Construction Business Management


Mechanic’s Liens

A lien is a security interest in property. For construction purposes, it is a legal means available to material suppliers, workers, subcontractors, and general contractors to encumber an owner's real estate when the owner does not pay as agreed. Lien laws vary widely from state to state, but a common element is that the terms of the lien statutes must be followed precisely if a lien is to be valid.

The complexity and rigidity of lien laws dictate that you employ a lawyer who regularly uses the lien statutes to place or remove a lien. You should research the lien laws of any state in which you build a project, and structure your payment procedures and documentation accordingly so that you will know how to protect yourself from liens placed on the owner's property by others, for which you may be responsible, and what you must do to protect your right to lien the owner's property if that should become necessary. Again, you should consider consulting with a construction lawyer.

In some states, the maximum amount for which a subcontractor may place a lien is the unpaid balance of the owner-contractor agreement. This is intended to protect the property owner (who may or may not be the project owner) from double payment; in other states, the owner of the property on which the project is built may be liable to lienors even if he has already paid the full contract amount to the contractor.

Some states' lien laws require the material supplier or contractor to give advance legal notice to the property owner that he is going to perform work on his property. Failure to do so may jeopardize the supplier’s right to lien the property. In still other states a lien in favor of the contractor or supplier is automatically placed on the property upon commencement of the work.

When placing a lien, be aware that your lien is usually secondary to any mortgages and other claims placed at an earlier date. A lien must be filed within the time limit specified in the lien statutes of the various states. Also beware of contract provisions that attempt to limit your right to file a lien.

A lien secures your interest for a period of time but further legal action is required to collect the amount owed—possibly an expensive proposition that you must weigh against the range of possible outcomes. Collection may also depend on other factors, including your ability to prove your claim in court and the value remaining in the property after claims having higher priority than yours are settled.

Bankruptcy by the property owner changes everything, however. In this bleak event, check with your construction attorney before placing a lien, terminating your agreement, or taking other actions against the owner to collect. Not only are your actions invalid in some instances, they may subject you to bankruptcy court penalties and attorney's fees.

The lack of uniformity in the lien statutes of the various states makes it difficult to put them into a neat, easy-to-use package. The above general considerations are meant to alert you to the significance of liens and prompt you to consult with your construction lawyer about the lien laws of any state you work in and the steps you need to take to protect your interests.

The author of this article, Nick Ganaway, was a successful general contractor for 25 years. He is a consultant in Atlanta, Georgia, for contractors and other small business owners. Nick has described how to set up and manage a construction business that is profitable, enjoyable, and enduring in his book, Construction Business Management: What Every Construction Contractor, Builder & Subcontractor Needs to Know.


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