General contractors, home builders, building contractors; subcontractors such as painting contractors, roofing contractors, concrete contractors, electrical contractors, mechanical contractors, landscape contractors, plumbing contractors, HVAC contractors, drywall contractors, masonry contractors, and plastering contractors; design professionals such as architects and landscape architects; construction managers; material and/or equipment suppliers; as well as those construction industry professionals that use construction software and construction accounting software.
Construction professionals certainly know, but it is a mystery to the public at large. No, it is not the lien for a automobile mechanic. Such mechanics’ liens have ancient roots, at least as far back as Roman times in which construction lenders would receive a lien not only on the land, but the edifice built. Mechanics’ liens did not exist under English common law and are decidedly American in origin. They were meant to give contractors a preference over other creditors so that our nation could sustain the type of growth and building that it envisioned. The first enactment was by the State of Maryland in 1791 which was for the express purpose of helping build the capital city of Washington, DC. They were also enforced in old maritime law for the labor and materials in the improvement of a vessel.
The fact that most people don’t know what it is can actually cause some difficulties for contractors. When an owner finds out a lien has been placed on their property, their reaction can very well be surprise which, in turn, spawns anger. Because most states require some kind of disclosure of how the process works, it is a good idea for a general contractor to generally explain the situation to their owners. After all, you can end the discussion by saying that the lien arises only if there has not been proper payment on the project.
The lien acts like a mortgage or deed of trust since it is a recorded and/or filed claim against the property itself. It acts like a cloud or “hook” on title. For this reason, it is a very powerful device. It has the effect of preventing the owner from selling, financing, or refinancing the property. In those cases, they have to take care of the lien before this is accomplished.
Unlike a preliminary notice, which is a warning that a lien may be filed in the future, a mechanic’s lien is for services rendered and unpaid.
Believe it or not, you are special. When your friend in the computer industry sells an expensive system to an owner who does not pay, they have to go through the almost endless ordeal of bringing a lawsuit, waiting for trial, and finally getting a judgment before a lien attaches to the person’s home. In the meantime, they have no security for their debt. Although in some cases a prejudgment writ of attachment lien may attach or someone can file a lis pendens if the lawsuit specifically relates to the right to possession or title to the property, these two devices are expensive and usually require an attorney.
You get special rights because of the nature of construction. The person who buys the computer system and bounces a check unreasonably gets the right to enjoy the system without paying for it. But when this happens to a contractor, the owner not only gets the benefit of the improvements, but the increased value to the property. The contractor cannot “take back” their improvements as easily as the computer store owner can through repossession. The construction materials are already incorporated into the project and, many times, it would cause material damage if removed. Finally, the legislatures in our various states wanted plenty of building and improvements to help the economy and there had to be adequate incentives for the contractor.
The real question is who cannot. The legislatures have kept the doors wide open for you on this one. Generally, it is any person or entity who contributes labor, equipment, or materials that is used, consumed, or incorporated into the construction project. In other words, something you can actually see: An improvement to the property. This includes general contractors, subcontractors, material suppliers, lessors of equipment, design professionals (architects, engineers, and land surveyors), and landscapers. This rules out building permit expeditors, construction payroll services, construction software providers, real estate brokers, and others who do not furnish services or materials which are consumed in the construction. For example, it would be doubtful if mere landscape maintenance of already-installed plant material would qualify for a lien. In many states, union fringe benefits do not ripen into a lien, especially since they be pre-empted by federal law. Thus, it is usually necessary to the show the intent that the services or materials were used in the job and actually incorporated therein.
Material/equipment suppliers have a stickier job. If their contract is with the owner, agent of the owner, general contractor, design professional, or subcontractor of any tier, they get a lien. Thus, if someone supplies building materials to a “sub-sub-subcontractor”, there is usually entitlement. However, most states do not allow a lien if it is a materialman to a materialman or an equipment supplier to an equipment supplier. In those cases, a lumber mill supplying prefabricated trusses to a lumberyard would not get a lien, although the lumberyard would.
As to equipment suppliers, if they furnish plans and specifications and they decide independently how the work is to be done, they would be considered a subcontractor. If they merely supply the equipment and operators who are, in turn, directly supervised by the job foreman/superintendent, they are merely an equipment supplier. This means that if some of the equipment is supplied by another supplier, there would be no lien because it is “equipment supplier” to “equipment supplier”. For example, if a company specializes in supplying new and renovated backhoes, and leases one to Acme Company who, in turn, takes all their direction from the job superintendent and merely lends out the equipment, the original equipment supplier will not get a lien.
