Mechanic’s liens are commonly pigeonholed as a contractor’s “last resort” to secure payment on a completed project. Many in the construction arena believe that mechanic’s liens are only appropriate when contractors receive less than the total sum of compensation to which they are entitled.
While eligible contractors, subcontractors, and material suppliers can file mechanic’s liens when they get stiffed after completing a project, anyone who works in construction should understand who can file a mechanics’ lien in his or her state, when that lien must be filed, and how liens can be used more broadly in less stereotypical situations.
In this article, we will discuss some less conventional scenarios when viable claimants should consider filing a mechanic’s lien in order to address circumstances other than non-payment,
5 Reasons Why You Might Need a Mechanics Lien (That Don’t Involve Non-Payment)
Less Payment Than The Value of Work Installed
Imagine a residential project where construction is nearing completion, but the owner and her general contractor cannot agree on a disputed scope item. The contractor had submitted a written proposal to his client for kitchen renovations, which excluded certain appliances that had not been specified in the owner-provided design documents.
When the client requested that a specific dishwasher be installed, the contractor responded by transmitting a written change order for the extra work. However, because the GC’s subcontracted plumber was about to demobilize from the project and the marble countertops were to be delivered in a couple of days, the contractor elected to simply purchase and install the owner-requested dishwasher before getting the client’s signature on the change order.
Now that the kitchen renovations have been completed and approved, the contractor is prepared to issue the last invoice for the thirty (30%) percent of the contract value that remains outstanding, plus the extra cost for the added dishwasher. However, the client has refused to sign off on the change order and is citing the disputed charge as justification for paying the balance of the original contract. What can the contractor do to finish the project?
The contractor could file a mechanic’s lien for the value of the contracted completed kitchen renovations, and elect to simply eat the $1000 that he spent to purchase and install the client’s added dishwasher. Mechanic’s liens can only be filed for completed contract work. Mechanic’s liens should never be filed to seek compensation for an unapproved change order. In this example, the contractor might choose to file a mechanic’s lien for less than the total value of work installed, because obtaining the complete payment for the base contract and forfeiting the change border value would resolve a problematic project.
Approved Change Order Work
What about a different situation in which the contractor’s client has approved the added cost of extra work requests by signing written change orders, but then refuses to pay? Perhaps the client had been initially willing to pay more for the extra work, but later got frustrated with the additional time required to furnish and install the changed scope. Now that the job is complete, the owner is withholding payment based on the delay to the project.
Eligible claimants can file mechanic’s liens for work agreed to by the parties, invoiced by the claimant, but not paid by the party who received the value of the performed work. This means that the contractor can lien the client’s property for the full value of the performed work set forth in their agreement AND the additional value of the signed change orders.
As an aside, contractors should always strive to communicate any potential schedule impact caused by a client-driven change and capture that delay (or potential delay) in the written change order request to their clients. The default for every construction professional should be to favor the written form when communicating with clients. Any verbal conversation is inevitably lost or distorted through the winds of time. Embrace the habit of clear and consistent written communications to your clients now, and allow the benefits of these documents to bloom in your future.
Priority of Liens in a Foreclosure Action
The determination of which liens against a property take priority in a foreclosure action cannot easily be established as a general rule. In addition to the differences in how mechanic’s liens are handled in various states, all liens are not treated equally once the property once the foreclosure litigation has started.
For example, if a property owner was delinquent in paying his local real estate taxes and the municipality was prompted to initiate a lawsuit to foreclose to collect the tax lien, the local governmental entity where the property is located gets paid from the forced sale before any other party with debts against the property receives compensation based on a statutory privilege..
The mortgagor who loaned the property owner the funds to purchase the property typically retains the top priority among (non-government) lien claimants, but that position is not based on the statute. The lender who extended the loan to the property owner garners that top spot because the property deed is recorded immediately after the mortgagor has extended the loan. Therefore, the more general practice of first recorded = first paid would govern.
What if a mechanic’s lien is filed by a subcontractor or material supplier who was hired by the general contractor who built the house BEFORE the improved property is sold to the eventual property owner? That’s a gray area. The lien claimant would take precedence based on the earlier recording of the mechanic’s lien, but the mortgagor often enjoys a subordination right that permits the lender who funded the property purchase to get the first bite at the proceeds of the sale.
Although lenders generally enjoy the top priority (apart from unpaid tax bills) in a foreclosure action, the mortgage holder still has an active interest in pushing the mortgagee property owner to resolve any mechanic’s lien claim promptly. Often, the simple act of filing the initial mechanic’s lien claim is sufficient to spur the lender to require the property owner to resolve the debt.
More Leverage in Negotiations
Recording a mechanic’s lien against the improved property provides the claimant with a valuable legal asset against the property owner prior to the commencement of any other legal action. The recorded mechanic’s lien claim is an irrefutable legal asset in the claimant’s favor before the claimant ever sets foot inside the Courthouse.
Consider the parties’ relationships. If the claimant who files the mechanic’s lien claim does not have a direct contract with the property owner, then the claimant can reasonably expect that the property owner will be extremely upset to learn about the claimant’s debt. The most likely first response from the property owner will be to force their general contractor to satisfy and resolve the claimant’s underlying debt.
If it is the general contractor working directly for the property owner who filed the mechanic’s lien claim, then the two parties will be forced to resolve the issue one way or another. The property owners may legally challenge the mechanic’s lien claim filed by their GC and seek to use the forum to address related issues. If the property owners fail to challenge the asserted mechanic’s lien in a timely manner, the claimant will have recorded their debt as a baseline before any subsequent legal proceeding.
Preserving Your Rights
Lien Line is not a law firm, and every claimant’s situation is unique, but filing an accurate and proper mechanic’s lien claim against an improved property as soon as possible allows claimants to record their unpaid debt and expedite the collection process. A claimant with a properly filed and recorded lien claim has better enforcement options than a claimant who possesses an unpaid bill and an argument.
Conclusion
Construction professionals who understand the lien law in the states where they do business can establish better practices of collecting what they are owed without hiring an attorney. Rather than thinking of filing a mechanic’s lien claim as a desperate last minute “Hail Mary” pass to secure payment on a project, contractors, subcontractors and suppliers could collect more of what they are owed by using the lien statute with greater regularity.