Excerpted from a legislative analysis by construction law attorney William L. Porter
In light of recent residential developer bankruptcies, a change is proposed to ensure that title insurance policies will provide coverage against the risk that mechanics’ liens encumber newly purchased residential property. AB 2683 (Houston) is currently working its way through legislative committees. Contractors, subcontractors and suppliers should watch this bill closely and register their opinions with the bill's author.
Assembly Bill 2683 (Houston): Title Insurers to Cover Risk of Mechanics’ Lien Claims on New Residential Purchases
Recent residential developer bankruptcies have left new home purchasers with unexpected mechanics’ liens recorded by contractors and suppliers who contributed labor and materials to the construction of their homes, but were left unpaid when the developer closed its doors. New residential purchasers are thus being asked to pay twice. This legislation would shift the burden of satisfying these liens from new homeowners to builders and title insurers. Despite the apparent relief this bill seems to provide, there is little doubt that the true cost of shifting this burden would be spread out among all new homeowners in the form of higher title insurance premiums and corresponding increases in the price of purchasing a new home. Under this Bill Section 1094 would be added to the Civil Code to read as follows:
“1094. Every sales contract for the purchase of real property on which is located a newly constructed and previously unoccupied residential structure or structures shall provide for issuance of an owner’s policy of title insurance that includes coverage for mechanics’ liens for works of improvement commenced prior to transfer of the property to the purchaser."
The changes which have been proposed and are described above do not include all changes proposed and the descriptions given are only brief summaries. The full text of this Bill and all Assembly and Senate Bills can be viewed at http://www.leginfo.ca.gov/. Questions about these Bills can be directed to the sponsor of the Bill or to the California Law Review Commission whose membership and phone numbers are listed at http://www.clrc.ca.gov/.
About the author
William L. Porter is a partner in the Porter Law Group, Inc., Sacramento, California. The article was based on analysis of draft legislation as of mid-April, 2008 and on the California Law Revision Commission Summary of the legislation in question. Mr. Porter can be reached at (916)3817868 or at http://www.porterlawinc.com/.
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