Exercising Lien Rights
A common problem faced by contractors and subcontractors is getting paid for work performed on a construction project. This may be the result of the project owner withholding payments or in the case of a subcontractor, the general contractor refusing to issue payments. Whatever the reason, the contractor or subcontractor is faced with the dilemma of how to secure payment for the labor and/or materials that it provided. In seeking to collect money owed, the contractor or subcontractor must decide if and when to file a mechanics lien.1
Mechanics lien rights, which exist in some form in all 50 states, give a party an involuntary security interest in the property where the work was performed. The lien attaches to the property and creates a title defect for the property owner. In order to properly file a lien, the contractor or subcontractor must provide notice to the property owner prior to filing the lien. The notice informs the owner that a lien will be filed unless payment of overdue amounts has been made within a specified amount of time. A subcontractor can file a mechanics lien on the property even if the property owner has already issued payment to the general contractor.
A mechanics lien is one of the most powerful tools a contractor or subcontractor has to secure payment for work performed. While a contractor/subcontractor has the option of filing a lawsuit for breach of contract for unpaid work, that option can prove costly and may take a considerable amount of time to resolve. Thus, the mechanics lien may be a more efficient method of ensuring that the contractor or subcontractor’s invoices are paid.
In exercising lien rights, two factors often come into play. One is a concern about poisoning the relationship with the project owner, or in the case of the subcontractor, with the general contractor. Especially if one has a longstanding relationship with a project owner or general contractor, one does not want to unnecessarily create a hostile working environment or preclude the possibility of future business. One also has to be aware, however, that there are deadlines on when a contractor or subcontractor can file a lien on the property on which work has been performed. Although the deadline for filing a lien varies from state to state, the time to do so generally ranges from between 3 months until a year after the work on a project has been completed.2 Thus, if a project owner or general contractor is promising to pay, the contractor or subcontractor needs to be careful not to let the deadline for filing a mechanics lien expire based upon what may turn out to be empty promises.
A mechanics lien provides a contractor or subcontractor with important leverage to ensure payment for work performed. While one does not want to do so unnecessarily, if uncertainty exists as to whether you are going to get paid one should file a mechanics lien. As one subcontractor client often states, “‘if in doubt, lien it!”
Please contact GKG Law if you have construction related contract issues or litigation (or other contract issues). Brendan Collins may be reached by telephone at (202) 342-6793 or by email at bcollins@gkglaw.com; Kristine Little may be contacted at (202) 342-6751 or by email at klittle@gkglaw.com.
1 As discussed below, given the leverage afforded by a mechanics lien, it is important that the contractor or subcontractor not waive its lien rights in the construction contract.
2 A contractor or subcontractor can exercise its lien rights even if the property has been sold subsequent to the work being performed. In some states, however, such as Illinois, the deadline for filing mechanics liens are shorter under those circumstances. One should consult with an attorney to make sure that the contractor or subcontractor is not inadvertently waiving its lien rights.
