In general, Minnesota has mechanic’s lien laws that are favorable to contractors. This has resulted in one of the largest title insurance claim areas in Minnesota. Minnesota Statute Section 514.05 states that priority for contractors or material suppliers takes effect “at the time the first item of material or labor is furnished upon the premises for the beginning of the Improvement and shall be preferred to any mortgage then not of record unless the lien holder (the mortgage holder) had notice of that work.”  This is often called the “first visible improvement” rule.

Establishing Priority

What this means is that once construction has started on the site, all contractors or material suppliers have priority over a subsequently recorded mortgage from the date the first item of work started or materials were supplied by any contractor or supplier.

Because of this, a title company insuring a construction mortgage lender, definitely wants to make sure to establish priority of the construction mortgage over any potential mechanics liens. In order to this this, when we are aware that there will be construction on the property, immediately after we record the construction mortgage, we will send someone out to the property to take photos of the site and provide an affidavit about what they observed in order to document the Mortgage’s priority.

Certain types of work are not considered to be the “first visible improvement”, as outlined in Minnesota Statute Section 514.05, including Survey staking, Engineering, Surveying, soil testing or ceremonial groundbreaking

If we are unable to establish the priority of the mortgage over potential mechanic’s liens because the work has started or work will start before closing, we may be able to insure the lender as if they have priority over the potential mechanic’s liens even though they, in fact, would not. This scenario is often referred to as “early start” coverage.

To determine whether the title company can provide this type of coverage to a lender, the title insurance company needs to conduct an early start analysis, which involves reviewing the components of the construction transaction. We usually ask to review the following documents:

• Audited financial statements of the borrower(s) and guarantor(s).
• Sworn construction statement.
• Total project cost statement
• Construction contract
• Statement of sources and uses
• Value pages of the appraisal

Commercial Partners Title

Commercial Partners Title Company has decades of experience facilitating commercial transactions of all types. Our team of escrow agents, title closers, and underwriters can help you through all the details of your transaction. Contact us today at our Minneapolis office to learn more.