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Lenders Versus Mechanics’ Liens in West Virginia: A Question of Priorities

9/25/2013

Finally! After days, weeks, sometimes even months of waiting, you as the lending officer received approval from corporate that underwriting has just approved your borrower and you can proceed with the term sheet. Time to put things on the fast track and get this transaction closed ASAP, right? “Whoa, Nellie!” as the legendary sports announcer, Keith Jackson, used to say. The borrower has already broken ground on the site, or even just cleared brush, and now your closing attorney, title insurance agent and/or in-house counsel are calling this a “pre-start construction.” This common scenario plays out again and again for new construction projects. The bottom line in many states, including West Virginia, is that with a pre-start construction you’ve got a mechanic’s lien problem that threatens the very basis of your lending arrangement.
 
Because work performed, or materials supplied, including architectural and engineering services, relate back to the first day on which any services were performed or materials supplied, a mechanic’s lien can easily attach to a subject property prior to the date of the recordation of the deed of trust secured by that subject property.1 A lender should therefore presume that a mechanic’s lien will attach from the very first day anyone enters a property under the auspices of the construction contract.2 For instance, this scenario may occur when a property owner intends to make its final payment to its contractor and thereafter convert its interest-only construction financing into an amortized permanent loan. Although the property owner has paid the contractor as required under the construction contract, that contractor may have failed to pay its subcontractors and/or materialmen. The unpaid subcontractors and materialmen will inevitably look to the property owner by each filing a “Notice of Mechanic’s Lien” against the subject property, which may occur after the permanent loan has closed and deed of trust has been recorded. In this scenario, the permanent lender’s deed of trust will not have priority despite its having been placed of record in the county clerk’s office prior to the Notice of Mechanic’s Lien.3 
 
According to one large and reputable title insurance company, pre-start construction scenarios and the mechanic’s lien issues that arise therefrom are the most prevalent cause for title insurance claims in West Virginia. Thus, it comes as no surprise that title insurance companies will exercise greater caution and in turn require additional protections when asked to provide mechanic’s lien coverage. Typically, those protections will take the form of an indemnity requirement in form supplied by the title company. Such indemnity must also be supported by adequate financial certifications and statements from the indemnitor, which must ultimately prove that the indemnitor is currently capable of supporting the indemnity.4  
 
Where indemnity is not feasible or desirable, the lender will not achieve mechanic’s lien coverage through title insurance, at least in the short-term. However, the possibility remains that a lender can have its title insurance policy amended by endorsement 101 days after the last work has been performed or materials supplied at the subject property (as evidenced by owner/ contractor affidavits). This waiting period protects the title insurer because a mechanic or materialman must record its Notice of Mechanic's Lien within 100 days of completion of its work or supply of materials. Prior to attaining mechanic’s lien coverage through title insurance (and after attaining such coverage, for that matter), lenders should use credit line deeds of trust and, as a condition precedent to the owner's obligation to pay the contractor (or the bank’s funding of the next “draw”), require interim and final lien waivers to be executed by all parties who worked or supplied material to the subject property. 
 
Ultimately, the lender wants priority and the title insurance company wants to avoid liability for claims. This intersection of interests has created the above-described belt and suspenders approach, which can sometimes drive borrowers, lenders and/or closing attorneys crazy with paperwork and delay. Nonetheless, no one wants to deal with the headache of a mechanic’s lien where such precautions were not taken on the front-end of a transaction. No matter your role in closing the loan, if you become aware of a pre-start construction at the property to be secured, it’s your responsibility to make sure that someone has already said “Whoa, Nellie”!
 
Due to the complexities of mechanic’s lien issues in West Virginia, interested parties should exercise a heightened level of diligence when confronted by facts or circumstances that could give rise to a claim under these statutes. You can review a more comprehensive overview of West Virginia mechanics’ liens here. Should you have any questions or need any clarification with respect to the mechanic’s lien statutes or jurisprudence, please contact your Spilman attorney.
 

1  W. Va. Code § 38-2-17.
2  National City Bank v. Landau Building Company, No. 11-0437, 2011 WL 8197527 (W. Va. S. Ct. Oct. 21, 2011).
3  Note that West Virginia does not provide for a “bonding-off” of a mechanic’s lien. However, one can remove the cloud on title created by a mechanic's lien by making a cash payment into the presiding court equal to the full amount claimed under the lien plus a discretionary amount determined by the Court to cover interest and other costs potentially due the lien holder. See W. Va. Code § 38-2-36.
4 If the borrower is a “special purpose entity,” then a member must provide the required indemnity with supporting financials.
 

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Michael J. Basile / Responsible Attorney
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