What is a mechanics lien?
In the construction industry a mechanics lien (also known as a construction lien or contractors lien) happens when a contractor performs work that will permanently improve a property, but does not receive payment for the completed work. The unpaid contractor can place a lien on the property which acts as a security interest (or collateral) on the property until payment is delivered.
In other words a mechanics lien is a legal claim for unpaid construction work and means that a property owner owes a contractor money for work performed. This allows the opportunity for a contractor to place a lien (which acts as collateral) on the property to put pressure on the owner to deliver payment. A lien works to guarantee an obligation and can not be ignored by a property owner. Once placed, a mechanics lien is a cloud that hangs over a property and will make it extremely difficult to sell or transfer ownership of the property until the lien is lifted.
Despite their nefarious reputation, liens are a natural part of the contracting world. In certain circumstances they can in fact be a useful piece of documentation for ensuring fair treatment and payment. However, they are often misunderstood, feared, or misused by contractors. This article will look to break down how a lien works, when to use one, and how to safeguard your lien rights as a contractor.
Why file a mechanics lien?
Let’s start with a real world example. Say a plumber does a job on a property that is done correctly, up to code, on time, and efficiently. The general contractor that contracted the plumber is happy with the job, but cannot pay the plumber as the GC has not yet been paid by the property owner. By leveraging the lien process the plumber, as a subcontractor, can help kick start the payment process and place a sense of urgency on the matter. The further down the payment chain, the harder it becomes to have a voice or make your concerns heard. With a mechanics lien a subcontractor or laborer can ensure communication and visibility.
The importance of liens has been further showcased as a result of the COIVD-19 and continuing instability due to world events. According to recent studies only around half of all construction companies are paid in full on a project and 54% are unable to pay bills on time as a result of late payments. From these numbers it’s easy to see why contractors need mechanisms in place to protect their rights and ensure payment for honest work. It also highlights the importance of knowing your numbers, using data effectively, and planning efficiently to give your business a leg up on financial issues.
It should also be noted that a lien can be filed even if you don’t plan or intend to follow through with it. Filing a lien does not mean there is an issue, it just means the contractor is trying to protect themselves and only around 11% of contractors do so on every project.
A lien will dramatically increase the chances of getting paid should the worst case scenario happen in which the property owner declares bankruptcy. In this case the property will be sold and a portion of the proceeds will go towards settling the debt owed to the unpaid contractor.
Few contractors take advantage of their liens rights due to fear of damaging the relationship with a customer. It’s been estimated that as much as one third of contractors would rather preserve a relationship with a customer who has not paid them over filing a lien and protect their money.
With that said, filing a lien is a very serious step and should not be taken lightly. A contractor will need to first look toward talking through a dispute or payment and see if an agreement can be made. Most disputes are caused by communication issues and not due to bad intent. However, if a diplomatic resolution cannot be found a lien should be used as a last resort to get paid.
Who has mechanics lien rights?
Any contractor or laborer who has provided a permanent improvement to the property has lien rights if they are not paid. It’s important to note that if a trade requires licensure, any unlicensed contractor will not have lien rights and cannot place a lien on a property. In addition a mechanics lien will only apply to private properties. If working on a public property a bond claim will most likely be used instead of a lien.
If filing a lien it’s crucial that you know your state’s laws and regulations as it relates to the lien process. Each state has different timelines, requirements, and procedures. In addition the process and rules will vary depending on the state, project, and role that you have in the project. General contractors, subcontractors, suppliers, and laborers all have different rules and requirements in regards to filing and handling liens. So it’s important to know your state’s requirements.
Lien process in construction
The lien process is usually broken down into 4 steps:
It is considered best practice to provide a preliminary notice at the start of a project, even if your state does not require it. This will ensure you are protected moving forward and will improve communication and visibility.
The lien process is very time sensitive and should be followed with diligence and alertness. It’s critical that contractors do not miss any steps and hit time sensitive deadlines to ensure their rights are protected. In any case the lien process will need to start with filing a lien with the county recorder’s office in the county where the work is being performed.
In Colorado for example, contractors will have 4 months after providing the last service or material to issue a mechanics lien. From there they will need to provide a notice of intent to lien 10 days before issuing the lien. Many states require a notice of intent and even if your state does not require a notice, it’s regarded as best practice to issue a notice as it facilitates communication and may provide enough of a warning to the owner to expedite payment.
Finally a contractor will have 6 months after completion of services to file an action to enforce a mechanics lien.
Going farther with Colorado as an example the following information is required in the lien:
- Property owner information
- Claimant information / Prime contractors information
- Description of the property
- Amount claimed
- Proof that the notice of intent was served, often in the form of an affidavit.
- The lien must be notarized to be valid
It’s a common mistake for contractors to provide incorrect or insufficient information with their lien. It’s crucial to include as much detailed information as possible providing a comprehensive description of the property, work completed, and amount owed. Most important is hitting deadlines. Even an exhaustive lien will fail if deadlines are not met.
Once filed the property owner can deliver payment and then subsequently issue a lien waiver or release of lien which essentially works as a receipt that the job was completed and payment was delivered satisfying the agreement. The contractor will then submit an acknowledgement that payment was received and that the lien has been lifted. In this case everyone goes home happy.
If payment is still not received after the lien is issued, it can then be enforced. Which can result in legal proceedings, court action, and even the forced foreclosure and sale of the property. If enforcing a lien it is recommended to seek legal counsel.
- Communication is key. A lien is worth avoiding if possible and all efforts should go towards negotiating and coming to an agreement with all relevant parties.
- Only consider filing a lien if you are owed money for work completed and all other measures have failed. Don’t be afraid to file preliminary liens knowing that you have rights to protect your work.
- Ensure you follow your states rules exactly as they are stated to ensure your lien will survive and can be enforced.
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