On Mechanics Liens
“Pay me or I’ll slap a lien on your property!” are ten little words that you don’t want to hear in connection with your remodeling or repair project. These are, indeed, fighting words generally uttered by an angry, frustrated contractor to a defensive homeowner as a result of what is usually a dispute over workmanship, money or both.
Unfortunately, these dreaded words don’t necessarily have to come only from one’s chosen contractor. They are a legitimate threat by nearly any person or company who can demonstrate that they supplied labor and/or material to improve or repair your home or other real property and that they have not received payment per the terms of the job’s contract. Their ability to do this arises out of a widely known, but poorly understood law called the Mechanics’ Lien Law. The law, which dates back to ancient Rome, ensures that those who work on your home get paid for their services or they have swift and sure legal recourse that ties up your home and property until they are paid or the lien is resolved.
Any homeowner in the United States who employs outside labor and material for the improvement or repair of his or her home is vulnerable to the Mechanics’ Lien Law. However, because this law is based on state statutes and civil codes, every state can present unique issues. Thus, we suggest that you consult a local attorney for specifics in your neck of the woods.
Your understanding of this complex law and the steps that you should follow in the process can prevent you from paying twice for any phase of your project, and safeguard you from the possibility of losing your house to a disgruntled creditor in a nasty foreclosure sale because a material or a service bill was not paid.
Though a general contractor is the individual most widely associated with the threat of a lien, the list of prospective lien claimants can include any material suppliers, such as those furnishing concrete, lumber, roofing, and so on; subcontractors such as electricians and plumbers; and even laborers whom your contractor employs to clean up your job.
As if that isn’t bad enough, even if you pay your contractor as agreed, you can still be hit with a Mechanics’ Lien if your contractor fails to pay a material supplier, subcontractor or an individual who furnished labor for your project. The same holds true if a subcontractor doesn’t pay his material supplier. For example, you hire Acme Construction Company to build an addition onto your home. Acme hires ABC Roofing Company to roof the addition. ABC buys the roofing material from XYZ Roofing Supply. You pay Acme, Acme pays ABC, but if ABC doesn’t pay XYZ you could end up paying for the roofing material twice!
Though there are many means of preventing a mechanics’ lien, in the final analysis, your best protection has more to do with your contractor’s ability, business experience and integrity – and your ability to get along with him – than any other aspect of the process. Your main focus should be on finding a good contractor – one who can be your ally instead of your enemy.
Unfortunately, a mechanic’s lien can rear its ugly head even with the best of contractors, thus, we suggest that you consider the following options as a means of protection should the unforeseen arise.
• Make a list and check it twice: It helps to know who is working your job so that you can ensure that they get paid. Subcontractors and material suppliers are required by law to supply the property owner with a Preliminary 20-Day Notice within 20 days from the time that they become involved with a project. Since many fail to do so, insist that your contractor supply you with a list of subs and suppliers.
• Pay as you go: One of the biggest mistakes that many people make is to pay huge sums of money in advance of work being performed. A system that offers the consumer better protection — more leverage and time to hear from a sub or supplier who didn’t get paid – is to make progress payments as a percentage of completion of the work.
• Lien releases are a must: There are two types of lien releases; conditional and unconditional or full releases. You should not make a payment to your general contractor unless you receive a “conditional lien release” in exchange. The conditional release will become unconditional when the check clears the bank. You can insist on an unconditional release with each payment if you are willing to provide the contractor with a certified or cashiers check. Before making final payment, require your general contractor to furnish unconditional lien releases from all subs and material suppliers.
• Issue joint checks: You can issue joint checks to the general contractor and a subcontractor or material supplier. This option is not particularly popular to either the homeowner or contractor due to some additional management on both sides. It can also be disadvantageous to the owner and contractor by diminishing the contractor’s monetary control over subs and suppliers. An alternative is to issue joint checks for services that put you at the greatest financial risk – big dollar items such as lumber, kitchen cabinets, roofing (when doing the entire house), or windows (when doing whole-house window replacement). Keep in mind that joint checks are NOT in lieu of obtaining lien releases.
• Third-party management: Many banks, escrow companies, construction management firms and consulting architects are set up to provide detailed project accounting and pay construction draws as an agent for the owner. This option is generally reserved for larger-than-average projects and comes with a hefty fee. Be prepared to drop an additional 5 to 10 percent of the total contract value for this service. There go the upgrade appliances.
• Payment and performance bond: You can require your contractor to supply you with a payment and performance bond that provides that the bonding company will either complete the project or pay damages up to the amount of the bond. In short, it’s an insurance policy that you pay for as part of the contract that usually tacks on about 1 to 5 percent of the contract sum. One caveat; not all contractors are bondable due to longevity in business or financial position. Or, the amount for which the contractor can be bonded is only a fraction of the value of the job. Don’t confuse a payment and performance bond with a “surety” bond, which is required of most contractors with an average value of five to ten thousand dollars.
• Mechanics’ Lien Release Bond: After a Mechanics’ Lien is recorded; a property owner, general contractor, or subcontractor may record a Mechanics’ Lien Release Bond, which frees the property of the Mechanics’ Lien. Once such a bond is recorded, the real property described in the bond is real released from the Mechanics’ Lien and, more importantly, any action to foreclose on the lien. The bond acts as a substitute for your home as the object to which the Mechanics’ Lien attaches. In other words, once you have a Mechanics’’ Lien Release Bond, the person chasing your for the money must now chase the bonding company.
The Mechanics’ Lien Law is complex. Honing design plans and picking appliances, cabinets and flooring are fun and necessary parts of planning a home improvement project. Choosing a good contractor and understanding the Mechanics’ Lien Law are necessary steps in protecting your piece of the Great American and avoiding home improvement chaos.
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