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HOUSEKEEPING

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If you have a more complicated question, please feel free to call John Rothermel at 800-292-5712 or e-mail: [email protected]

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Note: PowerPoint and audio for the May 21, 2015, “Funky Liens” webinar

should now be available on our website.

For Escrow Officer Credit please e-mail one time only to [email protected] – for certificates, include:

The Password Attendees names TDI License number Webinar Title

For this webinar, please include “Construction Issues” in the subject line

of your email.

Attorneys: e-mail bar card number to the same e-mail for CLE credit.

Send to your training administrator if applicable.

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mailto:[email protected]

ADDITIONAL HOUSEKEEPING

INFORMATION

Because of opinions expressed by the Texas Insurance Department

concerning rebates, legal credit is available only to:

Attorneys who own title agencies that are Stewart Title Guaranty Agents

Attorneys employed by a title insurance agent licensed with Stewart Title

Guaranty or Stewart entities

Fee attorneys who have an Escrow Officer license through a Stewart Title

Agent or Stewart entity

If you are claiming legal credit for this web conference, please provide in

your email which category you are in.

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We welcome any other lawyers to listen, but cannot

provide continuing education credit to you.

We regret any inconvenience but we must take

reasonable steps to protect us and you from

enforcement actions by the Texas Department of

Insurance.

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CONSTRUCTION

ISSUES

Practical Guide for Construction Issues

Heidi Junge Texas Underwriting Counsel

June 18, 2015

Objectives For Today

• Understand Our Coverage

• Basics of Mechanic’s Liens

• Underwriting Before Construction

Commencement

• Underwriting With Lost Priority

• Homestead and Non-Homestead

• Rate Rules and Common Endorsements

Understanding Our Product Coverage Owner’s Policy of Title Insurance (Form T-1)

COVERED RISKS

…

…

The Company will also pay the costs, attorneys’ fees and expenses

incurred in defense of any matter insured against by the Policy, but

only to the extent provided in the Conditions.

2.

(d) Any statutory or constitutional mechanic’s, contractor’s, or materialman’s lien for

labor or materials having its inception on or before Date of Policy.

Understanding Our Product Coverage:

Texas Residential Owner’s Policy of Title Insurance One-To-Four

Family Residences (T-1R)

COVERED TITLE RISKS

This Policy covers the following title risks subject to the Exceptions and Exclusions, if

they affect your title to the land on the Policy Date…

…

OUR DUTY TO DEFEND AGAINST COURT CASES

We will defend your title in the part or parts of a court case involving a Title Risk covered

by this Policy. We will pay the costs, attorneys’ fees, and expenses that we incur in that

defense. We will not pay for the parts of a case not involving a covered title risk. You

may disapprove our choice of attorney for reasonable cause.

6. There are liens on your title for labor and material which have their inception

before the policy date. However, we will not cover liens for labor and material

that you agreed to pay for.

Understanding Our Product Coverage:

Loan Policy of Title Insurance (Form T-2)

COVERED RISKS

10. The lack of priority of the lien of the Insured Mortgage over any other lien or

encumbrance.

(b) over the lien of any assessments for street improvements under

construction or completed at Date of Policy.

The Company will also pay the costs, attorneys’ fees and expenses incurred in

defense of any matter insured against by this Policy, but only to the extent

provided in the Conditions.

11. The lack of priority of the lien of the Insured Mortgage

(a) as security for each and every advance of proceeds of the loan

secured by the Insured Mortgage over any statutory or constitutional

mechanic’s, contractor’s, or materialman’s lien for services, labor or material

having its inception on or before Date of Policy; and

In Texas…

Mechanic’s Liens priority is not

determined when filed!

Physical/Relate Back Test:

When construction began or materials

delivered

Texas Property Code Section 53.124, Inception of Mechanic’s Lien

GOOD: Insured

mortgage is of record

prior to construction

actually starting =

Insured Lien Priority

BAD: Any lien filed after

construction starts is an

inferior lien, so an insured

mortgage won’t have priority

if construction has already

started.

All lien claimants have equal

priority without reference to when

they filed their lien claim.

Texas Property Code Section 53.122, Equality of Mechanic’s Liens

Visible Commencement Documentation

No Work Affidavit and Indemnity:

You must receive a satisfactory affidavit and indemnity

executed by both:

(a) the owner, and

(b) the general contractor,

(c) stating that no work has been or will be performed or

materials delivered to the site prior the recording of the

mortgage;


Documented Inspection of No Work:

• documented by photographs and/or video of the entire site

• with date and time stamps

• immediately prior to the closing.

