As a construction project owner, it is important that you understand what mechanics liens are and how they can potentially affect you if there is a payment issue on your project. Contractors and suppliers also need to know the statutory requirements in the states they operate in so they can protect their revenue streams and businesses.What is a mechanics lien?
Mechanics liens are instruments that help contractors and suppliers get paid for work they have performed or materials they have supplied. Since construction work can’t be returned or removed after installation, states have passed laws that provide a means for construction companies and suppliers to collect on unpaid invoices. Liens are generally used as a last resort and can be filed by any company that provides labor and/or materials to a project.If there is a payment issue on a project, the company that is owed money files a mechanics lien with the county recorder where the project is located. The lien is a legal document and is attached to the deed for the project property. Once the owner is sent a notice of the lien, they have a set period to pay the requested amount or the lien will be perfected. The amount of time the project owner has to pay the debt is set by statute.
Note in California, material suppliers and subcontractors must file a 20-day notice early in order to preserve their lien rights later in the job.
If the amount is not paid with the required period, then the company that filed the lien must file a lawsuit to perfect or foreclose on the lien. If this happens, it means the property owner may be forced to sell the property and use the funds to pay the perfected lien. In all likelihood, pressure from the lender or the stigma of having a lien on their property will incentivize the owner to pay long before foreclosure.
If the owner pays the amount owed before the period expires, the lien is removed from the county records and there is no permanent record that it existed.
What to do if a lien is filed on your property?
If you are a property owner with a construction project going on, you need to be aware of the mechanics lien laws in the state the property is located in. There are deadlines that need to be met by the company filing the lien, and you need to know what your rights are if a lien is filed.The first thing to note is that any company working on your project or supplying materials to the project can file a lien. They can even file a lien if you have paid all your bills to the general contractor (GC) for the project. You may be paying the GC, but that does not guarantee they are paying all their subcontractors or suppliers. You, as the project owner, are responsible for making sure that all parties on your project are paid in full.
If you receive notice that a lien has been filed, you’ll want to contact the company filing the lien to get their side of the story and any documents they have to backup their claim. Then contact the prime contractor, if they aren’t the one filing the lien, to see what their story is and get any additional documents from them.
If there is a disagreement about the amount owed or who owes who, the first step is to try to negotiate. Refer to the contract documents and work through the conflict resolution process called out there, whether it be mediation or arbitration. Try to work things out and get the party paid, if that is what needs to happen.
Liens are filed without a burden of proof. Just because a company files a lien doesn’t mean that it is in the right. As the owner, you may have to pay additional funds to get a lien released from your property. The best bet is to work out an equitable resolution to the dispute as quickly as possible.
Once you have reached a settlement, or paid the amount that is owed, make sure the company that filed the lien releases it. You will receive notice from the county when a lien has been released.
How to protect your project from liens
It’s a good idea to know who is working on and supplying materials to your project. Ask your general contractor or construction manager to put together a list for you. You don’t have to know the supplier of every nail and staple on the project, but anyone providing over $5,000 is a good starting point.Be sure to make timely payments to your GC. Review your contract with them and know how long you have to pay them. Also know what the statutory timelines are for filing liens and prompt payment requirements. These timelines determine how long you have to pay the contractor and how long a contractor or supplier has to file a lien.
Once you send a payment out, ask the contractor to provide a lien release or waiver acknowledging the payment. You can also ask the GC to provide waivers from the major subcontractors and suppliers on the project as well. These documents act as receipts, showing that those companies have been paid for their work up to a certain date. Your construction manager can handle this management of lien releases for you.
Another option is to require payment bonds on your project. These bonds act as insurance against someone not being paid. If a company has a claim of non-payment, they submit a claim to the surety company that issued the bond, and the surety will take care of paying them or settling the issue. You will pay an extra 1 to 3% or so for the project, but the protection from payment issues may be worth it to you.