The field is also open as to the type of projects. Liens apply to both residential and commercial, whether by way of construction, addition, demolition, renovation, repair, and other improvements. And, it does not even have to relate to a structure, such as trenching, grading, and the construction of a berm or ditch. In almost all states the lien is only for a private work of improvement and not a city, state, or governmental public works project (e.g., Hawaii allows a lien against a private lease on public land).
Unfortunately, yes. And sometimes dramatically. This means that a form you are using in one state could be completely invalid in another. Prelien and lien forms are a “creature of statute” which means their requirements are contained in the legislative acts of each state. Different states have different concerns, so the forms vary.
Absolutely. The powerful device of a lien comes with a price tag: If you do not do it right, you will be thrown out of court. Even worse, you may be assessed costs and attorney’s fees if you do not take an invalid lien off record. The courts strictly construe these notices and expect you to know exactly how they are to be filed and what information they contain.
The biggest trap for the unwary are the time limitations. Because the lien is an obvious cloud on title, it has to be filed and enforced within exact time parameters, usually short in duration. If you are literally off by one day, you lose your rights. Unlike other laws that allow merely substantial compliance, the courts give you no leeway as to the time parameters.
The strict state time requirements are for the last day to file or record. In most cases you can do it earlier. In fact, some contractors/suppliers send out their pre-lien notices as soon as their contract is signed just so they do not forget. There are some exceptions and you should go to the state-specific sections in this web sit for more information. However, as a general rule, there is no such thing as filing too early.
That’s a good question because you do not always know. If, for example, you have to file your lien within “X” period of time after the actual completion of the project, this is a factual issue and you can usually come pretty close to that date. If it is the last work done by any of the contractors, you can make some telephone calls and find out who was last on the job.
But, some states start the time ticking after the recording of a notice by the owner that the property is finished, usually described as a “Notice of Completion”. The problem is that in some states, you do not know when that document has been recorded or filed because they do not give you notice. For example, in California, an owner can record a Notice of Completion without any proof of service or notification to the general or the subs. This is significant because without the notice, everyone has 90 days after completion to file their liens. With the notice the general has 60 days and the subs/suppliers have 30 days.
The rule is simple. If you nearing the end of the project and have not been paid, file your lien as soon as possible. And, IF YOU HAVE ANY DOUBTS, FILE OR RECORD IT RIGHT AWAY. Believe me, if you are late, opposing counsel will let you know and you can always release or withdraw the mechanic’s lien.
As a general proposition, if you know for sure that your lien rights have expired, you should not file the lien. You are simply setting yourself up for an action for slander of title and/or the assessment of attorney’s fees from the owner. Also, many states have penalties for intentionally filing a false lien, including criminal prosecution and/or license violations. See the specific state sections on this site for more information. Remember, that owners nowadays are sophisticated and they know these technicalities. Before payment, their lawyers are directed to scour the file to make sure all the formalities were taken care of before payment is made.
However, there are exceptions. Assume you are required to file a pre-lien notice within a certain period of time before the mechanic’s lien. You do not remember if it was filed on time. If you have a reasonable doubt, go ahead and file the mechanic’s lien before it expires and hopefully you can get a copy of the prelien at a later date.
No. Judgment liens can be an encumbrance against real property for long periods of time, especially if the judgment is renewed. Mortgages and/or deeds of trust are in the same category and could literally stay on the property forever, unless satisfied or reconveyed. Mechanics’ liens are a totally different breed. Because they are such a powerful cloud on title, the courts will not let them sit there for an appreciable period of time. Within a short time frame you will be required to bring a lawsuit to foreclose and/or perfect the lien. If you do not, the lien is no longer effective as a matter of record.
This does not mean that the lien disappears. It will still be on the records of the Recorder’s or Clerks Office, although it may no longer be effective. In other words, the courts hand you a powerful right, but you must enforce it very quickly.
Remember that the lien is like a hook which attaches to the property. This means it follows the property and encumbers it as to new owners. Assuming you have accomplished all the required prerequisites, the lien will “run with the land” to successors-in-interest and those new owners will have to acknowledge your lien for the exact same amount. If merely selling the property were to extinguish a lien, everyone would transfer it to their brother-in-law or spouse, eliminate the lien, and then re-transfer it back to themselves. Obviously, the law is not that nonsensical.
Generally no, without paying you off. Let us assume that the owner has a first deed of trust and/or mortgage, followed by lien next in priority. They could simply secure refinancing through a new second mortgage or deed of trust without paying you off. However, that instrument would actually be in third position and your equity in the property would not be diminished. Unless you are dealing with a private lender, most institutions would be reluctant to do that.
