Don’t Forget to Terminate the Notice of Commencement
Florida Statutes Section 713.13 provides that an owner shall record a Notice of Commencement prior to commencing to improve real property, or recommencing completion of any improvements after default or abandonment of the construction. Without going into all of the details and nuances of Florida’s Construction Lien Statute, Chapter 713 is designed, overall, to protect owners from double paying contractors and subcontractors and to give those who work on or supply materials to a job site, protection that they will be paid. As long as owners and contractors follow the provisions of the statute, each side has protections. Owners know who is working on their property and are assured that the workers are getting paid and liens will be released. Contractors and suppliers have lien protection, evidenced by and relating back to the Notice of Commencement (NOC), no matter when they begin working on the project, so that the owner can’t foreclose out subcontractors and suppliers by taking out a junior mortgage.
But that is not what I want to talk about today. So much is written about Florida construction lien law and the perils associated with not following proper procedure. Instead, I want to focus on the end of construction and the termination of the NOC. When selling or refinancing a property, it is common to find outstanding Notices of Commencement in the title search. These affect the status of title because all contractors, subs and materialmen who worked on the job and who provided notices to owner have lien rights that relate back to the date of the NOC which will have priority over any newly recorded deed or mortgage. Therefore, in order to insure a new owner or mortgage, the NOC must be terminated. But, months later, this could be complicated.
The first thing to do is to check the date of the NOC. Has it expired? Notices of Commencement expire and automatically terminate 1 year after the date of recording (unless an earlier date is set forth in the NOC). If the NOC has expired, let the title company know and it will be deleted from the commitment as it is no longer an issue.
Second, if the NOC has not expired, before closing, you’ll need to obtain and record a Notice of Termination from the owner as well as a final contractor’s affidavit from the general contractor. The contractor’s affidavit is prescribed by statute, yet many small contractors pretend not to know what they are required to do. The contractor must attest that all work has been completed and all subs and suppliers have been paid and the contractor must satisfy and release its lien. The affidavit should be recorded with the notice of termination. The contractor should also provide waivers of liens from all subs who have provided notices to owner.
Why wouldn’t an owner terminate a NOC when the work is done? Many times, for ordinary home repairs, such as the installation of a new AC unit or a new roof, the home owner doesn’t know to record a termination and the contractor doesn’t tell the owner to do so. That is why this is a common problem. In my own case, I installed a new roof on my house last year. I know that I needed a Notice of Termination and just never got around to it or asked for the contractor’s affidavit. And then, we decided to sell our house. I have had to get the contractor’s affidavit quickly. It wasn’t hard for me because I knew exactly what to do and what to ask for. But a typical homeowner might have had more difficulty.
Third, if construction is on-going and the contractor can’t say the work is complete, closings can still occur, but there are strict rules to follow. When a client is purchasing a condominium, for example, the association might be renovating common areas. In this case there might be multiple NOCs which affect title to all units. While each unit is specially assessed for the renovations, the association is responsible for payment of the work. Therefore, title to an individual unit or a unit mortgage can be insured if you obtain an affidavit from the association stating that the association has sufficient funds available and set aside to complete the work.
Sometimes developers will begin construction work on a site before obtaining construction financing. Therefore, a NOC is already recorded before a mortgage would be recorded. This would make the liens of the contractor and all subs and suppliers superior to the mortgage. Obviously, no lender would close on this bases. To remedy, the NOC has to be terminated, the mortgage recorded and the NOC re-recorded.
But it isn’t that simple. The owner has to pay the contractor for all work completed to that point, including retainage and the contactor must assure that all subs and materialmen are paid to date. That way, the contractor can provide a “final” contractor’s affidavit and release of lien and all subs and suppliers can provide lien waivers. They are final because all subs and suppliers will have been paid for all work rendered. In addition, work on the site must stop for at least 24 hours. Taken together, going forward, the new work is treated as a new contract and a new NOC for the work that will be done after the mortgage is recorded. However, owners don’t like to shut down a job site. To comply with the statute and guard against lost time, we try to close on Fridays so that the shutdown period can occur over the weekend when work isn’t generally scheduled, or only light work would have been scheduled.
With the exception of this final case where a termination and new NOC are required, I would say that most of the time, owners don’t record notices of termination and rely on the 1 year expiration period as they don’t intend on selling or refinancing for more than a year. In commercial practice, this is probably ok because construction loans are usually disbursed on a draw basis following title updates and upon receipt of proper documentation from the contractor and all subs, including upon the final draw. They will have the proper documentation on hand if necessary. However, if you are a homeowner doing a major renovation, it is not a good idea to wait to get the notice of termination, contractors affidavit and lien waivers (my own stupidity notwithstanding). You never know if there is a subcontractor out there who has a dispute with the contractor who will come back and cause you problems. Don’t make that last payment until the contractor can provide the affidavit and lien waivers and you can sign and record a Notice of Termination properly.