If you are involved with construction, either as a contractor or as the owner of real estate, you might have heard of a legal document known as a “mechanic's lien.” Depending on the jurisdiction, these are sometimes called “construction liens” or “property liens.” What are these documents, and how might they affect your rights?
Mechanic's liens are legal documents that essentially reserve the rights of the filer to seek unpaid compensation. They are usually filed by contractors, subcontractors, or suppliers that never received payment for work that they performed or materials that they provided on a piece of real property.
For example, imagine that you hired a contractor to build a new swimming pool in your backyard. He does all of the necessary work and creates a beautiful pool. But at the end of the project, you refuse to pay him the final $5,000 on the contract balance. The contractor can, of course, sue you for breach of contract. But the lien laws give the contractor an additional remedy: filing a mechanic's lien on your property.
Mechanic's liens create a cloud on title, and appear in public property records. Liens are sometimes said to “travel with the land,” meaning that anyone who buys your house would take the property subject to the contractor's lien (or, more likely, demand that you pay it off first).
Practically speaking, this makes it highly unlikely that you would be able to sell your home until you pay off or otherwise deal with any outstanding liens. Similarly, banks and lenders are ordinarily unwilling to refinance homes or lend against property that is encumbered by liens.
For all of these reasons, liens are a nuisance for homeowners. But they give important leverage to contractors, subcontractors, and suppliers.
It is not just general contractors, like the pool installer, who can file a lien. Subcontractors and suppliers also potentially have this remedy. For example, imagine that the pool contractor hired a concrete subcontractor to pour the concrete for the base of the pool. The subcontractor would have no contract with the owner of the property; she would merely have a contract with the general contractor.
What happens if the general contractor never pays the subcontractor? She could sue the general contractor for breach of contract. But she can also file a lien directly onto the property owned by the owner. This gives her some leverage, since the homeowner will immediately receive notice of the lien and likely pressure the general contractor to remedy the situation and remove the lien. The legislative purpose of these lien laws is to encourage settlement, and also to ensure that workers receive their due compensation.
Not all costs can be included in the amount of a lien. While the exact rules vary from one state to the next, contractors can normally only lien for labor, materials, and services that they have provided that have improved the real property.
In the above example, the subcontractor could include in her lien the value of the concrete, the rental costs of her equipment, and hourly time cost for her services. But she could not include, for example, her attorneys' fees to file the lien, since these fees did not benefit the value of the property. She also could not include punitive damages, emotional distress, or other sorts of qualitative damages. The amount of a lien must, broadly speaking, be limited to the hard costs of the improvement to the land or property.
While many legal documents look essentially the same from one state to the next, mechanic's liens are highly state-specific. In the United States, individual counties are typically in charge of their own property records. This means that different county clerks might have very particular practices with respect to how they need liens to be formatted in order to be accepted.
Moreover, each state has specific limitations periods for when liens can be filed. In some jurisdictions, the time limitation is different for private and public property. For example, in New York, a lien must be filed within eight months of when the last labor was performed or materials were provided, unless the lien is against a single family home, in which case it must be filed within four months.
Because of minor distinctions like these, it is extremely important to consider local law and practice. Before trying to file a lien yourself, it might behoove you to speak with a local lawyer, specifically one who practices construction law.