If the mortgage is not filed for record on that date:

• must conduct a supplemental inspection on the date of filing of the mortgage.

In addition, you must:

• annotate a survey of the site showing the location of the pictures and videos.

• This should be accompanied by a written statement from the person performing

such filing, confirming the date, time and place of the documented inspection;


Notice of Commencement:

Require filing of instruments documenting

construction commencement after recording of the

mortgage (e.g., a “Notice of Commencement”), if

customary;


Other Affidavits: Don’t forget commencement of construction activities/services that would

not be disclosed by a site inspection, such as:

• Demolition

• Architectural

• Engineering

• Surveying

• Geological Services

You must also confirm by affidavit that no such services have been

performed;

Mechanic’s Liens Documentation if No

Priority or Loss of Priority/Lost Priority

Financial Documentation and Indemnities

Documentation required from the owner/borrower:

– Current audited financial statements;

– Indemnity against Mechanic’s Liens;

– Credit Enhancement (such as Letter of Credit, Escrow or

Disbursement of Funds, Satisfactory Solvent Upstream

Indemnitor, Statutory Bond; Unencumbered Equity)

Documentation required from the general

contractor:

– Current financial statements;

– Indemnity against Mechanic’s Liens;

– Prospective Subordination Agreement subordinating

the general contractor’s existing and future mechanic’s

liens claims to the lien of the insured mortgage, to the

extent permitted by law;

– Prospective waiver of right to file mechanic’s liens, to

the extent permitted by law.



Project Documentation:

– Copy of construction contract;

– Project cost breakdown (budget), including land

acquisition costs and hard and soft costs;

– Dollar amount and percentage of work: (i) performed

to date, (ii) remaining to be performed, (iii) paid for to

date; and (iv) dollar amount and percentage of funds

remaining, including sources (i.e., equity and loan);



Project Documentation: – List of all contractors, subcontractors and suppliers who have or

will furnish labor, services or materials to the project;

– All amounts billed, previously paid, and currently due to all such

contractors, subcontractors and suppliers to date (including

architects, engineers, surveyors, and demolition);

– Proof of payment of all work performed and materials delivered

to date: lien waivers, paid bills and/or estoppel certificates, from

the general contractor and all subcontractors and suppliers who

have furnished labor, services or materials to a date immediately

prior to the loan closing.



Don’t forget to get

Underwriter Approval!!

Construction—Underwriter Approval

P-8 is your Construction Hard Hat!

Basic Rules of Thumb: – All commitments and policies should

contain a general mechanic’s lien

exception as provided in P-8 (Re:

Issuance of Policies Prior to

Completion of Improvements)

– Do not delete the general mechanic’s

lien exception or the pending

disbursements language in P-8 from

the Loan Policy before or during

construction.

Residential Construction Projects

Basically 2 Types:

1. Residential Construction Projects

(improvements and new construction)

2. Commercial Construction Projects

Homestead or Non-Homestead?

– Texas law holds an owner has only 1

separate homestead at a time.

– Nothing special is required to create a valid

lien for improvements of non-homestead

property

Section 50(a)(5), Article 16, Texas

Constitution sets out the prerequisites

for validly imposing a mechanic’s lien

against homestead property:

For both Improvements/Remodeling and New Construction, you need:

1.Contract in writing

2.Executed by husband and wife

3.Before any work is done

4.Recorded in the public record (**Section 53.254 of the Texas

Property Code)

For both Improvements/Remodeling and New Construction, you need:

a) Contract in writing

b) Executed by husband and wife

c) Before any work is done

d) Recorded in the public record (**Section 53.254 of the Texas

Property Code)

e) 5 days must elapse between borrower signing loan application and

execution of the improvements contract;

f) Borrower’s right to rescind the loan transaction within 3 days after

execution of the improvements contract; and

g) Improvements contract must be executed by the borrowers at the

lender’s office, an attorney’s office, or at the office of a title company.

When in Doubt?

There is no harm in getting a mechanic’s lien

contract if non-homestead, but…

OUCH!

If you don’t get a mechanic’s lien contract and it is

a homestead!!

RATE RULE R-2: “Pay-As-You-Go”

Policies

**General Rule: Premium must be paid in full to

the issuing title company prior to delivery of the

Policy or Endorsement to the Insured.


