THE MECHANICS
OF MECHANIC'S LIEN
AGENT APPOINTMENT AND CONSENT
by W. Riker Purcell*
Like all mechanic's lien laws, the residential lien law adopted in 1992 is full of technical requirements. This article addresses only the issue of the appointment of the Mechanic's Lien Agent. Specifically, it asks this question: What must a mechanic's lien agent do to consent to the appointment?
PRE-1992 LAW
Traditional Virginia mechanic's lien law allowed a mechanic's lien claimant to file a notice of lien up to 123 days after work was completed (90 days after the last day of the month in which work was done or after construction was complete, plus a weekend). The claim could reach back 150 days before the filing. This allowed a "secret lien" that covered a period of almost five months.
That was the law in 1992, when we experienced a crippling downturn in the real estate market. At that time, builders and developers were unable to sell their product. Buyers were backing out of contracts. Subcontractors and materialmen were not being paid. Millions of dollars worth of liens were filed, and title insurance companies were paying out millions of dollars for mechanic's lien claims.
THE LAW AFTER JULY 1, 1992
New legislation addressed the problems that afflicted residential construction. The mechanic's lien law for residential one- and two-family construction (VA. CODE ANN. § 43-4.01, et seq.) became effective July 1, 1992 and sought to cut down the 123-day notice period and the 150-day reachback period. The law introduced the concept of a Mechanic's Lien Agent ("MLA").
In order to qualify for the exception, a builder has to appoint an MLA and put the MLA's name, mailing address, and telephone number on the building permit. The MLA must consent to the appointment in writing. Anyone who performs lienable work on the site must give the MLA notice within 30 days after beginning. If the notice is properly given, the lien claimant can assert a lien for work or materials supplied during those 30 days. If the notice is not given within 30 days after beginning, the claimant's lien can only be for work or materials supplied after the notice. The positive effect of the law for lenders and title insurance companies is that the secret lien period is cut down to the 30-day period between the date that a worker or materialman begins to supply services or materials and the date notice is given to the MLA.
After a period of confusion, the industry settled into a pattern. Title insurance
companies, lawyers, and lenders were authorized to act as MLAs. The title insurance
company that issued a construction loan policy mechanics' lien coverage would
also agree to act as the MLA. A written appointment was signed by the builder/developer
at the closing of the construction loan, and the MLA's name, address, and telephone
number were put onto the building permit, which was posted at the construction
site. As a practical matter, the purposes of the statute were served because
many persons and entities who were appointed as MLAs were prepared to perform
their duties even if they did not get a copy of the appointment. They received
and indexed notices from mechanics and materialmen, and they provided lists
of these notices when lenders made disbursements of construction loans.
But the appointment process had a weak spot. More often than not, the document appointing the MLA remained in the closing file. It was not forwarded to the title insurance company, and the MLA did not actually consent to the appointment.
APPOINTMENT AND CONSENT
There is some question whether the appointment procedure satisfies the requirements of the 1992 law, which added a definition of mechanics' lien agent to Section 43.1 of the Code.
The term "mechanics' lien agent" means a person (i) designated in writing by the owner of real estate or a person authorized to act on behalf of the owner of such real estate and (ii) who consents in writing to act, as the owner's designee for purposes of receiving notice pursuant to § 43-4.01.
The consent in writing is the problem. If the appointment form never reaches the title insurer or other MLA for consent, then the appointment may not be valid. Even if the MLA accepts in writing eventually (i.e., after the filing of the mechanic's lien notice), the appointment may be challenged. If the appointment is not valid, then the lien claimant is free to file liens under the old law, using the 123-day notice and the 150-day reachback.
LITIGATION
This issue may have been litigated several times. I have heard of several cases in which the appointment of the MLA has been upheld. Obviously, these cases depend entirely on the facts. I am familiar only with a case litigated in the Hanover County Circuit Court (Case No. CH05-145) on July 5, 2005. The attorney for the owner unsuccessfully asserted the validity of an appointment signed at the closing of the construction loan. The MLA consented to appointment, but not until after the notice of lien showed up.
