As a contractor, you probably know about mechanics liens. You may run into situations where the property owner you’re doing work for doesn’t make a payment. That can happen if the owner has a problem with the work you’ve done, or if they don’t have the cash they need to meet their obligations. You can have the same problem as a subcontractor if the general contractor isn’t paying your invoice.
What should you do in those situations? You could sue, but that can be expensive and time-consuming. Your other alternative is to file a mechanics lien, which gives you a different way to pursue payment.
The other time when you’ll need to know about mechanic’s liens is if you have refused to pay a subcontractor who has done a poor job. In that situation, that subcontractor may file a mechanics lien against the property you’ve been constructing. Therefore, it’s critical that you understand how mechanics liens work.
What is a Mechanics Lien?
A mechanics lien is a legal document that contractors use to preserve their right to demand payment. The mechanics lien is a claim that a contractor makes against the property they were working on until they are paid. You can think of a mechanics lien as “following” the property.
Even though contractors or subcontractors file a lien because a property owner or contractor hasn’t made required payments, it puts a cloud on the ownership of the property. The property owner will have a difficult time selling the property with the lien in place. If a buyer purchases a property with an active mechanics lien, the buyer then becomes responsible for it.
As you can imagine, no buyer would be interested in taking over someone else’s financial liability. In addition, if the buyer wants to finance the property, their lender will typically require that the individuals involved work together to remove the lien before approving the financing.
Unlike suing for breach of contract, a mechanics lien gives the filing party the right to sue both the contractor and the property owner if they aren’t paid. Therefore, a mechanics lien is a powerful tool contractors use to encourage a resolution of the dispute that caused them to file the lien.
The property owner won’t want the lien complicating their ownership. They will be motivated to come to a resolution with their contractor. If a subcontractor is the one who filed the lien, the property owner will be even more motivated to force a resolution since they weren’t even involved in the original dispute.
How Does a Mechanics Lien Work?
The following examples show how mechanics liens work in different situations. Keep in mind that state laws control how mechanics liens work in each state. As a result, the rules in your state may produce examples that are different from these. Let’s assume that:
· the property owner doesn’t pay you according to the schedule defined in your contract. Your mechanics lien would give you the right to demand payment. The property owner can’t ignore the lien because it is affecting their ownership of the property. The lien will give you leverage to work with the property owner to make payment.
· you haven’t paid a subcontractor, or that the subcontractor doesn’t believe you have lived up to your end of the contract. The subcontractor would file a mechanics lien against the property. You can imagine how your client, the property owner, will react. You’ll need to get the lien removed as quickly as possible.
· you have paid your subcontractor, but that person hasn’t paid laborers or their employees who worked on the project. The laborers and employees may be able to file a mechanics lien.
· you have paid your subcontractor, but that person hasn’t paid for materials or for rental fees for equipment they used. The suppliers of the material or rental equipment may be able to file a mechanics lien.
The laws governing mechanics liens are complex and any error made in the filing could make the lien unenforceable. For example, depending on your state’s laws, a contractor may be required to send a preliminary notice to all involved parties. If the contractor doesn’t provide a preliminary notice in a state where it is required, the right to file a mechanics lien is no longer an option.
What Can a Mechanics Lien Include?
Subject to differing state laws, typically a mechanics lien can include any expenses the contractor paid to improve the property or the land. For example, that could include materials and labor, but it wouldn’t include things such as attorneys’ fees to file the lien.
What is Lien Priority?
A property may have a variety of liens on its records in addition to mechanic liens, for example:
· Mortgage loans: When a lender finances the purchase of a building or the construction of one, they hold title to the property until the owner pays the mortgage in full.
· Second and third mortgages: If the property owner needs more cash flow, they may take out second or even third mortgages on the same property.
· Judgment liens: If someone sues a property owner and the owner loses, the winner may file a judgment lien. The lien is to ensure payment of the amount the court awarded to the person suing.
Most commonly, courts assign lien priority in chronological order. For example, the first lien is probably going to be the mortgage loan, and that will get first priority if a foreclosure forces the sale of the property. After that, liens get priority based on the lien’s filing date.
In some situations, and in some states, the court may give some liens higher priority, regardless of when they were filed. This could include property tax liens, some HOA liens, and mechanics liens. As a result, even if you think that a property owner is going to go into foreclosure, it makes sense to file a mechancis lien to protect your rights.
What to Do if You are Served with a Mechanics Lien
How you respond to a mechanics lien is critical to achieving a reasonable solution to the problem. The process will be different depending on the state you’re in, but these are common steps you may need to take.
1. Determine whether the lien is valid. If you receive a preliminary notice, determine if the contractor has filed within the required timeframe. Then, determine how long they have to file the actual lien. If the contractor doesn’t file the lien within that timeframe, it isn’t valid. You’ll also need to check your records to determine if you really owe the payment.
2. Send a lien removal demand. If you don’t believe the lien is valid, you should send a letter to the person filing explaining why the lien isn’t valid, and demanding its removal. This lien removal demand letter has several benefits:
· State laws may require that you send the demand letter.
· The letter formalizes your reasons for believing the lien is invalid to ensure that there is no miscommunication.
· The filer may voluntarily remove the lien. This resolves the issue and gives you a better opportunity to recover attorney fees if the filer refuses to remove the lien.
· If you can’t resolve the issue, you’ll need to file a lawsuit to force the lien removal.
The demand letter can sometimes resolve the dispute. The advantage is that you will avoid the higher legal fees you’d incur to pursue the matter in court.
3. Post a bond. If the filer won’t release the lien, you may decide to post a bond. The bond amount will be different in each state, but would typically run 110 percent of the lien amount.
When you post a bond, the lien will transfer to the bond. This will clear the title to the property. You’ll want to do this to relieve your client, the property owner, of the problems caused by having the lien liability on the property. In addition, some contracts give the contractor responsibility to keep the property lien free.
4. Fight the lien in court. The filer of the mechanics lien will file for a foreclosure on the lien. If that filing were successful, you’d be required to pay the lien amount. To avoid this, you can file suit to go before a judge. Based on your legal filings and testimony, the judge will decide to either remove the lien or require you to remove it by paying the lien amount.
How to Avoid Mechanics Liens
It doesn’t matter how well you manage your company, someday someone may file a mechanics lien on one of your projects. Here are some things you can do to try to avoid liens.
· Pay with joint checks. The property owner can issue checks to the contractor and the subcontractor.
· Use Lien waivers. In some cases, you may be able to get your subcontractors sign lien waivers. However, some states don’t allow waivers.
· Keep good records. Keep all records you receive from subcontractors and suppliers. Include detailed information on the advice portion of your checks to prove what each payment covers.
The law surrounding mechanics liens is complex. States have different very detailed requirements for issuing or responding to a lien. Overlooking one of those details can cost you a significant amount of time and money.
If you need to file a mechanics lien or defend yourself against one, contact Smiley Law Firm. Our attorneys are experts at representing clients to save them time and frustration at a reasonable flat fee.