Telling the Story of the Deal
COMMERCIAL CONSTRUCTION PROJECTS rarely move in a perfectly straight line. Budgets shift, schedules change, contractors dispute payments and financing structures evolve throughout the life of a deal. For title professionals, those realities make mechanic’s lien coverage one of the most nuanced and fact-driven areas of commercial underwriting.
According to Nancy Landmark, deputy chief underwriting counsel for commercial services at Stewart Title Guaranty Co., and Neil Higgins, national commercial underwriting counsel at First American Title Insurance Co., understanding mechanic’s lien risk requires title professionals to look beyond forms and filings and instead focus on the entire story behind a construction project.
“Every decision that’s made on mechanics lien coverage is very fact-specific,” Landmark said. “What works one time may or may not work the next time.”
Higgins agreed, noting that mechanic’s lien analysis becomes even more complicated because laws vary significantly from state to state.
“The mechanics lien laws are different in all 50 states,” Higgins said. “We’re really talking about mechanics lien issues generally because every jurisdiction has its own nuances.”
The two recently discussed common underwriting considerations, evolving coverage practices and practical ways title professionals can better evaluate mechanic’s lien exposure in commercial transactions.
A Different Type of Title Risk
Unlike many title issues that can be identified through a search of the public records, mechanic’s lien exposure often exists before a lien is ever filed. At its most basic level, a mechanic’s lien is a statutory remedy designed to protect parties that furnish labor, materials or professional services for improvements to real property. Depending on state law, that can include contractors, subcontractors, engineers, architects, surveyors, suppliers, laborers and equipment rental companies.
“These statutes were enacted to provide parties a greater remedy in the event of non-payment for their services, labor or supplies above and beyond contract law,” Higgins said.
Mechanic’s liens present a unique challenge because the risk may arise through what underwriters refer to as “inchoate” lien rights. Those are unperfected interests that may later mature into enforceable liens.
“That’s really the off-record lien risk,” Higgins explained. “When we talk about off-record lien risk, it’s this inchoate interest that we are really talking about.”
The scope of potential lien claims can also extend far beyond vertical construction.
“Improvements are not only buildings and actual structures,” Higgins said. “They may also include demolition, grading, clearing, excavation, site work and waste removal.”
That creates situations where mechanic’s lien exposure may exist even when a property appears vacant.
“You may have vacant land projects where there was recent construction activity,” Higgins said. “There could have been demo work done within the statutory lien period that you’re not aware of.”
Similarly, work occurring inside an existing structure may create lien exposure that is not immediately visible during a site inspection.
“If you walk inside the property, you may be able to clearly tell there’s been recent work done,” Higgins said. “The only way to really know that is if that is disclosed.”
Why State Law Matters
For lenders and title insurers, one of the most important questions is whether a mortgage has priority over potential mechanic’s lien claims. But the answer often depends entirely on the jurisdiction involved.
“It’s really critical that you know the law in whatever state you are dealing with in respect to priority because it’s very different,” Landmark said.
Some states provide construction lenders with strong statutory protections. Others rely heavily on factual determinations about when construction activity began.
“In some states, for example, in North Dakota or South Carolina, the contractor never has priority over the construction loan mortgage,” Landmark said.
Other jurisdictions operate under “first visible improvement” standards, where priority may depend on when physical construction activity became visible at the site.
“You have states like Minnesota where it’s a factual priority question,” Landmark said.
Certain states create statutory safe harbors if lenders satisfy specific requirements.
“In Wisconsin, if your lender is a national or state-chartered bank, they have priority,” Landmark said. “If you have a private individual or a nonprofit corporation that does not meet that definition, they don’t necessarily have priority.”
Future advances can complicate the analysis even further. In some states, future disbursements under a construction loan retain the original mortgage priority. In others, priority may only exist for funds already advanced before work begins or before a lien is filed. That means title professionals cannot simply evaluate mechanic’s lien exposure once at closing and move on.