In 2009, real property claims comprised 49% of all claims reported to Lawyers Mutual. One issue we have seen time and again is the failure to comply with new lien waiver and affidavit requirements imposed by title insurance companies. For purchase closings with recent construction, title insurers changed their standard lien waiver provisions to require a “long form” lien waiver and affidavit (including certifications by all suppliers of materials or services to the property) instead of the “short form” lien waiver commonly used in the past.
Where a long form lien waiver is required by the title insurance commitment but not executed at closing, the final title policy will include an exception stating that the title company assumes no liability for unfiled Mechanic’s or materialmen’s liens. Title insurance companies have also revised the terms of their Insured Closing Protection Letter (ICL) to reflect this new lien waiver requirement. The ICL may now include an exclusion relieving the title company of any liability for losses arising out of Mechanics’ or materialmen’s liens unless coverage is also provided under the title policy. Although the ICL generally provides coverage to owners and lenders for errors made by the attorney in connection with closing, if the attorney’s error is a failure to submit the proper lien waiver and affidavit, there will be no coverage under the title policy or the ICL. If claims of lien are later filed against the property and not covered by the title insurance policy, the owner and lender may look to the closing attorney to resolve these claims.
A closing attorney should carefully review the terms of the title insurance commitment regarding lien waiver requirements and should confirm that the proper form is used.
Another potential trap that may arise relates to the closing attorneys’ duty to investigate or guarantee the accuracy of the lien affidavit. We have seen some claims where the owner/developer signed a lien waiver certifying that there had been no improvements within the last 120 days. However, the statements in the affidavit were false and work had been done on the property prior to closing. The lender then asserted a claim against the closing attorney on the grounds that he or she should have known that the affidavit was inaccurate.
Where we see potential liability in such instances is when the attorney has a long-standing relationship with the builder and would have reason to know that the affidavit is not accurate. The attorney’s search of tax records could reveal newly platted lots or partially completed construction. If this information differs from what is on the affidavit, this could be a problem. A CO, septic permit, or termite warranty provided at closing could be evidence of new or ongoing construction.
A closing attorney should not accept an affidavit that construction has been completed for over 120 days when other information in his/her file clearly contradicts the affidavit. This is especially true if there is an established relationship between the builder and the attorney.
Another potential trap is when final title policies include lien exceptions that did not appear in the title commitment. We have seen instances where the closing attorney submitted the lien affidavit required under the commitment. After closing when the attorney sent in the final title opinion, the title company inquired whether work had commenced on the project. The attorney responded that work had commenced. Following this email, the final policy was issued with an exception for liens. If a contractor later perfects a lien that relates back prior to closing, the title company may deny coverage based on the exception and the lawyer may face liability.
As the closing attorney, your best course of action is to send in the final title opinion as soon as possible and to verify that no new exceptions were added to the final policy that were not included in the commitment.