On the other hand, if there is a complete refinance of the property, the first as well as your lien would have to be taken care of before the new lender would be willing to close escrow and loan the money.
Many people secure construction financing with a company that insists on being in the first position. Construction loans have high rates of interest and are very expensive to continue after construction is completed. The owner will immediately attempt, through the same or another lender, to secure “permanent financing” to “take out” the construction lender. They cannot do that without paying you off. The permanent loan is for long periods of time—as much as 30 years. The construction loan is for a short period of time and is limited in duration to the time for constructing the improvements only.
Although arbitration has become more expensive of late, it is classically considered the best venue to resolve your dispute. If you go to court, the judge may not know much about construction. And who wants to put a jury to sleep with discussions of weep screeds? For this reason, the American Arbitration Association, and other like associations, have, for years, specialized in binding construction arbitration. This is usually handled by experienced construction attorneys to act as the judge. The proceedings are informal, usually are quicker than court proceedings, have less expense through discovery, and are binding, without the right to appeal. Many contractors favor this process.
But, one can be in a “Catch 22.” Your state will require you to file a lawsuit (as opposed to arbitration) within a certain period of time or lose your lien. So what do you do? Most attorneys will file the lawsuit, protect the state statute, and then immediately ask for a stay for the purposes of finishing the action through binding arbitration. In some states, such as California, this can actually be done “ex parte”, in other words, without an actual hearing and simply submitting the proper paperwork to a judge at the time of filing the lawsuit.
Many contractors mistakenly believe that the lien is effective only upon filing or recording. This may or may not be the case. (Now, doesn’t that sound like something written by a lawyer!) In most states, the lien rights of all contractors and equipment/material suppliers start when the first work is done to the property. Assume the first visual work at the property consists of demolition. This is well before the other contractors and suppliers get on board. Believe it or not, in most states, this is where the lien first gives birth.
This starting point is applicable for all contractors as well as equipment/material suppliers that come on the job later. So, if a painter arrives at the job eight months after the grading, that person has the same start date for lien rights as everyone else. You can imagine if it was otherwise: You would have a hodgepodge of priorities, depending upon the vagaries of which subtrade showed up first. That would make little sense.
This means that when the painter files his or her lien later in the project, it is as if it related back to the original start date.
Now we know that all the lienholders have equal priority, so the question is: What are their rights in relationship to the construction lender? The construction lender has priority against all contractors if the loan is made and recorded prior to the commencement of work. This is why lenders have their agents visit the property to make sure nothing has started before they loan the money. If they slip up, which they do at times, and do not notice the forming of the foundation, or other visible work, they will be behind you in priority.
This means that in the overwhelming number of states, when the lien is recorded/filed months later, it takes priority from the start date and not the recording date.
In many cases, yes. If there is a recorded mortgage/deed of trust before work is commenced, that encumbrance has priority. When it is foreclosed, it wipes out everybody in a junior position, including lienholders. The new owner, after receiving record title, takes free and clear of your lien. This leaves you with the sole remedy of suing the general contractor (if you are a sub) or a subcontractor (if you are a sub-sub or a material supplier to a sub).
So, in summary, even if the work commenced and the lien was filed before the foreclosure, it will be wiped out if the mortgage/deed of trust was recorded before commencing the work.
There are complications (surprise!) if the new owner of the property at foreclosure knew, ratified, or consented to the work being done. Assume that Mr. A owns property and has a contract with Contractor C to do termite work so that an escrow can close for the sale to a third party. Well before the work starts, a first mortgage/deed of trust was on the property. Unfortunately, soon after the work was done, that lender starts foreclosure proceedings and the prospective sale to the third party dies. Shortly before the foreclosure, Mr. B, in the business of buying foreclosed properties, visits the site, talks with the contractor, and is fully cognizant of the work being done. The property is then foreclosed and Mr. B takes the property over asserting it is free of the lien, even though he saves money with not having to do the termite work after foreclosure. One might argue under the general equitable principles of unjust enrichment, the knowing acceptance of these benefits requires Mr. B to pay Contractor C. However, this would depend upon state law.
It is still a very good weapon. It is true that most states allow the owner to bond over the lien. This has the effect of taking the lien off the property. But, it is like buying an insurance policy in favor of the lien claimant. The claimant continues to prosecute the action in court to judgment, but at the end of the process, can turn to the bonding company for immediate payment. These companies rarely appeal the judgment and are usually quite fastidious in trying to cut down costs and attorney’s fees from their side. Once they pay you, they go directly against the owner/contractor who took out the bond under the indemnity provisions of the lien release bond. It is even better than foreclosing on the property.
