Construction Lien Law in Oregon is governed by Oregon Revised Statutes (ORS) Chapter 87. ORS 87.010 defines who is entitled to file a construction lien. The statute is quite broad and includes laborers, suppliers of material, architects, owners of leased equipment, and landscape architects.

The primary source of concern to out of state lenders is the super priority that ORS 87.025 bestows upon lien claimants. Construction Liens will have priority over encumbrances, such as mortgages and trust deeds of record, regardless of the fact that the lien was recorded after the security instrument. It is an exception to the general rule of first to record has priority. The controlling question is: was the lien perfected (recorded) while a 75 day filing window was open? ORS 87.025(2) If the answer is "yes", a properly filed lien will have priority over other monetary encumbrances recorded while the 75 day window was open.

To perfect the lien, the claimant must record notice of the lien: 1) within 75 days after completion of construction; or 2) 75 days after ceasing to provide labor, materials and rental equipment, whichever occurs first. ORS 87.035(1).   Failure to record within the 75 day period will result in the loss of the super priority status and the claimant will become an unsecured creditor. Therefore, title insurers require the filing of a completion notice as an outside limit to start the tolling of the 75 day lien period. ORS 87.045 defines what constitutes completion of construction and the proper form of the recorded completion notice.

Here’s an example. XYZ Builder finished construction of a new home on February 1st. On February 1st, Mr. Jones purchased the house. Bank A furnished the loan and secured it with a trust deed on the property. Prior to this, on December 1st, Handy Andy furnished and installed the kitchen cabinets. Because he was not paid, on February 13th, Handy Andy files a construction lien. Is the lien valid and superior to Bank A’s trust deed? Was the lien properly perfected? Handy Andy had 75 days from December 1st (date of completion of his work) to file his lien. The 75th day occurred in February on February 14th. Since Handy Andy filed on February 13th (the 74th day), the lien is valid.

What happens if the mortgage was recorded before any work, labor or materials were provided? Oregon law permits this same super priority if the loan proceeds were used to finance the work. There is no statute of limitation, so long as the lien was perfected while the 75 day window was open. If the preexisting mortgage was not used to finance the improvement, the lien will not have priority. For example, Bank A lends Mr. Jones $10,000 on January 1st and records its trust deed against Mr. Jones’ property. On August 1st, Mr. Jones hires XYZ Builder to remodel his kitchen, using the $10,000 borrowed from Bank A to finance the project. On October 1st, the remodel is completed, but Mr. Jones and XYZ get into a dispute. XYZ files a construction lien. Does the lien have priority over Bank A’s trust deed? The answer is yes. So long as the loan proceeds are used to finance the remodel, a properly filed lien has priority. The project was completed, and the 75 day window was still open.

When issuing an ALTA Mortgagees Policy, title companies will normally include an exception in the following form relating to the filing of construction liens:

Statutory Liens for labor or materials, including liens for contributions due to the State of Oregon for unemployment compensation and for workmen's compensations, which have now gained or hereafter may gain priority over the lien of the insured mortgage where no notice of such liens appear of record.

There are several options available to deal with the construction lien issue.

• The simplest and cheapest approach is to leave the construction lien exception in the policy and endorse it out for a nominal fee after the expiration of the 75 day period, providing no liens appear of record. The charge is $30.00. Under this plan, the lender assumes a greater role in reducing lien problems. Many Oregon lenders closely control and track the loan . These programs usually involve: 1) The lender tracking the projects progress in phases; 2) The builder being required to bring to the lender all invoices from subcontractors and suppliers at the time of each periodic disbursal; and 3) The lender depositing money into the builder's account after examining checks made out to the various subcontractors and suppliers.

All other options require "early issue" coverage, that is issuing the policy without reference to the construction lien exception, prior to the expiration of the 75 day lien period. Hence, the name "early issue". As a result, an ALTA Extended Loan Policy insures against loss or damage sustained by the insured by reason of construction liens, whether such liens are of record or not, at the time the policy is issued.

