November 30, 2022

Protect Your Lien Rights as a Contractor - Construction Lien Basics

What is a construction lien?

First, a word of caution. Non of this should be taken as gospel. Please, please please, consult your attorneys on anything lien related. This is just here to point you in the right direction. Now, a construction lien is a legal right that allows a contractor (or supplier) to claim an interest in real property when they have not been fully paid for services rendered. A contractor or supplier can file a construction lien against the property owner if they haven’t been paid for their work. The laws and regulations surrounding construction liens vary from state to state, as do requirements for filing a lien, when to file and collecting on it. Some states allow mechanics liens, which are similar to construction liens but allow contractors to collect unpaid labor costs, while other states don’t recognize this type of lien at all. The first step you have to take before you actually file is a notice of lien must be sent, or an intent. Usually this is enough to get any property owner or bank that provided the construction funds that is involved in the financing to take notice, but if it doesn't you'll have to go through the entire process which can be a bit tricky if not done properly.

Non-payment and the power of a lien for construction contractors.

So, you haven't been paid huh? The property owner isn't responding or the general contractor is telling you that he also hasn't been paid? Non-payment is a huge issue in the construction industry, especially for contractors who are struggling to make ends meet. When a contractor is not paid, they can file a construction lien on the real property they worked on. A construction lien gives contractors and subcontractors a powerful tool to help them secure payment when they have not been paid by the general contractor, because if there is a lien on the property it stops the owner from selling (which happens often in commercial real estate,) refinancing, and in some cases cause foreclosure of the property. If the project is financed the bank also will not like the property encumbered because it's technically their asset. If the contractor files a lien, they will provide notice to the owner of the property that they were not paid properly. This serves as an incentive for the owner or general contractor to pay what is owed promptly, which is ultimately your last line of defense in a long long of options. The filing also prevents any sale or other transfer of ownership of the property until payment is made and it allows for the potential removal of encumbrances from title when payment is made in full. Ultimately, construction liens give contractors significant leverage over non-payment issues in order to receive compensation that is due, but often it's done wrong or not done at all.

Who can and cannot file a construction lien?

Any company or person who contributes labor or materials to the project, including contractors, subcontractors, and material suppliers can file a construction lien if they have not been paid for their services or materials. Usually you'll need to provide the legal description of the property, your contract with the contractor whos in charge of the project, the of the commencing work, who has interest in the property, and the county where the project is located, Property owners also have the right to file a lien if they are not satisfied with the workmanship, quality of the materials used, or other contractual obligations. In some states, however, suppliers who do not provide labor on the project cannot file a construction lien. Please check your local state law to see which category you are in. Additionally, some states may limit lien rights for certain types of contractors such as architects and engineers, or if the work performed was solely for maintenance of the property (Think Landscape Maintenance, Snow Removal, Window Cleaning, Etc.)

What is my time frame to lien a property?

The time frame to lien a property depends on the lien law of your state, the construction industry you're in, and any preliminary notice requirements. Generally, you must file a lien within a certain number after the completion of any actual work being complete. This doesn't include demobilization, site meetings without work being done, or maintenance of anything post contract. In most states, this is 90 days from completion or last furnishing of labor/materials. However, some states have shorter deadlines; for example, in California it's just 60 days. Before filing a lien, you may be required to serve a preliminary notice sent to the owner and a copy of the notice to the general contractor and in accordance with your construction contract. Depending on the state, this deadline can be as soon as 20 days from first providing labor/materials. It's important that you understand your state’s laws so that you don't miss any deadlines and protect your rights to get paid.

Can you lien without a change order?

Without a change order, it is possible for a contractor to place a lien on real property but it is much tougher. Again you need to refer to your local state laws surrounding this. If you have written authorization to perform the work or that work was performed, but not an actual signed change order as outlined in the contract documents and you a recorded lien you may be well within your rights, but outside of your contract rights. It's important to review both and be careful to fully understand the contract documents before you do anything outside of the original scope. Most contract documents have specific verbiage about who and how extra work is authorized to be completed. Typically it's a written directive on the GC's paperwork that explicitly says that a change order has been added to the contract. Do not do any work outside of your contract without getting these written approvals first.

Missed That Lien Deadline?

If you're a contractor who has missed the lien deadline, it's important to act quickly. If you miss this deadline, you won't be able to collect any money owed for your services or materials without a fight as you won't get help from the courts to collect on your work or materials. To protect yourself, it's important to send a notice as soon as possible or in some cases pre-lien the project to alert the courts that you have worked on this project and you're extending your rights to be paid. This will give the person or company who owes you money an opportunity to make payment before you file a lien. By sending a notice, you'll also ensure that if you do have to file a lien, it will be in compliance with all applicable laws and regulations. Doing so can help protect your rights and ensure that no one takes advantage of your situation. But if you've already missed your deadline your best course of action is most likely a lawsuit which is much more expensive and a longer process. Filing a lien is cheap insurance compared to a full blown lawsuit.

How to preserve your lien rights (or do the hard work up front.)

Honestly, the best way to preserve your lien rights is to do the hard work no one wants to do up front. It means that you read your contract and really understand it. That you have a absolutely solid accounts receivable process in place before doing any work so that you stay far ahead of any payment issues. That you know your lien rights, and you know when they are about to expire so you can execute on those if need be. This is cheap insurance, the last thing you want to do is get into a lawsuit with the owner and the person whos potentially going to give you more work in the future. In some cases it's a must to take action against the owner but it should be the last option. It is an important part of being a contractor. If you have done unpaid work, you have the right to file a mechanics lien against the property owner, sure, but having solid processes in place long before you get to that point is much better and will ensure that your cashflow is handled and in place for growth. By taking these steps, contractors can ensure that their lien rights are preserved and that they will be paid for any work they have done on a project.

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