If you are a general or sub/supplier, and either hear or receive notice of the filing of a bankruptcy by the person who owes you money, what should you do? Section 361 of the Bankruptcy Code places an automatic stay at the commencement of filing as to any collection actions, especially lawsuits. This also means you cannot take any steps to collect, including hiring an attorney, writing demand letters, attaching property, or the like. However, you are allowed to file a mechanic’s lien to protect your time limits. But, you cannot bring a lawsuit to foreclose the lien. In any event, you do not have to worry about the time limits to bring suit because it is “tolled” or frozen during the pendency of the bankruptcy. So, if you had three months left on the time to file a lawsuit when the bankruptcy was commenced, after a dismissal or discharge of the bankruptcy, your time will start where it left off under that three-month period. This, of course, assumes there has not been a discharge in the bankruptcy which means you could not file any suit thereafter because there is a permanent stay after the final discharge.
And, the beauty of filing your lien, is you become a secured creditor for purposes of your Proof of Claim in the bankruptcy proceeding. This gives you preference over unsecured creditors. Finally, you may wish to talk to an attorney about filing a “Motion for Relief from Stay” which might allow you to foreclose against the property after getting permission from the bankruptcy court. (cite the basic law as to how you can do this, including not interfering with the disposition of the bankruptcy)
If I don’t file my lien or lawsuit on time, can’t my lawyer argue the equities of the case or come up with some kind of technicality?
Nice try! Mechanics’ lien laws are very picky – you are either in the box or not. They are strictly construed by the courts and they show no forgiveness. We are all aware of equitable principles of fairness that apply throughout the law. And, how could we forget the numerous technicalities that an inventive lawyer could come up with. It won’t work in these cases. A subcontractor attempting to go against an owner after an invalid lien under esoteric theories of common counts, quantum merit, unjust enrichment, promissory estoppel, constructive trust, and equitable liens have, for the most part, fallen on deaf ears.
Loosely assembling the forms and verbally directing your staff do not work very well. I need not remind you that the construction process is complicated and fast-moving. Contractors are some of the busiest people on earth. The only surefire way of doing this is buying a one-inch binder (also called a Lien Procedures Manual) and some tabs. Download some of the information on this site as well as the forms you need. Put them in the different sections of the binder and have simple instructions to follow. That way you simply grab the binder and do not have to think each time. Remember, that even construction lawyers sometimes find it hard to memorize all these technical rules.
It depends if you are a general or subcontractor. If you are a general with a direct contract with the owner, you have two guns: A lien against the property and a personal cause of action against the owner. With that personal cause of action for breach of contract, you can logically go against the personal assets of the owner. With a lien, you can only impress that obligation against the property itself. This also means that if the property is not worth anything and is over-encumbered, then you get nothing. It is not unusual that multiple loans have been made on a property when the fair market value was over-estimated. When the value goes down in relation to the loans, there may be little, if any, equity. That is why a personal obligation against the owner is so important.
It is completely different as to subcontractors as well as material/equipment suppliers. Because, by definition, they do not have a direct contract with the owner, the only regress you have is a lien against the property itself. You can never go against the personal assets of the owner.
You may not believe this, but the law is more common sensical than you think. If the TI work is paid for by the tenant and done exclusively at his or her direction, it would be unfair to impose the obligation against the owner or that person’s interests. An owner’s interest in property is called “fee simple absolute” and covers the entire bundle of rights in the property, improvements, and the ground itself. A tenant’s interest is only the right to possession for the period of the lease together with the removable trade fixtures if allowed by that lease. However, the lease actually has a market value, especially if it is long term with options, and at a good rental rate.
In general summary, most states allow the landlord/owner to insulate themselves from liability by serving and/or posting a document which is variously referred to as a “Notice of Non-Responsibility”. It basically tells the world they are not responsible for the work done by the tenant. After all, it is the tenant’s responsibility to make sure everyone is paid and the property is free from liens.
Now, once again, you are not going to be surprised if you were told there were complications to this simple principle. The only surefire rule is if the landlord/owner does not file or serve the required notice, that property will be subject to liens. But it is even more complicated. Even if this is done, various states have wrestled with the following nuances:
1. What if the lease requires the improvements? And is it any different if the lease simply permits them?
2. If the tenant improvements are built out as new construction and the work is required before the lease is entered into, what effect does that have?
