Self-Taught MBA: Lean On Your Construction Lien Rights
Don't ignore your most powerful tool for collecting debt. Many contractors waive theirs, but you should not make this mistake.
Any sort of financial security interest in a property is called a lien. Your unpaid property taxes become a lien on your property, and your lender becomes a lien holder after filing a mortgage your property. The tax debt or the loan acquired is secured by the value of your property. Should you default, the bank can foreclose (take ownership of) the real estate and then sell it to get paid—a very powerful collection tool.
As a building contractor, you have the same collection power tool at your disposal. Every state provides the means for a person who supplies labor or materials for a construction project to claim a lien (security interest) against the improved property, and then sell it if they are not paid.
The common law basics of a mechanic’s lien
The mechanic’s lien law was the brainchild of Thomas Jefferson, the author of the Declaration of Independence and our third president. The original intent of providing this powerful security interest was stimulating construction in nascent Washington, D.C.
Since many tradesmen and material suppliers are required for a single construction project, before mechanic’s lien laws existed, when the owner or general contractor defaulted, the ensuing race to collection became a melee, resembling musical chairs, where many creditors were left without recourse. Building was risky business.
To provide a degree of parity between the constructors and materialmen on a project, a statutory lien scheme, based on French civil law – the word lien is derived from the French “liaison” — was established by the original Maryland General Assembly, and then adopted and tweaked by all 50 states.
In general terms, the mechanic’s lien rights protects the financial interests of the prime contractor, laborers, subcontractors, and material suppliers. But unlike all other financial security instruments, mechanic’s lien rights are extended to contractors and material suppliers who may not have a direct contractual agreement with the owner of the land. Otherwise, subcontractors and materialmen would only have recourse to suit the general contractor.
In every state, a mechanic’s lien is a site-specific, involuntary lien, that encumbers only the property where you did the work or supplied materials. In some places, mechanic’s liens are also called construction liens and materialmen liens, but that’s where the similarity ends, and complications begin.
Know Your State Mechanic Lien Laws
Every state has their own mechanic’s lien statutes, and in California and Texas, these rights are guaranteed under the state’s constitutions.
Since the mechanic’s lien subjects the owner of real property to involuntary encumbrances, and the onerous risk of paying twice for the same work – paying the prime contractor, who may default on payments to his subs and suppliers, hence forcing the owner to pay those subs and suppliers again – all state statues have a series of disclosure requirements to put the owner on notice.
In California, failure to provide the owner and prime contractor a Preliminary 20-Day Notice within 20 days of furnishing labor and/or supplies dooms your chances to file a mechanic’s lien, no matter how egregious the default. New Jersey has the strictest notification requirements, and Texas the most complex.
Many states require the prime contract to incorporate a Notice to Owner in the construction contract, alerting the owner and informing them of the mechanic’s lien’s exposure. Many states also require subcontractors and suppliers to send the owner a Preliminary Notice, to the same affect. When state law requires these notifications, it takes the weight off the contractor, who can tell the client, “It’s not that I don’t trust you, it’s state law.”
In Colorado, any subcontractor, laborer or material supplier may file a “Notice to Owner” that requires the owner to withhold funds to ensure payment for the notifying party.
It’s important to study your state’s lien notification requirements and follow them to the letter. If you decide to file a lien, then procedures and time limits also affect your rights.
For example, in Colorado, to preserve a lien for work performed or materials furnished, the filer must serve the property owner and the principal contractor with notice of intent to file a lien at least 10 days before recording the lien statement. The filer must serve this notice personally or by registered or certified mail.
Not following the precise steps outlined in your state procedures will imperil your rights under mechanic’s lien statues and may leave you without recourse.
To get an idea on how state laws vary, you can check out a chart outlining the notification requirements of every state in the union at Seyfarth Shaw (click on the hyperlink), an international law firm headquartered in Chicago, Illinois.
There’s an App for That
Because it’s tough to keep track of all the deadlines, a couple of folks offer lien apps that will help you keep on top of your state lien notification and filing requirements automatically. Just enter your project information and pertinent dates and the app will send documents and provide a tickler to keep you on top of due dates.
Zantia Group provides a free app if you work in Canada.
LienTracker® Online (LTO) is an online tool with some additional credit-collection and bond-claim tools.
Zlien provides a free lien-deadline calculator as a teaser to a full lineup of lien-tracking services. This company offers the most comprehensive lien-related services and a rich information library. The app even integrates with QuickBooks to send lien waivers when requesting payments and keep track of calendar deadlines within your accounting software.
More Powerful Than the Bank
If you do follow the statutory procedures, you may discover you have enough power to virtually assure every unpaid bill for your construction services. In fact, in some instances mechanic’s lien priority can supersede a mortgage. The only lien more powerful is the tax lien, which always takes priority over all other liens regardless of filing date.
Once you file a lien with the county clerk or local recorder’s office, your state imposes limits on how long the lien can sit there without your filing lawsuit to enforce it. In Connecticut, you must file suit within one year. In Colorado, it’s only six months.
It’s important to know that in most states and on all federal property, mechanic’s lien laws do not apply. No private party can obtain ownership of public property, so security liens are not enforceable. Therefore, most public projects require payment bonds. If the contractor defaults, subs can file against the bond, but not the property.