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Mechanic's Lien Legislation Agreed on in Richmond

In the Fall issue of The Edward Gross Report, we reported on the growing number of mechanic's liens being filed in Northern Virginia as the real estate market sours. The mechanic's lien is a legislative creature that protects a subcontractor's or supplier's investment of time, effort and money in a structure by giving him a priority claim in the event the developer files for bankruptcy. In Virginia and only a small handful of other states, such a lien can be enforced even after the property has been sold and the buyer has gone to settlement. The purchaser's protection against this threat to his ownership has traditionally been title insurance, and the title insurance companies have responded by fleeing the Northern Virginia market, unwilling to continue in what is virtually guaranteed to be highly unprofitable business.

Now on agreement has been negotiated between representatives of the development industry and the legislators, providing statutory procedures for protecting the interests of buyers, lenders and title companies, as well as those of contractors and supply companies. Both of the bills have passed- House Bill 972 and Senate Bill 462- require that subcontractors and suppliers give notice of mechanic's lien claims against a developer to an agent designated by the developer. The latter, in turn, would either have to certify to any buyer that all outstanding claims have been paid, or else provide a list of outstanding claims at the time of the sale. Noncompliance could result in stiff penalties, including criminal sanctions. Thus the subcontractor or supplier would continue to enjoy his priority status in the event of bankruptcy, and a potential buyer would either know that the property is unencumbered, or be forewarned of any potential claims against his ownership. The bills, applying to one to four-family residential buildings, and not commercial properties, are expected to give residential housing a boost, and bring the title companies back into the market.