• The second option is to file the completion notice, record the mortgage or trust deed, and then issue the policy without reference to the exception. If the policy has already been issued, the lien language may be endorsed out once the completion notice is recorded. The title company then bears the risk for the 75 day period. The charge is based on the amount of liability. Policies under $100,000.00 are assessed a surcharge of $1.00 per $1,000.00 of liability. In excess of $100,000.00, the surcharge is $2.50 per $1,000.00. To recap, construction must be completed, and the completed notice must be of record.

• Under option three construction is completed, but the completion notice has not been filed, and the commencement of the statutory lien period is uncertain. The charge is $1.50 per $1,000.00 for liability under $100,000.00, and $3.50 per $1,000.00 for liability in excess of $100,000.00.

• Option four is to issue the policy without the lien exception where construction has not begun or is only partially completed. This is the most expensive alternative, and therefore, is rarely used.

If the liability is under $100,000.00, the charge is $2.00 per $1,000.00. In addition, the company may require one of the following: a performance bond, naming the company as co-obligee; an irrevocable letter of credit equal to the face amount of the policy; a loan disbursement program approved by the company; or a construction escrow administrated by the insurer.

If the company's liability exceeds $100,00.00, there are four alternative courses of action under option four.

First, a performance bond is filed for the amount of the policy liability, naming the title company as co-obligee. The surcharge is $2.00 per $1,000.00. In certain circumstances the company may forego the bond where a security deposit or irrevocable letter of credit in favor of the issuing company is obtained.

In Alternative Two, a performance bond is issued without naming the title company as co-obligee. The charge is $4.50 per $1,000.00.

Alternative Three< is a disbursement program, normally under the control of the lender and approved by the title company. The surcharge is $3.50 per $1,000.00. In addition, the following exception will appear in the policy:

Statutory liens for labor or materials or any rights thereto where no notice of such liens for which payment has been made with funds disbursed by lender as approved by or through the Company and as to such funds, the Company will insure that they have been applied in payment of bills for labor, materials, and subcontractors in the matter of the construction of the improvements of said property.

Alternative Four is a construction escrow handled by the title company. The charge is $4.00 per $1,000.00 plus any additional escrow fees as may be deemed appropriate.

Please note that in all cases where "early issue" coverage is requested, the company must be satisfied that no construction or labor liens will be filed. Such assurance may be in the forms of lien waivers, inspections, review of any disbursement programs, examination of the financial strength and reputation of the borrower and contractors. In addition, the company will usually require some form of indemnification, either from the contractor or other individuals or companies of sufficient net worth and proven track record in the type of project being undertaken. This is to provide further security to the company for any loss from construction liens.

There are two endorsements that are used in conjunction with construction loans: Form 7.21 Statutory Construction Lien Endorsement, and Forms 7.20A and 7.20B Priority of Advance Endorsement.

The Statutory Construction Lien Endorsement was designed to provide assurance that no construction liens have gone of record since the date of the original policy. It provides protection against recorded construction liens only. This endorsement is used where the borrower makes periodic draws from a construction loan, and the lender wants to ascertain whether any liens have occurred prior to making the disbursement. Form 7.21 offers a form of lien protection without incurring the cost of "early issue" coverage. After the expiration of the 75 day lien period, the construction lien language can be endorsed out for a nominal fee.

The charge for this endorsement can be computed in two ways, depending on the number of endorsements that are desired. Under method one, a 5% charge of the basic rate is made for each endorsement, payable when issued. In the alternative, a block of 10 endorsements for 10% of the basic rate, or a maximum of $1,000.00 are purchased when the policy is written. These endorsements can then be issued at any time during construction. If additional endorsements are necessary, the lender may purchase another block of 10 at the 10%/$1,000.00 rate or single endorsements at the 5% rate each.

