This is long overdue. It seems I get a call or email weekly about a proposed purchaser looking to buy a New Construction Condo with Mechanics Lien Coverage. The process of insuring such a transaction has become more and more complicated in the last 3 years and for good reason. Title Insurance companies used to insure against the possibility of mechanics liens without too much of a problem. However, the financial markets collapse and concerns over contractors’ solvency has caused title underwriters to reconsider such risks and it is now much more difficult or at times impossible to obtain the appropriate coverage. Before diving into the issue on how such a transaction can get insured let me first make sure you understand what a Mechanics Lien is.
Mechanics Lien is defined as:
“A legal claim placed on real estate by someone who is owed money for labor, services or supplies contributed to the property for the purpose of improving it. Typical lien claimants are general contractors, subcontractors and suppliers of building materials. A mechanics’ lien claimant can sue to have the real estate sold at auction and recover the debt from the proceeds. Because property with a lien on it cannot be easily sold until the lien is satisfied (paid off), owners have a great incentive to pay their bills.
|In 2007, Governor Rendell signed a new law that provided greater protection to subcontractors and suppliers of materials.|
The previous law allowed the owner of the property or developer to sign a “waiver of liens” (also known as a Stipulation Against Liens) and record the document in the prothonotary’s office of the county where the project is being completed. This document would basically prevent any and all liens from being filed, even those from subcontractors who did not sign the “waiver”. The new law no longer permits a “waiver of liens”, with two small exceptions exist: 1) when the builder or GC supplies a payment bond of 1% of the cost of the project; or 2) for residential property not exceeding 3 stories in height with a contract amount of less than One Million Dollars. Moreover, the new law gives a contractor, subcontractor and sub-subcontractors a period of 6 months from the completion of the claimant’s work to file.
So how does a buyer obtain Title Insurance with Mechanic’s Lien Coverage?
All Title Commitments come with the standard mechanic’s lien exception:
“Any lien, or right to a lien for services, labor or materials heretofore or hereafter furnished, imposed by law and not shown by public records.”
I believe the legislation is quite flawed and in more then just one way. Perhaps I will contribute something at a later date on why Pennsylvania remains behind the curve when it comes to Mechanics Lien Law. For now my intention is to address all of the buyers out there who do have good questions and concerns on making sure they are properly covered. The good news is that with a cooperative seller and a knowledgeable title insurance company mechanic’s lien coverage is still very much available.
Marc E. Shaw, Esquire, is an attorney in Pennsylvania and New Jersey and managing partner at World Wide Land Transfer, Inc. and has represented a many builders and developers in Pennsylvania as well as many home purchasers in need of the proper title coverage. Contact Marc with questions or comments at firstname.lastname@example.org.