Policies

**Authorized Exception to the General Rule:

A Policy premium can be paid in progressive installments if

a) the face amount of the Policy is $5,000,000 or more and includes the value of future construction,

b) the Policy’s Schedule “B” includes the two contemplated-improvements exceptions from Rule P-8(b) [Mortgagee Policy] or P-8(a) [Owner Policy], PLUS added language for the “Liability” or “Pending disbursement” exceptions required by Rule P-8, and

c) Down-Date Endorsements under Rule P-9(b)(4) or P-9(a)(3) are at each stage after the initial closing, at cost of $50 per Endorsement [Rule R-11(c) for the Mortgagee Policy, and Rule R-15 for the Owner Policy].


Policies

“Pay-As-You-Go” can be applied to a Mortgagee Policy alone, an Owner Policy alone, or both Owner and Mortgagee Policies in the same transaction.

When both Policies are issued, the Owner Policy is charged for at a simultaneous-issue $100 rate under Rule R-5(B), plus the difference in premium if the Owner Policy amount exceeds the Mortgagee Policy amount.

RATE RULE R-2: “Pay-As-You-Go” Policies

R-2 requires payment of the fraction of the premium and Down-Date Endorsements as the loan is disbursed. Failure to meet these

Conditions results in the entire remaining premium being immediately due and payable.

RATE RULE R-3: Owner Policy Coverage for

Contemplated Improvements

and Increased Coverage

Owner Policies may be issued for:

a) Current sales price,

b) Current sales price, plus contemplated improvements,

c) If no sale, value of the land and improvements,

d) If no sale, value of the land and improvements, plus contemplated improvements.

EXAMPLE: Buyer is purchasing $50,000 tract of land. Buyer intends to build

$200,000 (total premium of $1,429). Typically. Seller pays for the Owner Policy on the land ($522 premium). Buyer pays $907 ($1,429-$522).


Contemplated Improvements and Increased

Coverage

Owner Policy can be “surrendered” and a new owner policy issued that includes the cost of completed improvements. The premium for the new policy will be LESS the premium paid for the surrendered policy. NO time limit.

EXAMPLE: Buyer has $50,000 Owner Policy and has completed a $200,000 house. Buyer surrenders the existing policy and receives a new policy for $250,000. Buyer pays $1,184($1,706-$522).


Contemplated Improvements and Increased

Coverage

Owner Policy can be endorsed to reflect increased value under R-3c using the Increased Value Endorsement, the T-34.

Insured must satisfy the company as to the current value according to the Procedural Rule P-9(a)(2).

Premium is based on basic rate of current value, less premium paid for existing policy and any prior Increased Value Endorsements. Premium cannot be less that minimum policy Basic Premium Rate.

EXAMPLE: Insured has a $30,000 Owner Policy (premium of $380) and has constructed $150,000 worth of improvements several years ago. Appreciation has raised the total value to $250,000, as evidence by an appraisal. Premium for the Increased Value Endorsement is $1,326 ($1,706-$380).

RATE RULE R-5A: Simultaneous-issue

of Owner and Mortgagee Policies Rate Rule R-5A provides for what is sometimes referred to as an “up-front” construction loan. The first part of the paragraph provides for the basic simultaneous issuance rate.

But the second part, appearing in parentheses, provides that if the new Owner Policy is to include the cost of contemplated improvements (Procedural Rule P-8a) and an Owner Policy has been issued to the current owner, covering the identical property, and within the last four years, a credit on the new Owner Policy SHALL be given for the amount of premium paid for the existing Owner Policy and the Mortgagee Policy shall be issued for $100, plus endorsements.

There is no requirement the prior policy has to have been issued by the same agent or underwriter and there is no requirement the prior policy has to be surrendered.


of Owner and Mortgagee Policies EXAMPLE: Insured has a $50,000 Owner Policy issued in 2014 ($522 premium). Currently owes $30,000 on a purchase money deed of trust. Insured is going to sign a $200,000 mechanic’s and materialsman’s lien contract with a builder for a new home.

This lien will be assigned to a lender that will be making a $230,000 loan renewing and extending the existing purchase money deed of trust and the construction contract.

The owner Policy will be issued for $250,000, land cost ($50,000) plus cost of contemplated improvements ($200,000). The premium for the owner Policy will be $1,184 ($1,706-$522). The premium for the Mortgagee Policy will be $100, plus endorsements.


of Owner and Mortgagee Policies EXAMPLE: Insured has an Owner Policy issued in 2014 for $200,000 on an improved property ($1,429 premium). The Insured’s house has burn and the insurance has paid off all but $30,000 of the old loan.

