Imagine that your family bought a suburban home last year. The price was modest, because you knew that much structural work was needed on the house. The roof needed repairs, the bricks needed repointing, and the old plumbing needed replacing. You carefully researched general contractors in your area, interviewed several candidates, and finally picked one. The general contractor would to the work for certain sum of money, and hire subcontractors as needed. You signed the contract, and were happy to see the work move along quickly.
Within a couple months, the work is complete and your final bill to the general contractor has been paid. You are starting to enjoy your renovated new home. But then, one day, you arrive home to find a certified letter waiting in your mailbox: a mechanic’s lien has been filed by ABC Plumbing, Corp. for $8,000. It's a company you've never even heard of. They claim that the general contractor never paid them in full. What is this document, and what can you do?
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. Usually, contractors, subcontractors or material suppliers will file liens; although architects and engineers can file them as well, in certain situations. Liens are typically filed in the clerk’s office of the county where the property is located.
For example, imagine that you had a contract with a general contractor to renovate your home for a lump sum of $20,000. The contractor did all of his work, yet you paid him only $10,000. The contractor could sue you for breach of contract for the remaining $10,000, and he 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 him 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 he can also file a lien directly on your property!
A lien is filed publicly, and represents a cloud on your title to the home. In other words, a lien indicates 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 workers to obtain payments they are owed. Liens can give bargaining power to small construction companies, for example, to ensure that big owners, developers, or contractors do not cheat them. At the same time, liens can cause aggravation for owners, sometimes unjustly.
As a homeowner, you certainly want to remove liens from the title of your property as quickly as possible. To state the obvious, liens provide no benefit to you; rather, they represent a liability and a legal risk. Liens will impede any efforts to refinance your home, and will also make it difficult 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 a few options for how to respond to a mechanic’s lien. First, 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 that it is the contractor’s responsibility to settle the lienor’s claims. You should immediately notify the contractor, letting the contractor know that this 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 the title to your property relatively quickly.
Third, you can attempt to settle with the lienor directly. For example, you might enter into a negotiation with the lienor in which you agree 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 may be 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, you should consult a construction or real estate attorney in your jurisdiction with experience in removing mechanic’s liens.