Earlier this year, GRS | Title was engaged to provide title and escrow services for a local developer who had teamed up with a national hotel chain on a “to be built” 4-site transaction. The sites were located in four different states, Tennessee, Louisiana, Texas and California. One of the advantages of being a national agent like GRS | Title is having multiple underwriters at our disposal to provide the best coverage for our clients. In this case, mechanics liens coverage was insisted upon by the lender and having multiple underwriting options turned out to be critical to the successful conclusion of the transaction.
Mechanics liens are creatures of state statute. Generally, they are liens that secure payment for labor or materials supplied in improving, repairing, or maintaining real or personal property. Mechanics liens are particularly problematic for a lender. Depending on the state, the priority of a mechanics lien may relate back to period well before the notice of such lien appears in the public records, perhaps even to a date prior to the issuance of the lender’s title policy. For lenders, this presents a clear problem because payment failures that prompt foreclosure are often the same conditions that lead to the filing of multiple mechanics liens. As a result, it has become common for lenders to negotiate for extended coverage that provides coverage for mechanics liens for the duration of the construction of the property.
It was the goal of all parties involved (Developer, Developer’s Counsel, Lender, and Lender’s Counsel) to ensure that our client and their lender received the most appropriate form of coverage available. There were distinctive differences between the endorsements offered by the various underwriters. One gives coverage from the very beginning of construction while the other offered coverage from the first construction draw. Each had a number of specific requirements to be met by the client and their lender. These differences were very important to the project, given the amount of construction that had begun on two of the four sites.
Working with the various constituents involved, GRS | Title was able to negotiate the coverages and requirements for this multi-site, multi-state transaction, which is now well underway. Our advice to future clients contemplating construction would be to understand the differences in potential coverages that may only be available before the beginning of construction and those that may be available after construction has begun. Discussing these differences with potential construction lenders and understanding those lenders’ own coverage requirements should avoid costly, and time consuming, problems later. Please feel free to reach out to us here at GRS | Title for further education on these complex title underwriting issues.