Most contractors, subcontractors and suppliers are reluctant to hire a lawyer to collect their promised payment when the project is complete. Legal expenses are not generally included in estimated project costs and hiring a law firm hurts the bottom line. Construction professionals measure their success by solving problems and consistently delivering effective projects – not based on their skills at completing legal collections.
Mechanic’s liens represent an underutilized path because contractors and materialmen can initiate a legal claim on their own behalf. Construction professionals who understand how mechanic’s lien works in their state(s) are more likely to collect all of what they are owed at a fraction of the cost.
What is a Mechanics Lien, and How Does It Prevent You From Getting Screwed?
A mechanic’s lien is a privilege authorized by state law that permits contractors, suppliers and certain qualifying construction professionals who have provided labour or materials to improve real property to publicly record the value of the unpaid improvements against the property owner’s title. When executed promptly, filing a mechanic’s lien claim can be an extremely useful tool when a property owner or general contractor fails to issue a payment that is due.
The ultimate “hammer” contained in most states’ lien laws is the statutory right to foreclose and seize ownership of the improved property. The more practical application of a mechanic’s lien claim is that introducing the foreclosure spectator presents the non-paying owner with a stark consequence for his continued refusal to pay what is owed.
For example
An independent residential contractor in sunny California has wrapped up a major project, only to be ghosted by the owner when the final payment is due. She reaches out multiple times through phone calls, text messages, and emails, but the owner remains unresponsive.
The contractor knew that this type of problem might eventually happen. A demanding client expects perfection in the construction of his dream home and cites this alleged high standard as a reason to withhold excessive sums for minor disputes. She took pride in her ability to win over difficult clients and simply avoid projects where the client was unreasonable.
The contractor wants to take legal action to get all the sums that she is owed for the completed project, but she is extremely cautious about proceeding. All the stories that she heard from friends in the business who have taken the legal route have involved a significant amount of frustration. She does not currently have the time, resources, or knowledge to start a legal battle with this challenging and well-funded homeowner.
Based on her colleague’s casual suggestion, the contractor learns about the possible utility of filing a mechanic’s lien claim against the homeowner’s property to expedite the dispute’s resolution. She is faced with two primary options: file a mechanic’s lien claim with the assistance of an informed service provider or take the steep haircut in accepting the discounted contract value that the owner is currently demanding.
Steps to Take Before Filing
The Good Old “Heart to Heart”
You should never underestimate the potential value in having a candid and direct conversation with the owner. On an endeavor as challenging and stressful as a construction project, payment issues often stem from misunderstandings by the client.
The contractor believes that her client may be stalling based on the presumption that all custom homebuilders and home improvement contractors make money hand over fist. Apart from that dubious suspicion, she does not believe that her client is dishonest or unreasonable. She is wary of assuming that her client is acting in bad faith, so she decides to send another message that says something like the following:
“Hello, I hope you are doing well. I just wanted to send a quick reminder that the final payment for your completed project is due. We have not spoken in a while, so I wanted to make sure everything was OK on your end. Please let me know if you need any clarification from me about the invoice or if you need any additional paperwork. I sincerely appreciate your business! Thank you.”
The message is polite but direct. If the client’s refusal to issue payment was accidental or inadvertent, this reminder might eliminate the need for any legal action.
Using a Mechanic’s Lien as Leverage
Do not kid yourself. The main reason that clients stall on payments is the hope that the delay will prompt the contractor to accept a lesser amount than what she is owed. Contractors, in general, and residential contractors, in particular, invest considerable efforts to ensure that their online reviews and reputations are uniformly positive.
Filing a mechanic’s lien claim on your own is more aggressive than leaving a polite message to your client, but it is less combative and costly than filing a lawsuit. If the contractor decided to sue her homeowner client who was refusing final payment, the aftermath would likely include her client filing a counterclaim seeking a reduction based on asserted defects in the construction. Clients do not like getting sued. It’s too strong a response for a frequent issue.
Filing a mechanic’s lien claim against her client’s improved property puts the owner on notice that the contractor does not agree that payment of her company’s invoices is discretionary. By making the legal property claim on her own behalf, the contractor is signalling that payment in full is due and expected.
Consider Alternatives to Mechanics Liens
Although they might not be available to the hypothetical residential contractor in California, a couple of other options should be considered:
Payment Bonds
Payment bonds are typically only available on public projects on which unpaid contractors and suppliers are barred from filing a mechanic’s lien claim on public land. However, on projects where the GC was required to procure a payment bond, filing a claim with the surety is a task that a contractor or supplier could accomplish without retaining legal counsel. Because payment claimants should reasonably expect that the surety will seek to discount their submitted invoice, any party pursuing payment through a claim against the surety’s payment bond would likely get paid more if represented by their own attorney who understands the practice of construction law.
Personal Guarantees
Personal guarantees are rarely encountered in the construction industry. However, if you are party to an agreement where the other party personally guarantees that payments will be made, that would provide you with another viable claim in the event that formal litigation becomes necessary.
Alternative Dispute Resolution Clauses for Arbitration/Mediation
Every contractor who issues contracts to its clients should invest in hiring an attorney who understands construction law in their state to ensure that the contractor’s agreement is accomplishing all of the applicable objectives. Contract drafting is well outside of Lien Line’s service of helping construction professionals file their own mechanic’s liens, but our Recommended Counsel could probably provide this counsel.
Arbitration is when a legal dispute is settled by a third party who is not part of the governmental judicial system, but who the parties have contractually agreed has the authority to resolve their disputes. Mediation is when
With All That Said…
Even with mechanics liens in place to help us with payment disputes, the process of filing claims can still be a headache if we’re unfamiliar with the language. It shouldn’t be part of our job to spend hours searching for solutions to payment problems, adding unnecessary stress to our already insane routines.
To which we, from Lien Line, say: You’re 100% right—that shouldn’t be on you, ever.
Companies like Lien Line take the hassle out of mechanics liens and claims, should you ever need them. We offer simple lien filing services so you can focus on getting the claim up and running in no time, and get back to your actual job responsibilities. As soon as you’ve filed with us, you can stop playing payment catch-up and relax. We’ll make sure the payments come through.