Insured is going to sign a $200,000 mechanic’s and materialman’s lien contract with builder for a new home. This lien will be assigned to a lender that will be making a $230,000 loan renewing and extending the balance owed on the existing deed of trust and the construction contract.

The Owner Policy will be issued for $250,000, current land value ($50,000) plus cost of contemplated improvements ($200,000). The premium for the Owner Policy will be $277 ($1,706-$1,429). The premium for the Mortgagee Policy will be $100, plus endorsements.


of Owner and Mortgagee Policies

Rate Rule R-5B provides for the simultaneous issuance of the Owner Policy for $100 plus any difference in the basic premium for the Owner Policy and the basic premium for the Mortgagee Policy in “pay-as-you-go” situation.

It also provides for a credit against the premium for the Mortgagee Policy for the premium for an existing Owner Policy covering the identical land and issued to the same owner.

There is NO 4 year limitation.

RATE RULE R-5C: Simultaneous-issue

of Owner and Mortgagee Policies Rate Rule R-5C provides for the simultaneous issuance of an Owner Policy and a Mortgagee Policy with a credit for an existing Owner Policy AFTER completion of improvements.

This rule appears to have been an effort to extend the credit for an existing Owner Policy to Insureds that did not purchase “upfront” policies under R-5A, but instead acquired binders. It pre-dates the limitations on the issuance of binders and the changes to Procedural Rule P-16 appear to have made this section almost useless.

Application of this section required the existing Owner Policy not contain any exceptions for construction (Procedural Rule P-8), be done after completion of improvements, be done only on “residential property” (NOT “residential real property”), the existing Owner Policy cover the identical land, be issued within 4 years of the date of existing Owner Policy, and that there had been no change in ownership. This section does require the existing policy be “turned in”.

RATE RULE R-18: “Going to Perm”

When a Mortgagee Policy is to be issued on a loan which renews and extends or satisfies a construction loan covered by an existing Mortgagee Policy, the premium for the new Mortgagee Policy will be the GREATER of minimum policy Basic Premium Rate (currently $238) or the difference between the basic rate for the existing Mortgagee policy and the basic rate for the new Mortgagee Policy.

EXAMPLE: A $230,000 construction loan is covered by an existing Mortgagee policy. A new loan renewing and extending the construction loan will also be for $230,000. Premium will be $238 plus endorsements.

RATE RULE R-18: “Going to Perm”

EXAMPLE: A $200,000 construction loan is covered by an existing

Mortgagee Policy (premium of $1,429). A new loan will renew and

extend the construction loan and an existing land loan $30,000

into a new loan of $230,000 (premium of $1,595.20). The premium

will be $238 plus endorsements.

The difference between the premium for the new loan and the

premium for the construction loan is $166.20. Since this is less

than the minimum policy Basic Premium Rate, $238, the minimum

policy Basic Premium rate is charged.

RATE RULE R-9: Additional Chains of Title

Just because the transaction involves a construction loan, don’t forget that other charges are still applicable.

– There is an additional chain of title charge for each additional lot or tract not in the same ownership.

– There is an additional chain of title charge for each additional platted lot out of subdivisions that weren’t platted on the same day. Multiple lots out of another subdivision still count as just one additional chain of title charge.

– There is an additional chain of title charge for each non-continuous, acreage tract out of the same county.

– There is an additional chain of title charge for each additional county where all or part of a tract or lot is located.

RATE RULE R-13: Mortgagee Title Policy

on Interim Construction Loan Procedural Rule P-16 was changed in 2006 to limit the use of binders. They can now only be issued for construction loans that do not include the execution of a mechanic’s and materialman’s lien contract and where the owner, contractor and obligor on the debt are all the same.

The charge for a Binder is minimum policy Basic Premium Rate ($238). Binders are good for one year and up to 6 extensions for 6 month periods can be purchased for $25 per extension. There is no prohibition on purchasing these extensions up front.

In other words, only builders can obtain

binders on property that they own.

No commercial deals and no build to suit deals.

RATE RULE R-13: Mortgagee Title

Policy on Interim Construction Loan A credit of 50% of the cost of the binder is authorized where:

A new Mortgagee Policy is issued on a loan that takes renews and extends or satisfies a lien already covered by a binder, or

A new Owner Policy is issued on a sale of the property, and the lien covered by the binder is released prior to or simultaneously with the sale.

The subsequent policy has to be issued within one year of the original binder to qualify for the credit.

