Imagine you’re a homeowner and you’ve had extensive renovations done on your house. You paid the general contractor in full, but instead of paying his suppliers and subcontractors, he spent the money elsewhere. In many parts of the United States (and other countries), you could very well find yourself on the hook, forced to pay the suppliers and subcontractors too, and if you couldn’t cover their costs quickly, you might even be forced to sell your home.

In this context, the law gives more value to the workers and suppliers who need to be paid, giving them the power to put liens on the property they have improved, and it falls to the homeowner to both satisfy their debts and take on the burden of suing the general contractor. Had both the homeowner and the contractors taken some basic steps upfront, the whole situation could have been avoided altogether.

It’s critical that anyone who supplies materials or services in a construction project to improve a property must understand their rights and responsibilities with regards to lien law.

A lien is essentially a collection technique. It consists of a legal document for a specific monetary amount that can be leveraged by creditors, tax authorities, or by a court judgement, which places your assets on collateral in exchange for unpaid debt. Liens force you to satisfy your debt even if it means liquidating or relinquishing your assets to do so.

There are many different kinds of liens that can be used to make a claim on all sorts of assets, including vehicles, accounts, companies, and real estate.

Liens give creditors the legal ability to seize and/or sell the assets of a person or entity who has not met their payment obligations for a loan or contract. Until the lien is resolved (ie: the debts are satisfied), the original owner is unable to sell or refinance the asset without the permission of the lien holder. Sometimes, liens are filed with the government to give public notice of their existence so that future purchasers are aware that the lien exists on the asset and that it will transfer with the purchase.

Liens give creditors the legal right to secure claims on personal property. Unless you have been careful and taken steps to properly secure your property and belongings, they are all at risk. Creditors can legally seize your assets and take your money from your accounts and investments.

There are two kinds of creditors - secured and unsecured. Secured creditors have a claim against a specific asset, while unsecured creditors have potentially empty claims. In the case that a company files for bankruptcy for example, the secured creditor can rest easy, knowing that their claim can be covered with the liquidation of the secured asset. The unsecured creditor on the other hand risks losing their claim altogether. To become secured, the unsecured creditor can file a lawsuit leading to a judgement that places a lien on the debtor’s assets, securing their claim.

There are three general categories of liens each with various uses:

The Judgment Lien is the result of a court order, usually on the back of a lawsuit. This could be for a cement firm seeking restitution for damaged equipment, a jobsite accident victim seeking damages in excess of insurance, or even the plaintiff of a negligence suit who has been awarded a cash settlement and needs a lien to secure the debtor’s assets to cover the award.

The Consensual Lien (aka contract lien) is a lien you agree to. It’s created via a security agreement between the creditor and the debtor. These are voluntary and are commonly used when requesting loans or other credit. A lien could be placed when you borrow money to buy scaffolding equipment, or when you rent a portable generator. A lien most people are very familiar with is the mortgage they take out when they buy a new property. Other common examples of consensual liens include credit agreements where the creditor has financed furniture, or where a dealer has arranged financing for a vehicle purchase.

Finally, the Statutory Lien is formed on the basis of either state or federal law. This is a non-consensual, non-voluntary lien that arises when a specific statute entitles the creditor to the lien. A good example of this is the tax lien which is levied by the local, state, or federal government on the assets of delinquent taxpayers for both property and income taxes. In the United States, it is common for the IRS to place taxation liens when there is no interest shown in making payments. In fact, these federal tax liens can sometimes lead to a public auction of property, contents, vehicles and financial assets.

An important example of a statutory lien is the Mechanic’s Lien, which we will cover in detail below.

Surprisingly, the Mechanics Lien has nothing to do with engines or vehicles. Its name comes from the era the legislation was first conceived in America. Thomas Jefferson is credited in the late 1700s with having initiated this lien and back then, construction workers were known as mechanics. These days the Mechanic’s Lien is sometimes referred to as the construction lien or the materialman’s lien (for suppliers). The Mechanic’s Lien protects a wide range of workers engaged on private projects, from general contractors, subcontractors, and suppliers, to design professionals, landscapers, and even construction equipment rental companies. Workers on public projects are covered by bond, which is a different system.

