Depending on your point of view, a mechanic’s lien is the best thing since sliced bread or a pain in the neck. For contractors, subcontractors, and suppliers, a mechanic’s lien is a lifeline to compelling payment. For property owners, a mechanic’s lien can block them from selling said property until the lien is removed.
So, what is a mechanic’s lien, anyway? In this post, we will discuss why mechanic’s liens exist, how to set one in motion, how to avoid them in the first place, and dispel some myths about them, so you don't get side-tracked.
What Is a Mechanic’s Lien?
According to FindLaw, a mechanic’s lien is a “legal claim against a home or other property…[and] are typically used by subcontractors and suppliers when they haven’t received payment for improvements they made to a property.”
Investopedia expands on that definition by calling a mechanic’s lien a “guarantee of payment to builders, contractors, and construction firms that build or repair structures.” The site also notes that they can be used by suppliers of materials and subcontractors as well as to cover building repairs.
Mechanic’s liens may be called materialman’s liens, supplier’s liens, an artisan’s lien, or a design professional’s lien, depending on why someone initiates the lien.
The reason mechanic’s liens are available is that many construction companies, contractors, subs, and suppliers have had difficulties getting paid in the past. They needed a tool of enforcement. The issue with prompt payment is also why customers are asked for payment upfront.
Even when a property owner intends to ensure everyone gets paid, it can be difficult to identify everyone who worked on the project. Alternatively, a subcontractor or sub-subcontractor to know who the property owner is.
Like any property lien, a mechanic’s lien obligates the property owner, lender, and general contractor to pay the debt for improvements made to the property, even if they have no contract with that specific individual.
Mechanic’s liens also take the place of breach-of-contract lawsuits, which can get expensive.
Liens on real property can block a sale or lead to a foreclosure if the debt is not paid.
How to File a Mechanic’s Lien
The law regarding mechanic’s liens differs from state to state, so it's always a good idea to research your options. In general, the are four steps most states have in common for filing a mechanic’s lien:
- Provide Preliminary Notice. The notice tells the general contractor, the property owner, and/or the lender that the sub or supplier has begun work on their project. Preliminary notices clearly communicate your actions and lay the ground for claiming payment later.
- Send a Notice of Intent, a document notifying the GC, property owner, and lender that a mechanic’s lien will be filed if payment is not made. It’s a nudge to get payment without going forward with filing a lien.
- File the mechanic’s lien using the required lien claim form. Be accurate about the property, work performed, how much is owed, everything. File it with the county recorder’s office (or wherever state law decrees) in the county where the project and property are located.
- Release or enforce the lien. If you receive payment and the lien is satisfied, you need to cancel or release the lien to avoid penalties. If you do not receive payment, you can enforce the lien, which typically means a court action to foreclose on the property. Get a construction lawyer if it comes to this.
To reiterate, each state has different laws and requirements. Make sure you check before starting the process. Also, keep in mind that if there is a Deed of Trust on the property giving priority over a mechanic’s lien, you may not be able to enforce the lien completely.
Preserve Your Lien Rights
If you are a GC, sub, or supplier, make sure you retain your right to place a mechanic’s lien against a property if you can’t get paid.
- Research state laws. Mechanic's liens have strict requirements that differ by state. A tiny technical error can derail your chances of getting a lien. Be sure to check pre-lien requirements.
- File for the lien before the deadline. Most states require a mechanic's lien to be filed within a specific period after your last date of work. Also, if it comes to foreclosure, that must be performed within the time limit as well. You may need to coordinate with other agencies or individuals, so give yourself enough time to get it right.
- Preserve your statutory rights by recording your mechanic’s lien on time, following all the instructions to the letter, and making notes on your calendar about any deadlines such as dates by which you must foreclose.
Everything needs to be legal before you can get paid. Pay attention to the details; it’s just like reading blueprints.
How to Avoid a Mechanic’s Lien
If you are a property owner or GC in charge of paying subs and suppliers, you have several options to help you avoid being hit with a mechanic’s lien.
- Pay with joint checks. Make out your checks jointly to the general contractor and the sub or supplier. That way, the checks can only be cashed if all parties endorse them.
- Get a lien waiver. Ask the contractor to put a lien waiver clause in the construction contract. Then you aren’t held responsible for paying the bills belonging to the contractor. Check state law for details.
- Pay the subs and/or suppliers yourself. If you make payments directly to the subcontractors and suppliers instead of going through the GC, you can protect yourself from mechanic’s liens. There are caveats with this approach. You may then be considered an employer and responsible for withholding taxes, etc. Try options one and two first.
As much as possible, identify whom the general contractor has promised to pay, then confirm payment was made.
Property improvements and construction projects involve a lot of moving parts. As a property owner or GC, it’s up to you to understand who needs to be paid and when. If you are a sub or supplier, keep a mechanic’s lien in your toolbox for those times when, through intent or by accident, you do not receive payment for work done or materials supplied.
It’s never any fun to deal with legal stuff, but forewarned is forearmed. Pay your bills on time. Remind others of their obligations promptly. And keep track of all the details.