When unpaid on a construction project, those who furnished labor or materials to the job have the option of filing a mechanics lien claim. These claims can be a very effective remedy for the unpaid contractor or supplier. In fact, according to Levelset research, many times liens will get paid quickly (within 90 days) and without any further legal action.
Nevertheless, those considering a mechanics lien filing are confronted with a difficult process, filing a lien can be an intricate and convoluted process. Because filing a lien can take a lot of time and energy, the potential filing party wants to make sure that filing would actually result getting paid. This article addresses just one of the many ways a mechanics lien filing works to get construction industry parties paid: mechanics liens encumber or restrict the underlying property.
Non-Payment? No Problem
When filing a mechanics lien, the property becomes your collateral. The filing of the mechanics lien restricts the property/collateral by making claim to the property itself for the value of the labor or material furnished to improve it. This means that in the event of non-payment, the property itself can cover the amount owed. It’s very difficult for the property to be sold, refinanced, or transferred without a mechanics lien claim being paid off, and the property can even be sold specifically to pay the lien claimant. Considering the implications of the lien against the property value, no owner wants his or her property to be encumbered by a mechanics lien. Mechanics liens are still the most powerful tool contractors can use to get paid.
Timing Matters
Mechanics liens do not last forever and the time period before a lien becomes unenforceable varies from state to state. The amount of time a mechanics lien is valid and enforceable can be anywhere from 90 days to 6 years. If you do not file a lawsuit within this time period, the mechanics lien will expire and you may lose your only opportunity to get paid. Make sure you are aware of your state’s specific time restrictions.
Bond … Mechanics Lien Bond
Owners and lenders can bond off a mechanics lien. Although bonding off sounds bad, there is actually no reason to fear it, and in some respects puts a lien claimant in an even better position. What bonding off does is moves the interest the mechanics lien has given you in the property value and attaches it to a bond (pile of money) instead. Owners and lenders may elect to bond off a mechanics lien in order to free up property, but you are still financially protected. Your claim still lives on and remains secured – it’s just secured by the bond rather than the property value. Foreclosing on a mechanics lien is a lengthy and process, and nobody wants to be tied up in court with lawyers all the time. Because there is no need to auction a property to pay the claimant in an action to recover via a bonded off lien, the process of pursuing payment when in that scenario can be cheap and efficient compared to filing a foreclosure lawsuit to enforce a lien against the property.
If Filing Does Not Get You Paid, Foreclose
In most situations, however, a mechanics lien will not be bonded off. This means that the enforcement action necessary is foreclosing on the property itself. However, payment disputes giving rise to the mechanics lien claim rarely make it to the point that a foreclosure action becomes necessary. If such an action is required, though, the lien claimant should be prepared for a lengthy battle. While many states allow a successful claimant in a foreclosure action to recover attorneys’ fees and costs, most lawyers hesitate to take foreclosure cases on a contingent-fee basis, especially if the claim is relatively small, so the claimant might find himself more money out-of-pocket prior to recovery.
In a Nutshell
- Filing a mechanics lien restricts the underlying property from not being sold, refinanced, or transferred
- Timing matters and if you don’t follow the requirements of your state’s laws, your mechanics lien could expire or be ineffective
- When an owner or lender bonds off your mechanics lien claim, that can actually be beneficial for you
- Foreclosure, while rare, is the final step in enforcing a mechanics lien and pressuring an owner or lender to pay you for your services
Other Ways A Mechanics Lien Works To Get You Paid
A mechanics lien claim will restrict the underlying property, and that’s an important feature of these documents. Nevertheless, it is not the only feature, and there is an assembly of other effects that flow from a mechanics lien filing; all of which will improve your chances of getting paid. We’ve put together a Free Guide to the 17 Ways A Mechanics Lien Works To Get You Paid. The full list of these mechanics lien effects are as follows:
- A mechanics lien encumbers the property
- A mechanics lien gets the lenders attention
- A mechanics lien gets the owners attention
- When mechanics liens are filed they cause contracts to get breached
- More parties become obligated to your debt
- A mechanics lien sets a firm deadline
- You can always fall back on the property for payment if you filed a mechanics lien
- People will pay you to avoid dealing with the mechanics lien
- Mechanics liens are hard to challenge
- Mechanics lien claims help when parties file for bankruptcy protection
- Mechanics lien will effectively freeze money flow on a project
- Mechanics lien claims may force parties into favorable joint check agreements
- Lien claims may entitle you to attorney fees and other costs
- Mechanic liens escalate the situation and prioritize your debt
- Mechanics lien claims may affect a contractor’s bonding ability
- Lien claims affect relationships
- Mechanics liens creative leverage