One of the more complex and confusing issues that can rear its ugly head at a real estate closing is that of the existence of past, present, or, in some cases, future contracts for construction on the land. These contracts can create headaches for owners, purchasers, lenders, attorneys, and title insurers if the issues surrounding these contracts are not dealt with prior to closing. This article will identify construction issues that arise at closing and discuss how Chicago Title Insurance Company deals with these issues. The scope of this discussion will be limited to acquisition and refinance transactions rather than construction loan closings.
Illinois Mechanics Lien Law
Before one can start the process of determining if there is a construction issue at closing, a basic understanding of applicable Illinois mechanics lien law is necessary. To accomplish this, a review of the “Mechanics Lien Act” (hereafter referred to as the Act) found at 770 ILCS 60/1 et seq., is imperative. What follows is a brief synopsis of some of the pertinent parts of the Act.
A mechanics lien may arise in favor of any person who, pursuant to a contract, furnishes labor, materials, or services in connection with either the improvement of a parcel of land or the repair, rehabilitation, or remodeling of a building on that land. The lien attaches to the parcel of land in the amount due under the contract. This lien attaches, and the priority of the lien as to third parties is established, as of the date of the contract between the contractor and the owner or his or her agent. In the case of a subcontractor or supplier who does not have privity of contract with the owner, the mechanics lien relates back in time to the date of the contract between the owner and general contractor. A mechanics lien, therefore, is a “secret” lien, the priority of which is not determined by the date on which it is recorded; rather, its priority relates back to the date of the general construction contract. The secret nature of this lien is the cause of many headaches at closing.
For a mechanics lien claimant to enforce a mechanics lien against the owner of the real estate, a foreclosure suit must be filed within two years of the date on which the work was completed or the materials delivered. Regarding enforcement against third parties, however, a lien must be recorded or a foreclosure suit filed within four months of the date of completion or delivery. If a lien is recorded within this four month time period, the lien claimant then has two years from the date of completion or delivery in which to file a foreclosure suit. It is important to note that the purchaser of a parcel of land and the purchaser’s lender are defined as third parties under the Act. The Act grants priority to the mechanics lien claimant over third parties during this four month period even if the third party became an owner of the property or a mortgagee before the lien was recorded. Thus, a purchaser or lender can be subject to a mechanics lien claim when the contract on which the lien is based was with a prior owner, or a lender can be subject to a lien based on a contract with the current owner, if the appropriate steps to preserve the lien are taken by the lien claimant.
As previously mentioned, a mechanics lien will expire two years from the date of completion or delivery unless the lien claimant files a foreclosure suit within that time period. The two year statute of limitation may be tolled, however, if any of the following have filed bankruptcy: the owner, the general contractor, the subcontractor who has filed the mechanics lien or any subcontractor who is in the contractual chain between the general contractor and the mechanics-lien-filing subcontractor.
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