Mechanics Liens are a staple in the construction industry, and while everyone in the industry knows liens exist, its sometimes surprising how little folks know about these instruments. Unfortunately, that’s probably because there is just so much to know about liens. Hell, I’ve dedicated an entire blog to the issue.
But in this short post I want to clear through all the clutter, the deadlines and the hyper-technical requirements and just talk to you about the basics of a mechanics lien. What does it do generally? Why is it so important? And how do you avoid losing lien rights?
What Mechanics Liens Do
Attorneys and contractors alike call liens the most powerful collection tool available to contractors and suppliers. Why?
The power of the mechanics lien can be reduced to two explanations.
First, filing a mechanics lien gives you a privilege against the property where work was performed. You get a lien on the property similar to a bank’s mortgage, and that means the property can’t be sold, transferred, refinanced – and construction loans can’t be converted to standard loans – until your lien is resolved.
Now, liens expire. They do NOT stay on the property forever. Sometimes, they expire very quickly. However, you can file a suit to enforce your lien, and the lien will stick around on the property until the lawsuit is resolved. This is called a Lien Foreclosure action. While some may see this foreclosure process as a downgrading of the mechanics liens’ effectiveness, the truth is just the opposite. If you didn’t have a lien, you’d have to file a lawsuit against the property owner, win and then put the judgment against the property to get the benefits of the lien instrument. Filing a construction lien gives you this benefit from day one of the dispute, which is a huge advantage.
Second, a mechanics lien gives you the right to sue more people.
When someone breaches a contract and doesn’t pay you money owed, you can always sue that person. But you can’t sue anyone else – because they don’t owe you anything. They don’t have a contract with you, and they didn’t breach any obligations.
In construction, the property owner has a contract with the prime contractor, but not with all the subs and suppliers. So, the subs and suppliers can’t sue the property owner, right?
If you file a mechanics lien, you can sue the person you contracted with and everyone else up the chain. This can create a very delicate situation for the prime contractor and the property owner, which usually results in squeezing you payment.
Why A Mechanics Lien Is Important
Construction, unlike nearly every other industry, is statutorily given this mechanics lien remedy. The remedy is unique to common law countries, like the US and England, but the rest of the world doesn’t really have this. It’s a very powerful remedy that is in contrast to the usual workings of the law.
It’s powerful, and that’s why its important. You should use this remedy.
How Can I Mess Up Filing A Mechanics Lien?
Unfortunately, very easily.
Since the remedy is in contrast to the usual workings of the law, the law and courts are very, very strict when applying the lien statutes. That’s why there are so many dang requirements, and why they are such detailed requirements. And remember, the requirements vary state to state and project to project.
Remember this general principal though: the law tries to balance the rights of the contractor to get paid with the rights of the owner to his or her property.
This means the law requires you file your mechanics lien within certain parameters. These parameters fall into 3 categories:
Notice: Does anyone know you’re on the construction project? Does the owner? A lot of states require that you notify the owner you’re there and doing work, so in theory, the owner will not pay the prime willy-nilly and leave you unpaid.
Time: You can’t file your lien 10 years after you work on the project. The owner should get clear title to the property w/in a reasonable time. So, most states require liens filed within a very short period (30-90 days) from when work was last performed.
Form: Here is where those pesky requirements become relevant. Each state has a different lien form, and different requirements. You must state your claim correctly, so that when its on public records, its very clear as to who is making the claim against who, and for what. While you may think your mechanics lien claim is clear and correct, there are specific hurdles that must be met (like providing a legal property description) that can trap the inexperienced.