It is not always appropriate to waive Special Exceptions 2 (a) and (b) on the commitment for title insurance. This article addresses not waiving 2 (a) and (b) when there has been work done on the property or when work that has not been performed has already been contracted for. There are other situations covered by Special Exception 2 (b), which are not addressed in this article. While this article includes a discussion of policy coverage that applies to all states, please note that any reference to mechanic’s lien law is specific to Illinois.

In many transactions, Special Exceptions 2 (a) and (b) are waived with the execution of the ALTA Statement. However, waiving 2 (a) and (b) in certain situations is inappropriate even when the parties provide a completed ALTA Statement. This article will examine when those exceptions should not be waived.

Mechanic’s lien coverage is one of the issues addressed in Special Exceptions 2 (a) and 2 (b) of the title commitment. Special Exceptions 2 (a) and (b) provide:

2. Any loan policy issued pursuant to this Commitment will be subject to the following exceptions (a) and (b), in the absence of the production of the data and other matters contained in the ATG ALTA Statement form or an equivalent form:

   (a) Any lien, or right to a lien, for services, labor, or material heretofore or hereafter furnished, imposed by law and not shown by the Public Records;

   (b) Consequences of the failure of the lender to pay out properly the whole or any part of the loan secured by the mortgage described in Schedule A, as affecting: (i) the validity of the lien of said mortgage; and (ii) the priority of the lien over any other right, claim, lien, or encumbrance that has or may become superior to the lien of said mortgage before the disbursement of the entire proceeds of the loan.

The waiver of Special Exceptions 2 (a) and (b) provides mechanic’s lien coverage for the insured. ATG often receives marked-up commitments, or policies, that have waived Special Exceptions 2(a) and (b), even though the issuing agent knew at the time of the closing that work was going to be done on the property. In many cases, the owner or buyer has already contracted for work to be done. In those cases, the contractor would have priority over the insured mortgage because mechanic’s liens take priority as of the date that the contract is signed. To prevent claims for mechanic’s liens, it is imperative not to waive Special Exceptions 2 (a) and (b) if the agent is aware that the owner plans to have work done on the property.

There are common indicators that Special Exceptions 2 (a) and (b) should not be waived. First, the issuing agent should always review the ALTA statement to see if it indicates that any contracts have been entered into. Second, if the transaction has other indications that a contract has been entered into, or will be shortly, Special Exceptions 2 (a) and (b) should not be waived. For example, if any party will be handling a construction escrow (including the lender), Special Exceptions 2 (a) and (b) should not be waived. Another example is if the buyer’s loan documents indicate that it is a 203K loan. A 203K loan is a loan in which the lender holds back money for the repairs and pays the contractors directly for the work to be done. Typically, contracts have already been entered into prior to the closing taking place. In that case any mechanic’s lien claims could have priority over the insured mortgage.

Mechanic’s lien claims can be expensive to resolve and often involve protracted litigation.To prevent unnecessary claims, title agents should examine transactions closely to determine if a waiver of Special Exceptions 2 (a) and (b) is appropriate. If you have any questions, please contact the ATG Underwriting Department, legal@atgf.com, 800.252.0402, ext. 2020, or 312.752.1990.