If you are involved with construction or repair, 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 which jurisdiction you live in, these are sometimes called "construction liens" or "property liens." What are they, and how might they affect your rights? That's what we'll discuss here.
Despite the name, mechanic's liens have little to do with actual mechanics. Instead, they are legal documents that essentially reserve someone's rights to seek compensation in the face of nonpayment by whoever commissioned them to do some work. These liens are usually filed by contractors, subcontractors, or suppliers who never received payment for a project that they completed or materials that they provided on a someone's house, land, or other real property.
Imagine, for instance, that you are a homeowner who hired a contractor to build a new swimming pool in your backyard. He does all the necessary work and creates a beautiful pool. But at the end of the project, you refuse to pay 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 against 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. One way or another, you'd have to pay the lien off or come to some agreement such that the person who filed it will cancel the lien.
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; only 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 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 claimed under a lien. While the exact rules vary from one state to the next, contractors can normally only file a lien for labor, materials, and services that they provided that improved the real property.
In the above example, the subcontractor could include in the lien the value of the concrete, the rental costs of equipment, and hourly time cost for services. But the contractor could not include, for example, money spent on attorneys' fees to file the lien, since these did not benefit the value of the property. Nor could the contractor include amounts for 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 highly particular practices regarding how they require 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, you might wish to speak with a local lawyer, specifically one who practices construction law.