The construction industry in the Hoosier State has faced tough times since the Great Recession. With some property owners trying to reduce costs, contractors and subcontractors occasionally face the unfortunate scenario of being stiffed for their materials, labor, or services.
Imagine that your company performs roofing work on a residential home in Indianapolis, but then the homeowner who hired you refuses to pay all the monies owed at the conclusion of your work. Fortunately, Indiana law gives you a powerful mechanism with which to put pressure on the owner and obtain the payment to which you are entitled: mechanic’s liens.
What are mechanic’s liens, and how do they work in Indiana?
If a property owner fails to pay you, you will rightfully feel angry. But before you run to file a mechanic’s lien or a lawsuit, remember that persistence and negotiation might actually be more cost-effective ways to approach the issue.
In addition to mailing additional copies of your final invoice and/or statements, telephone the owner. Also send an email with a reminder about the contract balance. Try writing a formal demand letter on your company’s letterhead. More often than not, these attempts at collection will work, saving you the time and money associated with legal action.
If these initial steps do not work, however, consider hiring a lawyer to write a demand letter on law firm letterhead, which will sometimes prompt a response more quickly. It would be most effective to retain an Indiana-based lawyer with some experience in construction law. A lawyer will typically be willing to write a demand letter for a reasonable fee and it will show the property owner that you are serious about guarding your rights. (Note that lawyers in major metropolitan centers, like Indianapolis or Fort Wayne, will typically have slightly higher rates).
For more on retaining a lawyer, check out Guide to Finding an Excellent Attorney.
While the above strategies may work, there will still be situations in which owners will refuse to pay the monies that are owing. Of course, Indiana law allows you to simply sue for simple breach of contract, or some other related cause of action (such as what's known as quantum meruit).
But under the Indiana Mechanic’s Lien Act (codified as Ind. Code Ann. § 32-28-3 et seq.) you are also allowed to file what's called a mechanic’s lien, which can be a faster tool with which to pressure the owner to pay. A lien is publicly filed in the Office of the County Recorder in the county in which the property is located. (See, for example, the Marion County Recorder’s website, complete with forms and instructions). These recorders’ offices are usually located in the same building (or near to) the county’s local District Court.
The lien becomes a cloud on the owner’s title, meaning that the title is subject to your company’s financial interest in it. For example, if you put a $5,000 line on an Indianapolis home, a buyer of that property would purchase it subject to owing you that $5,000. This will make it difficult for the current homeowner to sell the property (or to refinance it through a bank or other institutional lender), since no one would want to take property that is subject to your claim. In other words, the lien can incentivize the owner to settle with you in order to get you to clear the title.
An Indiana mechanic’s lien is a relatively short document, generally just a few pages. Note that there are 92 counties in Indiana, and each county’s recorder has its own version of the form that you must use, along with its own local procedures and particularities for filing. You can see a template form here.
Under the law, the lien must include your company’s name, the owner’s name, the location of the property, and the amount of money still due, among other pieces of information. You must also describe the labor or material you provided (in other words, how did you improve the property?).
If you are a subcontractor or supplier and worked for a general contractor that failed to pay you, you must list the primary contractor's name and address, too. You will see that your signature needs to be notarized.
Unfortunately, much of the language of your state's statute is somewhat dense. As with most lien statutes, Indiana’s contains many rules and exceptions, depending on the type of property involved and the work performed. But there are some important concepts to remember as you consider filing a lien on behalf of your construction company:
As you can see, the timing of the filing is perhaps the most critical aspect of a successful lien. Indiana’s legislature is trying to incentivize potential lienors to make their claims quickly, and not allow liens to be filed years after a construction project is completed. While this gives owners some comfort in knowing that lien periods have expired, it means that you must act quickly to ensure that you do not lose any lien rights.
To protect homeowners from situations where subcontractors that they never hired suddenly file liens on their property, Indiana enacted Ind. Code Ann. § 32-28-3-1(h).
That statute provides that any “person, firm, partnership, limited liability company, or corporation that sells… material, labor, or machinery for the alteration or repair of an owner occupied single or double family dwelling… [to] (1) a contractor, subcontractor, mechanic; or (2) anyone other than the occupying owner or the owner's legal representative… must furnish to the occupying owner of the parcel of land where the material, labor, or machinery is delivered a written notice of the delivery or work and of the existence of lien rights not later than thirty (30) days after the date of first delivery or labor performed. The furnishing of the notice is a condition precedent to the right of acquiring a lien upon the lot or parcel of land…”
Put differently, if your contract is not with the owner, but instead with a general contractor or other entity in the construction chain, then you must give the property owner 30 days' notice after you begin work on the project. This notice will ensure that there are no “surprises” if you eventually need to file a lien. It will also prompt the owner to push any contractors above you on the construction chain to ensure that you are paid, so that the owner can avoid the annoyance of liens.
If you file a lien with the Indiana county recorder and serve the property owner with a copy of that lien, your action is likely to be perceived as aggressive. Taking this step might put the owner on the defensive and cause him or her to get lawyers involved, or otherwise retaliate by publicly claiming that you did shoddy work.
Perhaps filing a lien is the adversarial direction that you need to take, unfortunately, if the owner is refusing to pay what you are owed. But regardless, you should be prepared for antagonism once the filing is complete.
Also remember that liens and the laws surrounding them in Indiana can be highly technical. Further complicating matters, Indiana’s state legislature has amended parts of the statute over the past decade, while other aspects of the statute are much older. If you are owed a substantial sum of money, it is likely worth your investment in a consultation meeting with an experienced construction or real estate attorney in Indiana who can advise you of your rights.