Here’s the scenario: Repair work is done on property prior to the closing of a sale. The seller packs up and moves prior to closing and conveniently forgets about paying for the repair work. What if the contractor who did the repair work files a mechanics lien after the closing?
Here is a very important note to keep in mind: The priority of the mechanics lien is established when the work begins, not when the lien is recorded. If the work is started before the closing, and the party performing the work complies with the necessary statutory requirements regarding their right to claim a lien, that lien may have priority over the rights of the purchaser and their new lender.
If the purchaser learns of the recording of such a lien, they should contact their title insurer immediately. The homeowner should be protected if:
1) The policy is a Standard Coverage Owners Policy with an additional protection endorsement for homeowners and the purchaser did not join in the contract for the work, or
2) If the policy is a Homeowner’s Policy for One to Four Family Residence, or
3) The homeowner has an Owner’s Extended Coverage Title Insurance Policy, loss resulting from the lien is likely covered by the policy.
In any event, it is likely that the title insurance company will pursue recovery from the seller for any amounts paid based upon the rights contained in the policy and under the deed warranties. The title company may have also required the seller to sign a sworn affidavit regarding unrecorded labor and material lien rights as part of the closing.