In the 2011 Utah Legislative Session one of the hottest topics was House Bill 260 Mechanics’ Lien Revisions.  This new bill was achieved through extensive negotiations between Legislators and groups representing Lenders, Title Insurers, Builders, Contractors, and Subcontractors, and as a result makes significant improvements to our existing laws when the changes go into effect August 1, 2011.

The Problem

Under the old system the simple act of dropping off lumber, clearing an access road, putting in a sewer system to obtain a building permit, or providing any visible work or materials triggered mechanics lien problems with a property.   This early start before the loan was in place meant all contractors would be in a superior position to the Construction Lender, putting that Lender’s security interest in the project in danger of being foreclosed.

While most of these early starts were unintended, once priority is broken it is irreparably broken, as there was no mechanism available under the law to restore priority.  Lenders have always looked to Title Insurers for insurance coverage to protect against this danger, however due to massive losses underwriting restrictions were severely tightened for broken priority and mechanic’s liens issues.  As a result there were a growing number of projects where Title Insurers were forced to decline to insure construction loans.  Without the protection of title insurance, Lenders were unwilling to loan, resulting in everyone suffering from projects being killed.

The Solution

The new changes provide a much needed correction and will help restore balance to the mechanics lien process.  For projects started after August 1, 2011, the new changes will allow for a Construction Loan to regain priority even if work had an early start.   This is accomplished by making mechanics’ liens relate back to and take effect as of the first preliminary notice filed in the State Construction Registry (SCR).  The new law allows any preliminary notices filed early to be withdrawn by obtaining the consent of contractors who have filed in the SCR by paying them in full for any work performed and then the contractors withdrawal of the preliminary notice.  This still ensures that the contractors are in control and have received payment before they relinquish priority.  Additionally, contractors will receive more information as the Lender will be required to file notice of the loan and borrower’s default on the loan in the SCR.

So what does this mean?

Title Insurers will insure, lenders will keep loaning, and contractors can keep being paid for their work.  A Win – Win situation all around!!