The mechanics lien is an unique legal remedy available to the construction industry to both secure and collect on debt that arises from services furnished to a construction project. Wikipedia defines the Mechanics Lien as follows:
A mechanics lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property…[I]t is called by various names, including, generically, construction lien. It is also called a materialman’s lien or supplier’s lien when referring to those supplying materials, a laborer’s lien when referring to those supplying labor, and a design professional’s lien when referring to architects or designers who contribute to a work of improvement.
The remedy is surrounded by complications. Each state has specific rules about when the lien must be filed (read about Lien Deadlines), and who has the right to file it (read about different scenarios giving rise to mechanics lien rights). [pullquote style="right" quote="dark"]This general rule stands all across the country: If you furnished labor, materials, equipment or services to a project whereupon real property was being improved in any way, you are entitled to secure that claim by filing a lien against the property if you file the document relatively soon after your furnishing.[/pullquote]At the end of the day, however, this general rule stands all across the country: If you furnished labor, materials, equipment or services to a project whereupon real property was being improved in any way, you are entitled to secure that claim by filing a lien against the property if you file the document relatively soon after your furnishing.
And what is the exact value of a mechanics lien? Why should you file it and how exactly does it work to get you paid?
Generally speaking, mechanics lien claims are very effective at getting claimants paid, and paid rather quickly. Since lien claims have so many consequences, however, the exact consequence that prompts payment may be different for each circumstance. This post provides a list of some ways a mechanics lien can get your company paid. It’s an expansion to a white paper we published on the 5 Ways A Mechanics Lien Can Get You Paid.
1. A Mechanics Lien Encumbers The Property
When you file a mechanics lien, the document is actually recorded with land records and appears on a title search of the property. Anyone who buys or accepts the property after the recording of your lien claim (and sometimes, in some states even before the recording), accepts it subject to the claim. As a practical measure, this means the property will not be sold, refinanced or otherwise transferred without the mechanics lien claim being paid or addressed.
2. A Mechanics Lien Gets The Lenders Attention
Many construction projects have a construction lender, meaning that the construction is being financed by a bank or third party lender. These lenders are loaning tons of money to the project and they have a mortgage against the project property to secure that claim. When you file a mechanics lien, you are intervening in that security interest. In some states, you’re actually getting priority over the lender’s interest. This is a big deal to these lenders, and they usually step in after a mechanics lien is filed to demand action.
3. A Mechanics Lien Gets The Owners Attention
As a result of Reasons #1 and #2 above explained, in addition to other reasons, you gain the property owner’s attention when you file a mechanics lien. If you’re a supplier or a subcontractor, the property owner may not know or care who you are or whether you’ve been paid. Everything about that changes when you file a mechanics lien.
4. When Mechanics Liens Are Filed They Cause Contracts To Get Breached
Every construction projects has a number of contracts related to it. The property owner generally has a contract with the prime contractor, and the prime with the subs, and the owner with the lender, and the owner with the architect, and the owner with its tenant, and so on and so forth. It’s common — very, very common — that all of these contracts have a provision in them obligating a party to keep the property free and clear of liens. Once a lien is placed against a project, these contract provisions put one party in breach. This breach puts pressure on the breaching party to resolve the lien claim as soon as possible.
5. More Parties Become Obligated To Your Debt
If you don’t get paid on a project and you don’t file a mechanics lien, you’ll be restricted to filing suit against the party who you contracted with only. So, if you’re a supplier to a subcontractor, you’d only be able to file suit against that single subcontractor. If you file a mechanics lien, however, you bring a lot of other parties to the table. Typically, you’re authorized then to file suit against the general contractor and the property owner, and the land itself! The more parties obligated to pay your debt, the more pockets available to you to collect, and the more likely you’ll get paid.
6. A Mechanics Lien Sets A Firm Deadline
Sometimes, the problem isn’t that you aren’t going to get paid eventually, it’s that you’re waiting and waiting and waiting for payment and fielding promises about payment. Filing a mechanics lien can help in this scenario because it sets a firm deadline for resolution of your claim. Everyone hates litigation, and a mechanics lien will set a firm deadline for when litigation will begin if the claim isn’t paid. Deadlines get folks moving.
7. You Can Always Fall Back On The Property For Payment If You File A Mechanics Lien
One danger whenever you extend any type of credit is that the debtor just won’t pay, and worse, they won’t have any way to pay. Especially in the current economy, debtors are unable to pay and are facing bankruptcy more often. What can you do if someone owes you money and they just don’t have the money? Well, the mechanics lien gives you the authority to actually collect from the property. The real estate itself can be sold at auction to pay your claim, which means that you have to have a perfect storm of defaults to leave your company empty handed.
