A Notice of Commencement recorded prior to your mortgage can wreak havoc on your construction loan. In Florida, before any work can begin to improve real property, a Notice of Commencement (“NOC”) must be recorded in the Public Records. Chapter 713, Fla. Stat.* Too often this requirement causes borrowers and their contractors to record the NOC before the loan closes and the mortgage is recorded. Their eagerness to expedite the construction process has the opposite effect. Instead, the recording results in negative implications to the lender and the title insurance underwriter insuring the priority of the lender’s lien solved only by a complicated and time consuming process involving the restoration of priority of the construction mortgage.
Under Florida law, the priority of instruments creating liens on real property is determined by the order of recording. At the time an instrument, such as a mortgage, is accepted and recorded, the clerk must affix an official register number – typically a book and page or instrument number. The sequence of such official numbers determines the priority of recordation. “An instrument bearing the lower number in the then-current series of numbers shall have priority over any instrument bearing a higher number in the same series.” Sec. 695.11, Fla. Stat.
In order to undo the improper recording of the NOC to the satisfaction of the lender, a strict statutory process must be followed, in addition to sometimes onerous requirements imposed by the title insurance underwriters. In general, the process is as follows:
- All construction on the project must cease.
- The borrower must identify all individuals or entities who provided labor, services or materials for the project, pay each in full for services rendered up to the time construction ceased, and obtain a Waiver and Release of Lien Upon Final Payment from each. Each Waiver and Release of Lien Upon Final Payment must also acknowledge that the original NOC became null and void as of the date construction ceased and that any further labor, services or material provided to the property shall be rendered in accordance with a newly recorded NOC.
- The borrower must obtain an affidavit from the contractor stating that all lienors under contract who have timely served a notice to owner or the borrower and the contractor have been paid in full.
- The borrower must perform, and affirm by affidavit, that a personal inspection of the property was made to determine whether any notices were posted on the property.
- The borrower must remove the original NOC from the property.
Additionally, depending on the title insurance underwriter, the borrower may be required to provide an indemnification agreement in favor of the title company supported by financial statements ascertaining the borrower has sufficient assets to secure the indemnification agreement.
The time involved in obtaining the necessary documentation from the various parties as well as the extent and scope of the work done under the original NOC will determine the extent of the delay caused by the untimely recording of the NOC. Not until all of the foregoing documentation is supplied to the satisfaction of the lender and title underwriter, can the construction loan close. Once closed, the notice of termination, the mortgage and new notice of commencement can be recorded. The new NOC must be posted on the property and only then can construction resume.
“The magnitude of the task should not be underestimated nor short circuited.” The Fund, Title Notes 21.03.03. For more information on restoration of title priority issues, contact the attorneys at Starfield & Smith at (215) 542-7070 or email us at firstname.lastname@example.org.
*While outside the scope of this article, it is worth noting that in loans secured by mortgages, the lender must, prior to the disbursement of any construction funds, record the NOC. Failure by a lender to record the NOC renders the lender liable to the owner for all damages sustained by the owner as a result of the failure. The posting of the NOC at the construction site remains the owner’s obligation.