3. What if the owner takes an active role in construction, including approving the plans and specifications, monitoring construction, or having its own architect perform contract administration?
4. What if the owner participates in the funding?
5. What if the owner and tenant are in some kind of business relationship, whether partnership, joint venture, corporation or the rest?
Unfortunately, you will have to seek local counsel if you have questions on these subjects.
But assuming you only have an interest against the tenant, does this get you anywhere? Absolutely, because leases do have value and foreclosures are made not only against the lease itself (allowing you to hopefully assign or sublet it someone else at a higher rent), but most importantly, against the valuable trade fixtures. There can be literally hundreds of thousands of dollars’ worth of trade fixtures in the kitchen of a restaurant that is being built out. Construction attorneys foreclose against those interests all the time. As a general rule, the tenant is allowed to take with them trade fixtures at the expiration of a lease. A trade fixture is roughly defined as an improvement built upon the property without the intent to have it permanently attach and with the expectation it will be removed at the end of the term of the lease.
But then how do you word this in the mechanic’s lien? You have to make sure you are not putting the lien against the owner’s fee interest, but only the interest of the tenant. In the section of the form that describes the interest subject to the lien, you might want to have the following language: “This lien is against the tenant’s interest, Acme Restaurant, only, and not that of the owner, ______________. This shall include all interests of the tenant, including, but not limited to, the lease itself, personal property, removable trade fixtures, deposits, good will, and other interests in the business itself.”
It is not unusual for a general contractor to have the contract negotiated and signed by the owner’s agent, whether it be manager, other employee, architect, or real estate broker. Although state law differs, in many instances this is tantamount to a direct contract with the owner himself or herself. This assumes that the agent is acting within the scope of its authority and/or has been clothed with the appearance of authority (apparent authority).
If I lose my mechanics lien rights against the owner, can I still sue the general?
Yes. If you are a sub/general and have failed to comply with the lien requirements, you can still sue your general for breach of contract. This means the project will be closed out without payment on your lien, but your lawsuit against the general will continue. However, if the general files bankruptcy, you have little chance of recovery. You are considered an “unsecured creditor”. In a Chapter 7 full liquidation, you will probably get nothing, and in a Chapter 11, only pennies on the dollar.
Yes. In many states, if the owner pays the general and these monies do not filter down to the subs/suppliers, the latter can file liens and the owner will pay twice. To eliminate this problem, most states have set up procedures for either: (1) joint checks; (2) lien waivers that must be signed by the general and his or her subs/suppliers: (3) mandatory notice and disclosure requirements to the owner usually at the time of entering into a contract; and (4) builder control agreements and/or trust fund accounts through the construction lender who monitor the process. With all these protections, it is the owner’s fault if they set themselves up for paying twice.
Because of this dilemma, a number of states have passed laws helping out the owner. They basically state that if the owner pays the general, whether or not it filters down, the subs/suppliers only get a lien for the unpaid amount owing to the general.
There is an even bigger problem for the lawyer who represents the sub requesting the owner to pay twice. In negotiating with the owner’s attorney, there is an obvious emotional reluctance of paying twice, and this really hurts the settlement process. It also sets up a lawsuit or cross-action/complaint by the owner against the general. Many times the owner will hold off paying twice and go through litigation hoping to get the money first from the general. But this only delays the process and incurs more attorney’s fees to the owner who will ultimately have to pay anyway, with or without the payment from the general. It is even worse in the negotiating process if the general does not have the money, is insolvent, or declares bankruptcy. This sometime forces the sub to go all the way through trial and judgment before he or she gets their money, when in normal situations they would have been paid well before a lawsuit.
As an obvious proposition, we all know you cannot enforce such a lien if you are unlicenced. It is also grounds for discipline and possibly criminal prosecution in some states. But, what usually happens is not an unlicenced contractor asserting a lien, but one whose license has lapsed for a short period of time, usually because of some formality or forgetfulness.
Some states use a “substantial compliance” test: If the unlicenced status is brief and unintentional and was quickly cured, it will not preclude the lien enforcement. Or similarly stated, the lien claim is lost only if there is unlicenced status through a substantial period of the project. Alternatively, some courts are down on the contractor if the unlicenced status is at the beginning of the contract. It is sometimes easier to seek legal forgiveness if the lapse occurred later in the project. But, since this is a defense for the other side, let them bring it up first. You will then need competent legal counsel to help you through the thicket. But the point is, unlike mechanics’ lien timetables which are unforgiving, this is a situation in which the courts are more prone to lend their aid if the violation is minor.