Just when you think your home sale is about to close, last-minute details can delay or even derail it – for example, if the buyer’s closing attorney finds that one of your contractors has filed a mechanics’ lien against your home, and demands that you resolve the matter before the closing takes place. What do you do next?
When a contractor files a mechanics’ (construction) lien on a home, the lien makes the home security for an outstanding debt that the contractor claims the homeowner owes for services or materials. After a period of time, the contractor can attempt to collect that debt, by forcing a sale of the home. The home buyer certainly doesn't want to face this risk (and liens stay with the home even after a sale), so a home seller is typically asked to take care of such matters pre-sale.
The existence or validity of a mechanics’ lien does not depend on any underlying contract. If the contractor can prove that you received the benefit of time and materials without the contractor receiving appropriate compensation, the lien will stick.
Nor does the contractor need to prove a direct relationship between you and the contractor – this contractor may even be a subcontractor who wasn't paid when, for example, the general contractor went bankrupt. So, it’s possible for you to discover a mechanics’ lien on your house without ever having known the contractor who placed it there or being aware that the general contractor hadn’t paid off these debts.
Before you panic and write a check to remove the lien from your home title, find out whether the lien holds up to legal scrutiny. To establish a valid lien, a contractor typically must comply with a number of requirements set by the law in the state where the home was built: The builder must give the homeowner a preliminary lien notice within a specified number of days of beginning work or delivering materials; the mechanics' lien must provide a minimum amount of detail about the debt (its amount, the scope of the services for which payment is due, the homeowner's name and address, and so on); the lien must be filed with the local county court or registrar of deeds within a certain number of days of the completion of work, when the homeowner accepted the work, or when the homeowner began to use it; and the contractor must begin a lawsuit to collect the debt (perfect the lien) within a certain number of days of filing it.
If, after investigation, you are persuaded that the lien is invalid (because statutory filing requirements were not met, because time has expired, or for any other reason) you can petition your county court to dissolve the lien. This should take approximately 30 to sixty60 days. The court probably offers preprinted forms for this kind of filing. Strict compliance with your state’s filing procedures is important; you might want to have an attorney review your petition before you file it.
If the lien is valid (either because it was properly filed and the period for filing a lawsuit based on is still open, or the contractor has already commenced an action based on the lien to collect the amount claimed), and you have enough time before your closing date, try to resolve the underlying conflict with the contractor.
Both you and the contractor have a strong financial incentive to come to an agreement before you reach the courthouse. The contractor has already borne some expense in filing the lien, and will incur much more by bringing a lawsuit to collect the debt. And you, naturally, want to put this matter behind you and get on with your home sale.
Consider mediation or, if the amounts involved are substantial, binding arbitration. Prior to negotiations with the contractor or before mediation, you will want to assemble all of the documentation you have in your own defense (invoices, letters, photographs, logs of telephone calls, witnesses to the shoddiness or absence of the work or materials, and anything else that supports your position).
If and when you resolve the underlying issue, the contractor can voluntarily file to dissolve the lien.
With a home closing pending, you normally don’t have a lot of time. If the contractor refuses to settle or to engage in mediation or arbitration, and if the amount in question is manageable, you can post bond with the county court in the amount in dispute, along with a petition to dissolve the lien.
The dispute will continue, but the bond will take the place of the lien as security for the contractor’s claim. If you win the dispute or negotiate a settlement, you get your bond money back.
Typically, a subcontractor files a mechanics' lien when the general contractor has received payment from the homeowner for work done or materials delivered, but has not paid the subcontractor. Often, the failure to pay results from the bankruptcy of the general contractor or from a dispute between the general contractor or the subcontractor.
It seems unfair that you, the homeowner, should have to pay twice (for the same services or materials). The result reflects a legal preference for the subcontractor’s interests (you’re the one who owns the improved property) and assumes that you can sue the general contractor for the amount of the overpayment. In practice, the right to sue is cold comfort; lawsuits, no matter how justified, are always expensive, and the general contractor has already demonstrated that its resources are, at best, thin.
As with a lien filed by your own contractor, you can always post bond in the amount of the claim to enable you to close on your home sale or refinancing. The resolution of the underlying claim is more problematic. When dealing with a subcontractor, you've got the materials or the services, while the subcontractor doesn't have anything in compensation.
Assuming the lien is valid, this calls for some delicate negotiations. The subcontractor is entitled to something and has the means to get it, but won’t want to prosecute a lawsuit that eats up most of the claim. For your part, litigation – if the subcontractor’s claims are valid – is pure loss.
You've got the basis for a settlement if you can treat a portion of the claim that you’re willing to pay as an increase in the cost of the services or goods provided by the subcontractor and pay it without blowing your closing or refinancing out of the water. Here, good documentation and a showing of good faith and understanding for the subcontractor’s position will go a long ways toward the best possible settlement under the circumstances.