Imagine that your home needed structural work, so you found someone you believed to be reputable to fix the roof, brickwork, and plumbing. You signed a contract, and were happy to see work moving along quickly. You paid your final bill. But then you found a certified letter in your mailbox: a mechanic's lien, filed by ABC Plumbing, Corp. for $8,000. It's a company you've never heard of, which claims that the general contractor who worked on your house never paid it for its services in full.
What is this document, and what can you do about it? We'll shed some light on this here.
A mechanic's lien is a document that can be publicly filed by a person or entity that improves real property, when they believe that they were not fully compensated for their work. Usually, contractors, subcontractors, or material suppliers will file liens; although architects and engineers can file them as well, in certain situations.
Let's say you had a contract with a general contractor to renovate your home for a lump sum of $20,000. The contractor did all of the work, yet you paid only $10,000. The contractor could sue you for breach of contract for the remaining $10,000, and could also file a lien on your property for that same amount.
Similarly, imagine that the contractor in the above example hired a plumbing subcontractor, ABC Plumbing, Corp., for $10,000 but paid it only $2,000. The subcontractor neglected to pay the plumber the remaining $8,000. The subcontractor can sue the contractor for breach of contract, and can also file a lien directly against your property!
Liens are typically filed in the clerk's office of the county where the property is located, and thus are publicly available. They represent a cloud on your title to the home. In other words, a lien indicates to the world that the lienor has a legal interest in the property in the amount of the lien.
The purpose of liens is to create a relatively inexpensive, efficient mechanism for companies or individual contractors to obtain payments they are owed. Liens can give bargaining power to small outfits, for example to ensure that big owners, developers, or contractors do not cheat them. At the same time, liens can cause aggravation for homeowners, sometimes unjustly.
As a homeowner, you certainly want to remove liens from the title of your property as quickly as possible. They represent a liability and a legal risk. Liens will impede any efforts to refinance your home, and will also make it difficult if and when you want to sell. Moreover, the lienor could even attempt to foreclose on the lien; that is, file a lawsuit, possibly forcing sale of your home (though this rarely happens).
As a homeowner, you have some options for how to respond to a mechanic's lien, including:
If a subcontractor or supplier filed the lien, you should check your contract with the general contractor. The contract might require that the general contractor keep the property "lien free," meaning it's the contractor's responsibility to settle the lienor's claims. You should immediately notify the contractor, letting the contractor know that this current situation is unacceptable.
Second, if time is of the essence and you need to sell or refinance your home quickly, you can contact a surety company to obtain a lien bond. A lien bond is essentially an insurance product. Proof of the bond can be filed with the county clerk, and the lienor's lien will be attached to the bond instead of attached to your property. Essentially, lien bonds are a mechanism for clearing title to property relatively quickly.
Although it's probably not the most preferable option on your list, you can attempt to settle with the lienor directly. For example, you might offer to pay some percentage of the amount that is claimed quickly, in exchange for removal of the lien and release of all claims. Often, contractors are willing to settle for a lower amount of money rather than maintain a lien and enter into a lengthy legal battle.
Finally, you could choose to fight the lien. In other words, you could file a lawsuit to vacate or remove the lien from the property records, arguing that the lien is invalid. You might do this if you believe that the lienor is genuinely not owed any money. Perhaps you already paid in full, or the work was shoddy, or the limitations period on filing a lien has already expired.
Keep in mind that the laws surrounding mechanic's liens vary widely from one state to the next, and even from one county to the next. If a lien is filed on your property, your best course of action is to consult a construction or real estate attorney in your jurisdiction who has experience in removing mechanic's liens.