ONE OF THE MOST valuable tools in a contractor's tool-box, many believe, is his ability to use mechanic's liens to get paid for work. Given the complexities of modern life, this is frequently not always the case. In deciding whether to count on a mechanic's lien to protect your interests, take all the following into consideration:
Pre-filing legal requirements. There is no area in construction law that varies more from state to state than mechanic's lien law. In many states, the potential lien claimant has to put the owner on notice or file papers with a public office before any work is ever done in order to have lien rights later. If these requirements aren't met, the lien could be no good. In order to meet them, the contractor or supplier has to spend time and money before he ever knows if he will have a problem that requires a lien, so most of the time (one hopes) the filing effort is wasted.
Time limits to file liens. Every state is different — some as long as a year after the work is completed and some as short as a couple months. Where the problem is merely slow pay, and not a refusal or inability to pay, this puts the claimant in the position of having to spend time and money "just in case" there's a problem with collection — causing hard feelings with a customer even though it could turn out that there's no need to do so. It may even be necessary to file repeated liens to cover additional work to avoid the time running out on earlier work.
Cost to file liens. In most cases, it is necessary to spend hundreds of dollars to get accurate title information, make sure that your customer actually owns the property, get the right legal description, find out who else has liens and then get legal advice on how to correctly put the lien together. In some cases this might be easy, but as often as not it can turn into a real mess and take time and money to get it done right.
Limitations on what you can lien. This is another area where states differ greatly. In some, profit can't be included in the lien. In others, no more than the original contract amount and signed changes can be liened. In others, rental equipment or items purchased but not installed may not be lienable.
Tracking down owners and other interested parties. It is not unusual to discover in the course of preparing a lien that the person you are doing business with does not, in fact, own the property. This may change the whole process you have to go through. Additionally, many states require everyone showing an interest "of record" to get notified of the lien or served with a lawsuit to enforce it. This isn't always easy or cheap to do. One national discount retailer is known for having the ground for its stores owned by trusts, whose trustees are key executives, which in some states means that all of them must be found and served with court papers. Where their addresses aren't listed in the trust documents or public records, this can be a daunting task.
Priority of your lien vs. others. Again, every state is different, but it often happens — particularly with remodeling or additions — that prior mortgages or liens are on the property and would take priority over your mechanic's lien. You could find that all your work gets you nothing if they can wipe you out in a foreclosure, but you can't know this until you spend money for title information.
Split of foreclosure proceeds with other lien claimants. In many states, even if you are the first to file a lien, all others who improved the same property have the right to join in your fore-closure action. If they prove up their liens, the money that is raised by selling the property in lien foreclosure then has to be split pro-rata among the claimants (after deducting expenses, that is). This could end up netting very little.
The condominium conundrum. Be very, very careful about working on buildings that are going to be condominiums. Even if your contract is with the original developer, as the units get sold, each one of the buyers might have to be included in a lawsuit to enforce a lien, which could turn what had been a two-or three-party lawsuit into one involving a hundred parties. The cost goes up exponentially.
While mechanic's liens can be a valuable tool, a contractor could utilize many other resources to protect itself from non-payment that might be less expensive and cumbersome:
- Contractual right to contact the bank to make sure there are adequate funds available to pay bills;
- Contractual right to insist on joint checks or direct payment;
- Contractual right to stop work if payment is delayed;
- Use of escrow agreements and escrow agents to assure payment;
- Payment of surety bonds; and
- Getting guarantors of payment.
All these steps — along with the threat of a lien — should be considered when approaching private jobs. No one will protect you better than the way you will protect yourself.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., telephone 816/ 421- 4800, e-mail to [email protected]