New Home Builds Laying the Foundation for Rise in Construction Liens

This article was written for Birmingham Business Journal and was published September 1, 2023. 

The Commerce Department reports that new home sales in June 2023 were up 23.8% compared to June 2022, while existing home sales were down 18.9% over the same period. New home starts increased by 6.7% from June to July and were up 9.5% year-on-year. New homes are selling quickly despite high mortgage rates, because of a shortage of existing homes on the market due, in part, to the historically low mortgage rates on many existing homes.

With rising new home starts comes an increase in construction lending and, often, increased lien filings.

How can businesses and lenders protect their liens?

Businesses and people who supply labor and materials to construction projects may file mechanics' and materialmen's liens. These liens are purely statutory and the procedures and timing for filing and perfecting them must be strictly followed or lien rights may be lost. Lenders should also be diligent in protecting the priority of their construction mortgage liens from mechanics' and materialmen's liens.

Make sure mortgages have been properly recorded

Mortgages created before work began on a house or improvement have priority over liens arising from that work. Money does not need to be advanced at the closing of a construction loan to create a lien. A future advance mortgage is created when executed and recorded, whether or not funds are advanced. A mortgage will have priority over mechanics' and materialmen's liens so long as the mortgage is executed and recorded prior to the contribution of labor or material. Therefore, it is imperative that construction mortgages, and their related loan documents, are properly executed and recorded.

Conduct a title search

The closing process should include due diligence to verify that construction has not started as of the time the loan is made. A title search will reveal if any liens have been filed in the probate office. However, just because a title search does not turn up a recorded lien does not mean that labor or materials have not been contributed to the property. Depending on the nature and timing of the contribution, a lien claimant may have additional time to file a lien.

Inspect the site for construction

One of the best ways to verify that construction has not begun is to physically inspect the property. If an inspection reveals any improvements, the lender should obtain a lien waiver from the general contractor as well as any subcontractors and all suppliers of materials. Even if construction has not started, and the borrower has hired a contractor, the lender should obtain a lien waiver from the contractor. In addition, the lender's title company will likely require an affidavit from the borrower verifying that no labor or materials have been contributed to the property.

Perfecting and protecting liens in the area of construction can be treacherous for the suppliers of labor and materials, as well as lenders. All parties should be diligent and understand both the law and the facts on the ground.