Yes, receivers can sell real estate free and clear of mechanics liens.
This is not well known though – not even by title companies, highly experienced bank attorneys or many of the most experienced receivers. Not because these folks aren’t knowledgeable and sophisticated, but rather simply because there hasn’t been much call for selling real estate by receivers, so the area is full of myth and legend and misinformation.
It’s important now, though. Really important. Why? It’s important because the vast majority of defaulted construction loans are for new subdivisions – particularly housing (think condos and housing tracts), but also for hotel, office and retail condos, and they all share one very big long-term liability in common – ten years of construction defects liability for the owners, developers and contractors. Kind of like breaking a mirror, but for a longer time period and worse, this one’s not make believe.
Of course this liability attaches to the lender once they’ve foreclosed on the loan and become the owner. Traditionally the easiest way to remove a mechanics lien was to foreclose, and that’s what virtually all lenders did – the receiver held the property until the lender could foreclose it, and then the lender sold it post-foreclosure, free and clear of liens. Simple and clear cut, and it gave the lender direct control of the real estate to boot. And who doesn’t want control, after all.
However, as the result of long term construction defects liability that attaches to new subdivisions, lenders (both originating lenders and private note buyers) and their lawyers are now looking to receivers to sell subdivisions (both wholesale and unit by unit at retail) in order to avoid taking title to the property and taking on endless years of construction defects liability and related consumer protection issues.
Our receivership court orders now routinely provide for the receiver to have the authority to sell subdivisions free and clear of liens, subject to the consent of the lender. The concept is simple and equitable enough. Mechanics liens are nearly always subordinate to the lenders first trust deed anyway, which is why foreclosure eliminates them. So selling real property in receivership and paying off the first trust deed on a priority basis makes sense. To the extent that a mechanics lien has a legitimate priority over the first trust deed, that’s typically a problem for the issuer of the lenders title policy, not the receiver. The only issue arises when the lenders title insurance policy showed an exception at the time the loan was originated for construction contracts that commenced before the first trust deed was recorded – but even foreclosure won’t eliminate those mechanics liens. Stop notices pose the same problems and foreclosure won’t eliminate them either.
However, their are some complexities. The title company has to review the specific language of the court order. Most title officers are only now starting to become aware of what a receivership is. So it is important to work closely together with the title company, and to find out which title officer or lawyer within the title company has expertise with the sale of real property in receivership. There are other issues as well that arise for each particular situation, so it’s important to consult with a receiver or banking lawyer who has current specialized experience in this area.