EXAMPLE: Binder issued November 1, 2013. Builder sells house on January 3, 2015. There is no binder credit given because the binder wasn’t issued within one year of the subsequent policy.


Policy on Interim Construction Loan

Only the first subsequent policy qualifies for the credit if the binder covers multiple properties.

EXAMPLE: Builder obtains a binder issued November 1, 2014 that covers 5 lots. Builder sells one house on June 1, 2015, two houses on June 28, 2015, and the last two houses on June 30, 2015. Only the Owner Policy on the first house is entitled to a binder credit.


Policy on Interim Construction Loan

Only property being improved with one to four residential units qualifies for the binder credit.

EXAMPLE: Owner/contractor/obligor obtains a binder for a 24 unit condominium project on April 1, 2015. The first unit out of the project is sold on December 1. 2015. There is no credit on the Owner Policy since the binder didn’t cover property being improved with one to four residential units.

RATE RULE R-15: Owner Policy

Endorsement

This is where the $50 charge for the Down-Date endorsement of the “pay-as-

you-go” Owner Policy appears.

RATE RULE R-16: Survey Deletion

The exception as to area and boundaries that appears in Sch. “B”, Item No. 2 of both the Owner Policy and the Mortgagee Policy can be limited to the phrase “shortages in area” as set out in Procedural Rules P-2 and P-8a(2). There is no charge for the deletion in the Mortgagee Policy.

The charge for the deletion in the Owner Policy:

• 15% of the basic rate in T-1 Owner Policy and

• 5% of the basic rate in a T-1R Owner Policy.

Procedural Rule P-38 says that the T-1R can only be issued on property that is “Residential Real Property” (this term is defined in Procedural Rule P-1u.) and the policy is issued to a natural person.

The T-1R can be issued prior to the construction of improvements where the policy contains the construction exceptions (P-8a exceptions).


EXAMPLE: Existing house is sold to husband and wife. Premium for the survey deletion is 5% of the basic rate for the Owner Policy, Form T-1R.

EXAMPLE: Lot is sold to husband and wife. Premium for the survey deletion is 15% of the basic rate for the Owner Policy, Form T-1. Property is not improved and policy doesn’t include cost of contemplated improvements.

EXAMPLE: Lot is sold to husband and wife who immediately enter into construction loan for new house. Premium for the survey deletion is 5% of the basic rate for the Owner Policy, Form T-1R.


EXAMPLE: Existing house on 10 acres is sold to husband and wife. Premium for the survey deletion is 15% of the basic rate for the Owner Policy, Form T-1. Why? Unplatted property of over 5 acres must be used for agricultural purposes by individual insureds to fall within the definition of “Residential Real Property”.

EXAMPLE: Existing house is sold to limited partnership. Premium for the survey deletion is 15% of the basic rate for the Owner Policy, Form T-1. Owner is not a “natural person”.

RATE RULE R-20: Owner Policy after

Construction

Where an Owner Policy in an amount of $5,000,000 or more has been issued that includes the cost of contemplated improvements, and the improvements have been completed, accepted by the owner, and all bills have been paid, within one year of the completion a new Owner Policy may be issued by the company that issued the original Owner Policy for minimum policy Basic Premium Amount ($238).

If the new policy exceeds the old policy, the premium shall be minimum policy Basic Premium Amount, plus the premium difference. There is no requirement the Owner Policy be issued to the same owner. The property can be sold and this rule will still apply.

My Contact Information

Heidi Junge

Texas Underwriting Counsel

Stewart Title Guaranty Company

San Antonio, Texas

(210) 590-1981

[email protected]

Here’s how to get CE credit! E-mail your certificate request to:

[email protected]

Please include following information in your e-mail request: Name of Participant

This Presentation Name – “Construction Issues”

Presentation PASSWORD

TDI Number (one only)

• For Attorney CLE Credit also include: Texas State Bar Number

How Affiliated with Stewart

• Note: CLE credit for attorneys is limited to Texas license and

employment by a Stewart Title Guaranty Company title insurance

agent or a Stewart entity.


If you haven’t received your certificate within

2 weeks please contact:

[email protected]

You can access the full webinar materials 10 business days

after the webinar at: www.stewart.com/texas

under the “Texas TIPS” tab

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http://www.stewart.com/texas

Next Month’s Texas TIPS Online presentation is

July 16, 2015

“Legislative Update” presented by:

John Rothermel

For Questions/Comments Email

[email protected]

or

[email protected]

57



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