What is interesting about the Mechanic’s Lien is that it gives enormous rights to workers in the construction industry. In fact, it gives them almost a guarantee of eventual payment. In a situation where payment is neither received nor forthcoming for work completed, they can file a claim directly against the real estate where their services were used.

So for example, if you’re a subcontractor and you supplied either materials or labor for a renovation of a private building, and you haven’t been paid, you have two choices; you could either take the general contractor to court, which could stretch out for months and potentially never be resolved, or you could file a lien directly on the property where you worked and force the client to pay you instead. In fact, the Mechanic’s Lien is so powerful, you can often get paid without even having to contact a lawyer.

To clarify, whether you are supplying work or labor directly to a homeowner, or to a general contractor, or to a sub-contractor, in the event of non-payment, you have the right to file a lien on the property.

Note that Mechanic’s Liens are connected to the property itself, so if the owner decides to refinance or sell the property, they’ll need to settle the lien first.

Filing a Mechanic’s Lien is not overly difficult but there are a number of steps that must be followed to the letter, and they must be done so within a very tight schedule. Even one small mistake can lead to the rejection of your claim. To make things more confusing, different states have different regulations in place covering how and when a lien should be filed. It’s extremely important to keep note of the filing deadlines for each step and ensure you are hitting them. Any step filed outside the deadline can destroy your chances of getting your claim. If you have time and patience to spare, you can certainly file on your own but it’s not recommended. There are several agencies that will file for you at a nominal fee, or you can retain a construction attorney.

Preliminary Notice

Before even starting work on a project, you need to give pre-lien, preliminary notice. Depending on the state you’re in, this may have a different name; it could be called Notice of Furnishing, Notice to Owner, or 20-day Preliminary Notice. No matter the name, most states require it to be filed before you begin work on the project. Failure to file preliminary notice will lead to any liens you eventually file being rejected.

Preliminary notice is entirely precautionary, and serves to alert the project stakeholders that you are working on their project and that you are prepared to file a lien in the case that payment is withheld. Stakeholders include the property owner in addition to the general contractor. It’s a good idea to get in the habit of filing preliminary notice at the beginning of every project you work on.

Unfortunately, each state has different regulations on whether or not preliminary notice is necessary in order to file a lien, and in the case that it is, on what occupations need them. So for example, the regulations may change depending on whether you’re a supplier or a contractor and whether you’re in New York or New Jersey.

Benefits of Filing Preliminary Notice:

Notice fosters transparency and open communication.
Because the project stakeholders are aware you’re on the project, you’re more likely to be paid, and faster.
Notices minimize surprises, something stakeholders appreciate.
It is often a required step in an eventual lien filing.

Notice of Intent

In the event that you are being denied prompt payment for completed work, assuming you have already filed the preliminary notice, you should file your Notice of Intent (NOI). The NOI is a warning to stakeholders that a lien is not far off and is often sufficient for extracting payment. No one wants to be the unlucky recipient of a lien. In some states there is a time limit that you must wait after filing the NOI before you can file the lien itself. Your best bet is to consult the office where you plan to file to ensure you have all the latest information. If you’re still not sure, consult an attorney.

Note that it isn’t always necessary to file the NOI; some states don’t require one and for those that do, you may be able to get away with a simple demand letter to the various stakeholders.

Filing the Lien

Generally speaking, liens must be filed within 90 days of the cessation of work. That could be the day the owner stopped the work, the day the owner filed a Notice of Cessation of work, or the day the contractor decided to stop. In either case, in most states, liens filed outside the 90 day window will be invalid.

To file a Mechanic’s Lien, simply go to the county office in the locality where the work was completed. If you file it in a different county, it will be void. At the county office, ask to file a Claim of Mechanic’s Lien. From the point at which you file the lien, you have between two and six months to come to a solution with the owner, or file a lawsuit to foreclose on their property.

Before filing a lien, make sure that you are eligible to do so. You must be either the contractor, sub-contractor, or supplier, and it must be a private project. Double check with the county office to ensure you have the latest regulations for that region. At a minimum, you need to have filed both the Preliminary Notice and the Notice of Intent to the right people within the correct deadline, and you need to be filing the lien within the deadline as well. Additionally, most states require that the person filing the lien has the necessary licensing to perform the work for which they are requesting pay.

Next, make sure the lien application has the correct information. It’s very easy to make typos or accidentally record incorrect names for each of the involved parties. Any incorrect details can and often do lead to lien rejections by the court, so take the time to make sure you get it right.

