A contractor or supplier working in the construction industry is not a stranger to the payment issues that plague it. Payment delays and delinquencies happen often in the industry, making it necessary for construction business owners to be proactive in protecting their payment rights every time they sign on for a project. That is why, if a contractor has been working in the industry for a while, it needs to be familiar with the tools available to ensure it receives fair compensation for the labor provided and materials used. The most powerful of these tools is the mechanics lien.
What is a mechanics lien?
A mechanics lien is a legal claim filed by a contractor or supplier against a property to secure payment for the unpaid labor they provided or materials they furnished.
The mechanics lien exists to protect contractors given the nature and economics of construction projects. Without it, contractors and suppliers will have no remedy to seek compensation for unpaid work other than suing for breach of contract. As such, all 50 states have mechanics lien laws in one form or another. As long as a contractor provided labor or a supplier furnished materials to a project, and met their state’s relevant requirements, they have the right to file a mechanics lien.
How does a mechanics lien work?
In simple terms, a mechanics lien can be considered as a security interest similar to a home mortgage. A typical home mortgage involves a lender agreeing to give a loan to the borrower while the borrower agrees to use the house as collateral until the loan is paid. In the case of a mechanics lien, however, the security interest is involuntary and can exist even without the consent of the property owner.
In addition, a mechanics lien also puts a public record on the property’s title, making it virtually impossible for a property owner to sell or refinance the property through banks and lending institutions. This encourages the property owner to settle any payment issues with the project participants and have the lien released.
If the payment issues are not settled, the mechanics lien will be enforced through a judicial foreclosure. Similar to mortgage foreclosures, the court will order the property sold and the proceeds will be used to satisfy the liens in order of priority.
Should you file a mechanics lien?
The quick answer? Yes. If contractors want to protect their firms from getting stiffed, then protecting their right to file a mechanics lien is the best bet to get what is owed.
That said, filing a mechanics lien does not guarantee that contractors will automatically receive compensation for their unpaid work. There are several requirements that a contractor needs to satisfy before the court can order the sale of the property. For this reason, it is important for the contractor to refer to its state’s lien laws, taking careful note of the requirements and due dates to ensure the mechanics lien can be enforced.
How do you file a mechanics lien?
All 50 states have varying requirements regarding mechanics liens. Construction professionals need to be familiar with these requirements to ensure compliance. In general, there are three steps that project participants need to follow when filing a mechanics lien.
1. Send a preliminary notice.
A preliminary notice is a legal document that notifies a property owner and other relevant parties of a contractor’s participation in the project. It also reminds the recipients of the contractor’s right to get paid. Almost all 50 states require contractors to send a preliminary notice or risk losing the right to file a lien. It is always a good business practice to send a preliminary notice right after signing a deal to provide labor or furnish materials.
2. Serve a notice of intent to lien.
A notice of intent to lien is a legal document that informs its recipients of a contractor’s intent to file a mechanics lien. Not all states require this notice, but it is a powerful document that is sometimes enough to compel clients to pay what is due to the sender. The states of Arkansas, Colorado, Connecticut, Illinois, Missouri, North Dakota, Pennsylvania, Wisconsin and Wyoming explicitly require the serving of a notice of intent to lien for a valid mechanics lien.
3. File the mechanic’s lien.
A mechanics lien needs to be filed in the recorder’s office in the county where the job is located. Afterward, the claimant needs to send a copy of the lien to the appropriate parties in the manner prescribed by the law. If the client still fails to pay, then the contractor will be able to enforce the lien.
Ideally, contractors will want to settle payment disputes with clients in a professional and amicable manner. But when they have exhausted all of options to seek delayed compensation, a mechanics lien is the best chance to get paid. That is why protecting lien rights should be a top priority when entering any construction project.
