Mechanics' liens are one of the most important legal tools at the disposal of contractors, subcontractors, and suppliers. They are relatively quick and easy mechanisms to secure your legal rights to recover money for the work, labor, materials, or services that you performed to repair or improve a piece of real property. Whether you are a large general contractor, or a one-person specialty subcontractor, you should be aware of the role that liens can play in securing your rights.
Imagine that you are hired by a homeowner to construct a new garage next to a two-story house. The contract is for $20,000, payable in installments. You finish the project per the agreement with the homeowner and, at the end, send your final invoice for the last $5,000 to the homeowner. She never pays. What can you do?
Don't file a lien just yet. First, you should try to seek payment amicably. Call the homeowner. Send her an email. And then send her a formal demand letter, either on your corporate letterhead or from your attorney. These types of letters will put the homeowner on notice that you are still owed money, and that you intend to pursue your legal remedies. (They also could show a judge that you tried to resolve the dispute in good faith before rushing into a lawsuit.)
If none of these options result in payment, you may assume that the homeowner has simply decided to stiff you. At this stage, you can file a lawsuit for breach of contract, as well as other damages such as quantum meruit. But the lien law gives you an additional remedy: you can file a mechanic’s lien.
A mechanic’s lien is a short document, generally just a few pages. While the specific requirements vary from one jurisdiction to the next, the lien will ordinarily state the name of your company, the name of the homeowner, the address, the services performed or materials provided, and the amount of money still due and owing.
You must publicly record the lien by taking it to the county clerk where the property is located. Also, you will need to formally serve it on all other contractors or entities with a legal interest in the property, as well as the homeowner. The lien becomes a cloud on the owner's home title, meaning that the title is subject to your company’s interest in it. This will make it difficult for the homeowner to sell the property or refinance it through a bank or other institutional lender. In other words, the lien can incentivize the homeowner to settle with you in order to get you to remove the lien.
Note that liens are not only for general contractors. Subcontractors and suppliers are also able to file liens, even if they did not have a contract with the homeowner. Subcontractors and suppliers generally have a contract with only the general contractor. But this does not have any affect on the ability of the subcontractor or supplier to file a lien against the property.
First, consider the message that it sends when you file a lien. Filing a lien is perceived as an aggressive action by homeowners. If you take this step, it might put the homeowner on the defensive, and encourage the homeowner to get lawyers involved, or to retaliate by publicly claiming that you did shoddy work. Perhaps this is the direction that you need to take, unfortunately, if the homeowner is refusing to pay.
The single most important legal consideration when considering your ability to time a lien is time. Each state has a specific statute of limitations on a contractor’s ability to file a lien. Sometimes, this limitations period is only a few months. Often, the period is different depending on whether the property is public or private, or whether it is commercial or residential. The time limitation for filing a lien is far more limited than the time for filing a lawsuit (which is sometimes as much as three to six years).
Finally, before filing a lien, you must consider the state-specific requirements of the local lien laws. Each state, and indeed each county, has its own peculiarities with the technical aspects of a lien. What information must be included? What pages need to be notarized? Who needs to be served with the document?
In other words, there are many technical and procedural issues to consider. For this reason, it often makes sense to consult a construction attorney with experience in the county where the real property is located. A bit of advice can go a long way towards making sure that your lien rights are preserved and not precluded based upon some sort of technicality.