One of the most common mistakes people make that leads to rejections is writing the property address incorrectly. In fact, in several states, Mechanic’s Lien filings require the full legal address which can be found on the property deed in the county office, or on the contractor’s Letter of Commencement posted at the beginning of the project. It may be worthwhile consulting an attorney even just to make sure you’ve correctly filled the forms.

Filing Suit / Foreclosing

If neither your notice of intent nor filing of the actual lien got the property owner’s attention, it’s unlikely they’re going to willfully settle the debt and you’re going to need to file a lawsuit to initiate the foreclosure to force the sale of the property. In some cases, the owner may push you to file for foreclosure, assuming it’s invalid and giving them the opportunity to fight it in court.

A foreclosure suit for a Mechanic’s Lien is no different than any other lawsuit; you need to have the appropriate forms filled, pay the appropriate fees, and appear in front of a court. You can do it on your own if you want, but it’s highly recommended that you hire a lawyer. Otherwise, be very careful to ensure you’re filing at the right county office and, as with the initial filing, that you get the correct form and fill it out properly.

You’ll also need to gather your legal case. Take the time beforehand to put everything relating to the case on paper. Without doubt the homeowner will be attempting to discredit your lien filing so make sure you include enough evidentiary detail to make your case. At a minimum, you need to explain what work you’ve done, how much you should be paid, why you filed the lien in the first place, what you have done to recover payment, and why you are now filing the suit. Bring two copies with you for the filing; one will be your record and the other will be held by the court. Also make sure you bring enough money to cover the cost of the filing. The amount varies county by county. It can be anywhere from five dollars to three hundred dollars.

The next step is to serve your legal case to the property owner, legally advising them that a suit has been filed and a court date is forthcoming. Normally, papers are served by certified mail. The court will then schedule the hearing which will be your opportunity to state your case in front of a judge. The judge’s decision is final and will decide whether your claim is valid, and if so, how much of the liquidation will go to you. If there are other claimants on the same property, the judge will determine whose liens have payment priority.

Frivolous / Fraudulent Claims

Lien claims can be rejected because of forms not being filled out correctly, incorrect forms being used, and also when forms are submitted outside the deadline. Each of these are called frivolous claims. Others are due to filing the claim in the wrong jurisdiction, or even filing without claimant rights. While all of these reasons can be considered honest mistakes, they may nevertheless be rejected and worse, you may find yourself on the hook for the costs and legal fees of the party upon whom you were filing your claim. So in summary, while it’s possible to file claims on your own, it’s a very good idea to seek legal support.

Another type of frivolous claim is one filed on bad faith. Sometimes, liens are filed for monetary amounts far exceeding the outstanding amount, or for work that hasn’t been completed. Other bad faith claims are filed with the intention of causing someone trouble. In many states, the penalty of filing such a fraudulent claim (also known as ‘paper terrorism’) is anywhere from a misdemeanor to a second degree felony, punishable by up to twenty years in prison and a $20,000 fine. In short, think twice before filing a claim in bad faith.

Pay it off

When you’re on the business end of a Mechanic’s Lien, your choices are very limited. Whether or not you are at fault, your simplest option is to pay the debt. If you don’t have the money on hand, you may be able to negotiate a payment plan with the lien holder. However, the law favors the workers in this case and they have the right to demand payment. You may be forced to cover the lien and then chase after the contractor for damages.

Negotiate

If you don’t have the money on hand to pay the lien outright, you may be able to negotiate a payment plan that favors the lien holder, if they are agreeable. If the lien holder is a credit card company, they may even be willing to negotiate a settlement for less than the amount owing. Alternatively, you could look at refinancing your home and liquidating smaller assets.

Sell the Property Outright

If you don’t have sufficient cash on hand to cover a lien on your home, and refinancing, negotiating and settling are out of the picture, you may have to consider selling it outright. If the property is your home, this should obviously be a last resort. First look into liquidating your other assets to clear the lien. That means bank accounts, vehicles, real estate, and investments. On the other hand, where the lien has claim on a property other than your home, it may be more cost effective to simply sell it off. Remember that you need the lien holder’s permission to refinance or sell a liened property.