The MLA clerk for the title insurer testified that when the notice of lien arrived, she asked for and received the appointment form that was signed at closing, and she consented to the appointment at that time. She also testified that, as a matter of fact, the title insurance company she works for keeps all notices of liens it receives from any source, reports notices to anyone who asks, and in general always acts as though there is a proper appointment. None of this convinced the court that the lien claimant's rights should be governed by the new law.
Apparently, the court viewed the actual, written consent as a necessary part of the appointment. The court decided that the appointment was effective as of the date of consent. As a result, the subcontractor was allowed to reach back to claim a $45,000.00 lien for work performed 150 days prior to the filing of the notice of lien. In this case the subcontractor had stopped working a couple of months before the lien was filed, which meant that if the MLA appointment had been proper, he could have claimed no lien at all.
THE FUTURE
We may be facing a decline in the real estate market; mechanics and materialmen may again find that their bills are not being paid. It is time to consider whether construction loan procedures will protect lenders, owners, and title insurance companies from mechanics' liens.
The first solution, and the best, is for title insurers to insist that settlement
agents return the MLA appointment form immediately after closing a construction
loan so that the MLA can consent in writing. This may not be practicable, but
title insurance companies should insist anyway.
A second solution that will cover a number of cases is a blanket appointment and blanket consent. Title insurers can settle all the details in advance with certain approved builders. A builder can appoint a title company as MLA for all of its projects (actually, the builder can appoint several title companies). The title insurer can consent to act as MLA for all of that builder's projects. Settlement agents still have to pay attention to the documentation of these projects, to make sure that the right name shows up on the building permit.
If the appointment and consent issue winds up in court, then the only defense is to argue that the documents that typically exist in a construction loan should amount to consent in writing. The title insurance commitment for construction loans usually has a requirement that the title insurer (or a subsidiary of the title insurer) must be appointed as MLA in writing. It may be that the commitment language, together with the signed appointment and the issuance of a policy, can be characterized as written consent. This course is risky, and it is made riskier by the fact that commitment language may not quite amount to a kind of prior consent. In fact, some title insurance commitments require that the appointments be sent to the insurer "to be signed [by the insurer]," suggesting that even the title insurer does not view the appointment as valid until it is signed by the insurer.
AUTOMATIC CONSENTS
Because of the risks of litigation, this article suggests that title insurance companies should strengthen the language in the commitment and in the appointment documents. Title insurers should examine and modify their documents so that the legislature's scheme works properly: MLA is appointed; MLA automatically consents; the name of that MLA shows up on the building permit. For instance, the appointment form may say, "Acme Title Insurance Company's issuance of a policy with respect to this appointment shall be considered the Company's written consent to this appointment."
This automatic consent may work if Acme Title Insurance Company is appointed as MLA, and Acme Title Insurance Company's policy is issued. However, if Acme is appointed and Zenith Title Insurance Company's policy is issued, then the automatic consent does not take effect. Pretty clearly, the settlement agent is the one who has to make sure that the documentation is consistent.
CONCLUSION
When construction loans are closed, it is the settlement agent's job to ensure that a proper appointment of the MLA and consent by the MLA have occurred. If the settlement agent fails in this duty, then lawyers on both sides of the suit to enforce mechanics' liens will carefully read the language of the documents. Can the pieces of the loan and title insurance documentation be added together to amount to written consent of the MLA whose name appears on the building permit? To reach this result, title insurance companies can tighten their documentation and procedures. One possible solution is to modify MLA appointment forms to include the automatic consent language similar to the language suggested above.
Title insurance companies can protect themselves by nudging the sleeping settlement agents to alert them to the appointment and consent problem. Attorneys for builder/sellers also should pay attention during the settlement process to make sure that the documents satisfy the requirements of the Mechanic's Lien Agents law.
* Riker Purcell is Executive Vice President and General Counsel of Southern Title Insurance Corporation in Richmond, Virginia. He is a member of the Virginia State Bar and an inactive member of the State Bar of Georgia.