When a contractor performs work on a property they gain the right to file a lien affidavit if they are unpaid. The mere fact that they worked on the property starts their right to file that lien. They are not required to file anything in the official public records documenting their work.
Often times these liens are thought of as “silent liens” because there is a gap in time between when the contractor actually does the work and their deadline to file their lien affidavit. A contractor has until the 15th of the third (and sometimes fourth) month after they have finished the work to file their Mechanic’s Lien Affidavit. This means there could be a 90-120 day window where only the contractor and the property owner know that there is a debt owed to the contractor. The lien is “silent” until recorded of record. For this reason, mechanic’s liens are risky for title companies, realtors and buyers. If there is work being done on the property during the closing timeline (or prior to it) there can be a big surprise for a buyer post-closing.
How does this affect a buyer’s title policy?
In most residential transactions the T-1R Owner’s Title Policy is issued. The T-1R Owner Policy includes the following as a covered title risk: “There are liens on your title for labor and material which have their inception before the policy date. However, we will not cover liens for labor and materials that you [the insured] agree to pay for.”
This means that if a silent lien is filed after closing, but it is for work that started before closing, the buyer is most likely covered under their title policy.
Let’s look at a real life example to see how this can affect a buyer.
Prior to listing his property Sam had some repairs done on the property in the amount of $35,000. The contractor finished the work on November 1st. You represent a buyer that goes under contract and closing occurs on December 15th. On December 31st the contractor that performed the work files a Mechanic’s Lien Affidavit against the property. He also sends a copy to the property address and your buyer calls you upset and wants to know how to handle this situation.
Under this set of facts your buyer is likely to call the title company and file a claim against their title policy. Most likely this is going to be a covered claim under the buyer’s title policy and the lien will be addressed through the title company’s claims counsel in a manner that the claims attorney finds appropriate (as there are many ways to resolve this).
What do agents need to worry about with a Mechanic’s Lien situation?
Let’s throw a new fact in to this scenario to explore how this can create liability for an agent. What if the buyer (and buyer’s agent) knew that work had been performed on the property prior to closing?
If the buyer had prior knowledge that work was done it may create a limit on their ability to file a claim under their title policy. When the parties have knowledge that work was performed then the buyer carries a due diligence obligation to confirm that all contractors have been paid. They are constructively on notice that there is a risk of a mechanic’s lien and if they later tried to file a claim that claim would most likely be denied because the buyer had knowledge. If that buyer tries to file a claim and the claim is denied they will most likely start to look to the realtor that represented them in the transaction next.
What this means is that it is critical for agents to let the title company know if any work has been done.
What constitutes “work?” Work is basically any contractor that has provided services OR delivered materials to the property. This can be a simple plumbing repair all the way to a major remodel. When in doubt, it is best to let the title company know.
If the title company is made aware that work has been performed then the title company has methods by which they can close the gap on these silent liens and offer coverage to the buyer in their policy. Notifying title that work has been done is the most important thing that a realtor can do to protect themselves from liability as to this topic.
Working with a knowledgeable title company is the key to success and preventing problems from mechanic’s liens! These issues can be resolved as long as your file is in the right hands. The best thing a realtor can do is (1) select a closing team at Texas National Title to close the transaction and (2) tell us that there was work done. There are many tasks that must be done to get to closing and often times the clients need our support and guidance in getting the necessary documents completed. Our escrow teams and legal departments are experts in handling these issues and we are here to help you get your deals closed.