8. People Will Pay You To Avoid Dealing With Your Mechanics Lien
It’s common that you may go unpaid on a construction project because there is some type of dispute preventing payment. Maybe the property owner or general contractor disputes the quality of your workmanship, for example. They may play hardball with you and withhold money claiming default, but oftentimes, even in these instances, they fold when a mechanics lien is filed. That’s because dealing with a mechanics lien is expensive, requires attorneys and oftentimes (see below), has a grim outlook.
9. Mechanics Liens Are Hard To Challenge
One reason property owners and general contractors pay up when confronted with a mechanics lien is because they are extraordinarily difficult to challenge. If you don’t follow procedures when filing the lien and make a technical mistake, the lien will get tossed quick and easy. But, if you filed your lien properly, it can be a challenge to get a judge to toss the lien claim. And, it can be risky. Some states, like Washington, will award lien claimants attorney fees if someone challenges the lien claim and fails to win. That’s a big risk factor for those challenging a lien.
10. Mechanics Lien Claims Help When Parties File For Bankruptcy Protection
When unpaid for services or materials furnished to a construction project, the reason is often because one or more of the parties on the project have sought bankruptcy protection. This puts most debts in a state of limbo and makes it challenging to collect. Mechanics lien claims help in a bankruptcy situation, though, by doing one or more of the following: (i) It secures your debt to put you towards the top of the list of those entitled to payment in the bankruptcy; and (ii) It may give you the ability to proceed in court against other parties while the bankruptcy is pending.
11. Mechanics Lien Will Effectively Freeze Money Flow on the Project
Getting paid on a construction project can be tough because money has to be exchanged across multiple tiers of parties. Frequently, money is misappropriated before it ever gets to you. When you file a mechanics lien, however, you frequently force this flow of money to stop. The lender or the owner will actually stop paying its general or certain subcontractors until it gets assurances that your claim is paid.
12. Mechanics Lien Claims May Force Parties Into Joint Check Agreements to Benefit You
Sometimes, a mechanics lien claim will expose a party’s financial difficulty. For example, you may be supplying materials to a subcontractor going through tough times. When you’re not paid, filing a mechanics lien may be the only way to get the owner and the general contractor’s attention, prompting everyone to look at the subcontractor’s situation and learn that they are not able to pay the bills. This may result in the parties agreeing to pay you through a joint check on the project, allowing you to continue to profit on the job, but not subjecting you to the financial problems of your customer.
13. Lien Claims May Entitle You To Attorney Fees and Other Costs
When you file a mechanics lien claim, most states have statutes that allow you to add attorneys fees, collection costs, filing costs, interest and other expenses and charges on top of the lien claim (remember, don’t actually put them in your lien amount). This makes it a lot more risky for property owners and others on the project to dispute your debt, because if they do dispute and refuse to pay, every day and every move they make subjects them to more expense.
14. Mechanic Liens Escalate The Situation and Prioritize Your Debt
Sometimes, getting the owner or prime contractor to open the coffers and pay your debt just needs a little push. Filing a mechanics lien escalates your collection efforts and shows the other parties on the project that you’re serious about getting paid. This prioritizes your debt and gets you paid.
15. Mechanics Lien Claims May Affect A Contractor’s Bonding Ability
If you file a mechanics lien claim on a bonded project, the contractor’s bonding company is going to be ticked off. It creates more exposure for them, and they usually require the contractor to answer to them for the lien claim right away. This increased pressure results in getting you paid.
16. Lien Claims Affect Relationships
Typically, the prime contractor has a good relationship with the property owner, the property owner has a good relationship with the lender, and subcontractors have good relationships with the prime contractor. There are relationships all around on a construction project, but they are all very delicate. When a party isn’t getting paid and files a mechanics lien claim, these relationships are heated up to resolve the dispute — resulting in getting you paid.
17. Mechanics Liens Create Leverage
When negotiating a debt, leverage is everything. Any attorney or collection agent will tell you, having a mechanics lien connected to a debt is going to significantly increase the chances of having that debt paid. A mechanics lien on the property gives your debt security, it involves more parties, it creates contractual breaches, and it’s hard to remove — a lot of the reasons explained above. For these reasons it creates leverage, which becomes another way the mechanics lien can help get you paid.