THE VIRGINIAN-PILOT
Copyright (c) 1996, Landmark Communications, Inc.
DATE: Saturday, June 1, 1996 TAG: 9605300289
SECTION: REAL ESTATE WEEKLY PAGE: 20 EDITION: FINAL
TYPE: Forum
SOURCE: BY RONALD P. DONN
LENGTH: 60 lines
After reading the Real Estate Weekly in the Virginian-Pilot for several years, there seems to be an issue not covered that your readers should be aware of.
The issue of mechanic's liens is one that we encounter frequently, although it often does not appear for a buyer until the time of closing.
A mechanic's lien is a lien that a subcontractor or supplier can place on a house or commercial property for work or materials supplied months earlier.
Title insurance companies have long included in their policies coverage for certain mechanic's liens for work done prior to the date of the policy.
When someone obtains a mortgagee title policy for new construction, the lender will have coverage for mechanic's liens that might be filed as the title policy is updated. This type of coverage was not contemplated when title insurance first developed but, for various reasons, it is now given.
During the late 1980s, as the economy soured, the losses incurred from this coverage by title insurance companies was staggering, especially in Virginia, which gives the subcontractors and suppliers a higher lien priority than they have in many other states.
As a result of the losses, many title companies reduced their mechanic's lien coverage or simply stopped writing it. Thus, it became harder for lot owners and builders to get title insurance and for many who could, it was more expensive.
In 1992, Title 43 of the Code of Virginia was amended to make the system work better for all parties. The Code now provides for the use of a mechanic's lien agent, but only in one- or two-family residential construction.
If a MLA is noted on the building permit, then subcontractors and suppliers must give notice to the MLA within a specified time or lose their right to a lien.
On the other hand, the title companies require lien waivers from those who have given notice as construction progresses, so there is less danger that a builder will fall seriously behind in paying his bills.
As a result, we are finding that the MLA system is working well when it is administered properly, and residential construction is progressing well.
The biggest problem we are encountering is with the lot owner who gets his building permit but does not appoint an MLA at that time. Several weeks later, he goes to close his loan and is told he can't get the type of title insurance the bank wants because there is no MLA and the Code has no provision for appointing one after the permit is first issued.
Please warn your readers to be aware of this problem so that they do not get caught at closing with not being able to get the coverage they need or having to pay more for it. The MLA can be an attorney, bank or affiliate, or a title insurance company or one of its licensed agents, and the MLA must accept the appointment.
Every builder, architect and lot owner should be aware of these requirements as it will save them much aggravation later. When properly administered, the MLA system is working quite well and has helped the construction process for all parties involved. MEMO: Ronald P. Donn is an area agency counsel with the Southeastern
Virginia Branch Office of the Lawyer's Title Insurance Corp. by CNB