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By Troy Crawford, Esq.
Everyone is familiar with the recent rash of lien filings that have swept across the state the last several months as the new housing market has dramatically slowed. While small and newer builders were the first to feel the pinch as spec houses sat unsold and carrying charges escalated, several regional builders and developers have recently made newspaper headlines as they drain their cash reserves. Steve Brown, in a prior article published in 2006, details the historical basis for the lien statutes, and more importantly, the steps a practitioner can take to limit his client homebuyer’s risk. A copy of the article may be found on our website at www.nc.invtitle.com Click on Resource Center, Newsletters, Archives Click on the article “Mechanics’ Liens Revisited: Concepts Every Attorney Should Understand”.
Since his article, we have seen numerous claims arise related to homes that are either abandoned during construction or remain unsold for so long the construction lender forecloses. Under N.C. Gen. Stat. 44A-10, “A claim of lien on real property . . . shall relate to and take effect from the time of the first furnishing of labor or materials at the site of the improvement by the person claiming the claim of lien on real property.” In order to protect our lender’s priority position, owners obtaining construction loans are required to sign lien waivers stating that materials have not been delivered and work has not started. Additionally, lenders will frequently require affidavits of non-commencement or other forms to verify that their security instrument is in a first lien position.
While it can be challenging for a certifying attorney to verify that a builder or homeowner is not deceitful in executing affidavits, one source of liability that can be minimized is reducing the ‘gap’ between the execution of the lien waiver and the recording of the security instrument. It is imperative that the closing attorney get to the courthouse before the yellow machines show up at the jobsite. This need is further enhanced with the tightening construction industry – previously busy suppliers and subcontractors had ‘time off’ between jobs but now are trying to get to the job site (and get a portion of the loan draw) as soon as possible.
We recently had a claim where a lot purchase and construction loan closed at 2:00 p.m. in the attorney’s office, but did not record until 11:00 a.m. the next day. In the interim, construction allegedly began in full force, with a couple different subcontractors claiming they were on the job site first thing in the morning. The builder drew-out the construction loan, but failed to fully pay many of his subcontractors, including those that claimed to have started working the next day. In order to establish priority, we were reduced to comparing field notes of material suppliers to the time stamp on the recorded deed of trust to establish priority.
In addition to showing an example delay in recording can cause, a more detailed examination of the example illustrates another area of avoidable exposure – deeds and lien waivers prepared by the counsel for the developer/seller or the developer themselves. In our example, both the deed and lien waiver provided to the closing attorney were dated and notarized the day before closing. Therefore, the date of lien waiver was two days before construction began and provided no useful evidence in debunking what we perceived to be generous start dates of the subcontractors or providing a source of subrogation for our loss. As most developers are sophisticated parties with outside legal counsel, inspection of the seller documents is critical for the closing attorney to look at the effective date of the Seller’s documents.
While there are many causes for the recording delays, construction loans are usually not as prone to late arriving wires or ridiculous lender funding requirements that stall recording. Setting a closing time that accommodates timely recording and a careful examination of Seller documents prepared outside of the closing attorney’s office will go a long way to keeping a construction lender in proper priority position.
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