Note too that the lien has claim only on the property where the contractors worked and if its sale is not sufficient to cover the worker’s expenses, you may also find yourself on the receiving end of a judgement lien for the difference. Let’s say you had purchased a house for $20,000 that had been abandoned due to structural issues and you hired contractors who put in $30,000 worth of materials and work. If the liquidation of this property doesn’t cover $30,000, the contractors can take you to court seeking a judgement lien on your other assets.

Once you’ve paid the debt to the lien holder, make sure to ask them to file a Satisfaction of Lien at the county office in the locality you did the work. On the occasion the lien is invalid, and therefore unenforceable, it still must be removed before you can refinance or sell the property. If the contractor is refusing to remove it, even though they’ve been paid in full, you can either negotiate or take them to court.

As the contractor, the right thing to do is ensure the property is lien free once you’ve received payment. To remove a lien you have filed, you need to file a Release of Mechanic’s Lien document.

Lien avoidance is a hot topic in construction; workers would rather not file them because of the hassle involved and the inherent delayed payment, and property owners don’t want added risk placed on their real estate. There are a number of steps each party can take in tandem to avoid Mechanic’s Liens altogether. They mainly center on good communication and professionalism. Some require an initial investment of time and money but in the long run, they pay for themselves.

Pay For Services Rendered

Mechanic’s Liens get filed because workers haven’t been paid. The simplest thing you can do to avoid a lien is to pay your team what you owe them, on time. Often, this mistake happens because the person cutting the checks doesn’t have the full roster.

Request Preliminary Notices

To ensure the roster is complete, and therefore everyone gets paid, it’s a good idea to provide and collect preliminary notices before the project begins and as new workers come on board.

Check Backgrounds

Just as you would before signing a contract with any unknown party, do some legwork to ensure the people you’re going to be working with are reputable and reliable. If possible, check their past contracts and make sure they haven’t had problems with liens or missed payments.

Protect Everyone by Issuing Joint Checks

Unfortunately it can happen that the owner pays the GC in full but the money never makes it to the workers. Joint checks can prevent this sort of behaviour by requiring the endorsement of each party before they can be cashed. This ensures that relevant parties are aware that the owner has made payment which in turn makes it difficult for the GC to not pay out.

Employ Lien Waivers

One way to ensure contractors, subcontractors and suppliers who have already been paid don’t go on to file a lien is to have them sign a lien waiver. Waivers are legal documents that prevent people from filing a claim. Generally in construction, lien waivers are requested either at the time of payment, as a form of receipt of payment, or in advance, as a conditional waiver stating that the worker will waive lien rights the moment they have been paid in full. Either method is considered fair practice.

Waivers also benefit workers as they generally lead to payment in full. A property owner or GC who is being offered a waiver of future claim will often jump at the chance to make payment and reduce their risk.

Request a Payment Bond (Property Owners)

Because of the added cost, this is a less common practice in private construction, but nevertheless viable. Common in public projects, payment bonds are effectively a type of insurance that move the risk off the property and onto the bond issuer. In the case that a contractor files a lien, their claim will be on the bond rather than the property, an effective method of protecting a property owner’s assets.

File a Notice of Completion

A Notice of Completion lets everyone with lien rights know that work on the construction project has completed and that the countdown has begun towards the end of their window to file a claim. In many states, a filed Notice of Completion substantially reduces the normal deadline for filing lien.

Request / Send Invoice Reminders

With everything going on at a typical construction project, people sometimes forget to capture expenses and end up making the mistake of not cutting the right check. That can be avoided with simple payment reminders - basic letters stating that payment is almost due. It’s a simple, friendly reminder. In the event payment is not forthcoming, send another that letter stating that payment is past due. Often that is sufficient to jar memories and get the check cut.

While we hope owners and contractors act proactively and respectfully and make payments on time for work completed per contract, we know that things don’t always happen that way. As we’ve seen, Mechanic’s Liens are a powerful tool that can help ensure claimants get the pay they deserve for the work they’ve done. However, we’ve also seen that filing a lien correctly can be quite difficult, so while the system exists to protect the workers, it assumes those workers have the financial resources to hire an attorney which we know is often not the case. For this reason, we’ve made an effort to pack this article with as much useful information as possible, and we will continue doing so as time goes by.

Thanks for reading and we hope this was useful! The SINC Team