (effective on receipt of payment) or unconditional (effective when signed); partial (through a date) or final. Some states mandate statutory forms, and some void advance waivers;
- bonding off: many states let the owner or contractor post a bond or deposit that substitutes for the land;
- escrow holdback or indemnity that the company accepts at its discretion.
If the company removes the exception and a covered lien appears, it pays under the policy and may pursue the affiant or indemnitor (subrogation, Owner's Condition 13).
Requirements vary by state and underwriter.

ALTA 32, 32.1 and 32.2 (2021 v. 01.01) each delete loan Covered Risk 11.a and substitute mechanics' lien priority coverage to a Date of Coverage, measured by what has been disbursed:
- ALTA 32: charges designated for payment in the advance documents;
- ALTA 32.1: amounts the Company paid directly to the claimant;
- ALTA 32.2: amounts the Insured (or someone for it) paid directly.
ALTA 33-06 (Disbursement) is issued at each draw after a records check, moving the Date of Coverage forward and stating the disbursements.