The legal rights of a lien claimant in the construction industry includes a breach of contract remedy as well asthe extraordinary remedies provided by the mechanics liens laws. The legal rights of a lien claimant can include a claim of lien upon the real property improved and the funds due to the parties involved with the construction. While the contractual claim is generally a well known claim among most credit professional, the mechanics lien remedy can be complex, difficult and often ignored or misunderstood. Frequent failure to assert valid claims by those otherwise entitled to do so and the unnecessary cost of needless litigation is generally the result of a lack of knowledge about the applicable lien law. However, material suppliers who could be considered as secured lenders’ occasional misunderstanding of what makes a mechanics lien valid has led to otherwise invalid liens being paid off and discharged as valid.
Most states have enacted mechanics lien laws and they are normally statutory and thus vary significantly fromstate to state. Likewise, the individual state courts interpret these varying state law and derive at conclusionsthat may change the interpretation of the existing law. Consequently, credit professionals should use this article for general reference only. Specific questions of application must be examined in detail with each state law in mind. However, the following discussion covers some of the issues most frequently confronted in most states.
The remedies available to persons who furnish improvements, i.e., labor, equipment or material to a construction project depend upon the type of work or improvement involved. With privately owned construction projects, there is a potential right to a mechanics lien, the right to reach unexpended construction funds (often referred to as a notice to withhold or claim of lien upon the funds), and in some circumstances, to a labor or material bond. In connection with public projects for state or federal governments or a political subdivision thereof, there is a potential right to a notice to withhold, and a labor and material bond will generally be available because there cannot be a lien on publicly owned property. In connection with public works of improvement for the federal government, a labor and material bond is available.
What Is a Mechanics Lien?
A mechanics lien is a lien upon real estate to secure the compensation of those who have been directly instrumental in the improvement of such real estate. It arises by the public recordation (usually with a county recorder or register of deeds office) of a document and effects a real property lien upon the property so improved. A lien claimant can file a lien upon the real property even if the owner of the property did not directly contract for the improvement. In some states the owner can avoid the application of the lien by the recording and/or posting of a notice indicating that the owner has not contracted for the work, sometimes known as a notice of non-responsibility.
Requirement for a Mechanics Lien
Mechanics liens are generally available to those who provide labor, or furnish equipment or materials used in the construction, alteration, addition or repair of real estate.
*Who is entitled to a lien. Most states require that the lien claimant have had some impact upon the improvement of the real property. Generally, the lien claimant must have furnished labor, equipment or materials for the improvement of the real property. In addition, many states provide protection to others whomay improve the real property, such as architects, engineers and land surveyors.
*Definition of Permanent. Most states require that the item improved must be permanentlyaffixed to real property. The definition of permanent can vary upon the state. Thus, there are sometimes disputes over how permanently attached an item is to real property. Thus, one should be especially careful when dealing with improving items such as mobile homes or other types of theoretically movable structures.
*Required Notice. Many states require a lien claimant to make a written preliminary notice, usually within the first 10 to 30 days of a particular claimant’s actually delivering goods or services to a given project. In some states, material suppliers do not have to meet such a stringent prior notice requirement, on the theory that the materialman does not have control over when exactly the materials are placed on the project. Usually the notice must meet some statutory parameters regarding the content of the notice with regard to the identity of the real property, the goods or services provided, and sometimes must even be on a statutorily required form. Most states also require that the notice be served on the parties involved, generallythe owner, general contractor and subcontractors between the general contractor and the supplier, and also tobe publicly recorded and possibly posted at the site.
*Filing of the Lien. The mechanics lien must normally be served and publicly recorded within a statutory period of time following completion of the work on the construction project or within a statutoryperiod of time from the last date of furnishing material for the improvement. The definition of “completion of the work” also varies from state to state. In some states, this period can be shortened by the owner properly filing his own notice of completion. Even if the project is not complete, but work ceases for an extended period midway through the project, the deadline for filing may apply. Each state generally has its own set of requirements for service and content of the lien document itself, usually including similar information to the preliminary notice and sometimes may need to be notarized or verified.
*Lien Enforcement. A lawsuit must normally be filed to foreclose or to perfect the lien within a period of time of filing of the lien. Most states require the lawsuit to be filed within three to six months fromthe last day of furnishing material. Some states allow the owner to extend this period, but may require this extension to be in writing and publicly filed. Once suit is filed, many states require that a lis pendensnormally must be filed to protect the lienholder from the property being transferred to a third party buyer. Usually a successful suit will result in a judicial foreclosure of the lien. Some state’s laws also allow the owner to redeem the property from the foreclosure by payment of the lien within a certain period.
Priority of liens vary from state to state, with some providing a first in time rule of either filing of the lien or first in time of providing the improvements with others allowing all mechanics lienholders to share equal priority.
As previously mentioned, lien rights are likely to vary from state to state. Although the idea of protecting theprovider of materials, labor and/or equipment remains constant, the manner of protecting the lien claimant canvary greatly. Thus, please confer with an attorney who is familiar with the laws of the state where the real property is located for an accurate explanation of the lien laws in the particular state.