The Priority of Advance Endorsement (Forms 7.20A and 7.20B) was crafted to advise the lender of the status of title since the date of the policy as periodic loan disbursements are made. This endorsement can be issued only if the lender is insured under an ALTA Mortgagees Policy. Additionally, the company will require a written statement from the lender that an advance in a specific sum has been made. The advance must be evidenced by a promissory note which recites that it is secured by the insured mortgage or trust deed. Further, ownership of the title must be the same as of the date of the policy. Finally, the endorsement is limited to those situations where the liability assumed in the policy is equal to the full amount of the indebtedness secured by the covered security instrument. It cannot be utilized in conjunction with an open end type of security document.

The Priority of Advance Endorsement comes in two forms. Form 7.20A can only be issued in conjunction with an "early issue" coverage policy. This form provides affirmative language against construction liens in addition to other liens and encumbrances, subsequent to the date of the policy. Form 7.20B is issued in all other cases and does not provide affirmative construction lien assurances. The charge for each endorsement is 25% of the basic rate, minimum of $100.00.

The above provides a basic outline of the Oregon construction lien law and the types of ALTA Mortgagees insurance and endorsements that are offered by Pacific Northwest Title of Oregon, Inc., in the Portland Metropolitan area. This article is a guideline and may be subject to specific terms and conditions contained within the company's policies or other underwriting procedures. Underwriting practices may vary throughout the state, and; therefore, specific inquiries with individual insurers should be made. Please note, the term "basic rate" refers to the premium for a Standard Coverage Policy for a specific liability. Said rate does not include surcharges for ALTA coverage, endorsements or any credits that might be appropriate.

Can an owner purchase coverage against construction liens, just like lenders do? The answer is yes. The type of policy is an Owner’s Extended Policy. Remember, so long as a construction lien is properly perfected (recorded while the 75 day window is open), the lien has priority over everything else, even a new purchaser, if his/her deed was recorded during the same 75 day period. So, reviewing the first example given above, Handy Andy’s construction lien recorded on February 13th, has priority over the ownership interest of Mr. Jones. Mr. Jones acquired title to the property on February 1st, 62 days after Handy Andy furnished and installed the cabinets. Handy Andy recorded his lien on the 74th day, within the 75 day window of opportunity.

The premium paid for this type of insurance is significantly higher than Standard Coverage Policies. Additionally, the underwriting guidelines are more stringent. A title company may not extend this type of coverage if the owner and builder corroborated in the construction of the home. The earnest money agreements currently in use in the Portland metro area have a preprinted clause that obligates the seller to provide only a Standard Coverage Owners Policy for the buyer. A buyer must either negotiate this provision with the seller in the offer process or foot the bill for the additional premium associated with the Extended Coverage Owners Policy. As for the borrower, an Extended Lender’s Policy is generally a requirement of the lender making the loan. A borrower should factor this into closing cost estimates. Caveat: the Extended Lenders Policy only affords coverage to the bank, not the borrower/purchaser.

When title companies underwrite extended coverage policies, what factors are considered?

First, what is the reputation of the builder? Does he or she have a good track record of finishing projects, paying suppliers and subs timely, and following up on punch list items?

Second, what is the builder’s financial health? Does he have sufficient assets to pay any liens or bonds if necessary to remove a lien?

What is the contractor’s track record with liens in the past? If there were liens, were they paid or can they be explained adequately? Any complaints filed with the State of Oregon Contractor’s Board?

Has the builder been involved in any litigation either over a particular project or potential monetary awards that could affect the ability to do business in the future?

Is the builder willing to get into the boat with the title company, if necessary to defend against a lien, whether through participation or indemnification.

To sum up, construction liens are the exception to the first to record priority rule. They can and do take precedence if properly filed within specified time frames. Title Insurance Companies can provide protection against the filing of such liens. Like any other form of expanded coverage, these extended policies are more expensive and subject to additional underwriting criteria.

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This educational series is created to allow Realtors to obtain continuing education. The articles are intended for general informational purposes and are not to be construed as legal advice or legal opinion on any specific facts or circumstances. You are advised to consult with an attorney concerning any questions about your rights or responsibilities in any specific situation.