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When owners don't pay contractors or other skilled laborers who have completed construction work on a property, a mechanic's lien is a legal document that can be filed to collect the payment via the property. It goes on public record and ensures that all future buyers and lenders will know that the homeowner has outstanding debts to people who worked on the property.
But more than that, a lien is a serious precursor to foreclosing on a property. It demands that a property owner negotiate an amicable resolution, dispute the lien, or face foreclosure so the creditor can force a sale and get their money from the proceeds.
If the owner of a property attempts to sell the property while a lien is valid, the title search will generally locate the lien and any prospective buyer or refinance lender will require it be paid off before they close a deal. This is what stops unscrupulous property owners from getting a bunch of capital improvements done, not paying for them, and quickly selling the property for a profit without making the workers whole.
Who can file a mechanic's lien?
A mechanic's lien grants particular rights to a contractor or supplier to file a legal claim on property where they've provided labor or materials for a contracted project and have not been paid for it. If the lien goes through, the contractor or supplier has a legal claim on the property, meaning they become a creditor. The property is the asset.
This type of lien is also known as a construction lien, which is a bit more illustrative of its purview. Three type of professionals can file a mechanic's lien:
- A general contractor who was responsible for an entire project.
- A subcontractor who only performed one service; i.e., electrical work or swimming pool installation.
- A materials supplier who provided goods used in a construction project, including specially fabricated materials (something made custom for one project that can't be used in another).
If any of these types of professionals performed their role under contract, can prove it was completed satisfactorily, and were not paid for their work, their claim on the property is entered into public record. The property is the asset that secures their debt. They become a creditor, with various ways of collecting payment from the property.
What are the rules for liens?
Mechanic's liens fall under the umbrella category of statutory liens. The specific way they are filed and the procedural rules vary according to each state, but their broad purpose and outcome is consistent: To ensure people get paid for work they were legally contracted to do and to make the process of collecting debts easier for the unpaid party than if they had to sue.
Broad rules that apply to most liens across all states
Before filing, the person seeking payment needs to file a preliminary notice to any parties who will be affected. This includes not just the property owners but other contractors involved in the project, as well as the lenders that financed it. This gives everyone time to work out the issue before it becomes a legal one.
Liens can only cover the hard costs for an unpaid job -- materials, labor, and equipment. Typically a lien can't ask for administrative costs, legal fees, or punitive damages.
Property owners have the opportunity to contest a lien if they disagree that the work was completed properly or that the claimant's materials were actually used in a project.
If a fraudulent lien (one that's not just a dispute between owner and contractor but a "willful exaggeration" on the contractor's part) is filed, property owners can protect themselves legally through filing a suit to "vacate" the lien, and possibly by counterfiling for damages (depending on the state). In states that have harsher penalties, the court may actually file criminal charges against the fraudulent lienor and/or award punitive damages to the property owner.
There are strict time windows for filing liens and for every additional step in the procedure, including foreclosure and lien expiry. These windows vary from state to state, but they exist to ensure that nonpayment issues don't drag out forever. A contractor or supplier can't come back and file long after a project has ended and the property has changed ownership, and a property owner can't drag out the negotiating process forever once a lien has been filed. The intention is to force a resolution before it gets to the point of foreclosure.
Liens may expire within six months to a year, but they linger on credit reports and other records for years after -- especially if they are unpaid.
Suppliers need to be able to prove that the materials they are demanding payment for were in fact delivered to the project -- at which point, if a developer, contractor, or owner wishes to contest and say the materials were not used, they need to prove that those materials are still on the job site or property, are unused, and can go back to the supplier.
One very common way for property owners, contractors, developers, and other clients to ensure that a lien will not be filed is to require the subcontractor or supplier to waive lien rights upon payment. This stipulation is often put into contracts: "A supplier's lien rights are revoked upon receipt of agreed payment."
However, no states allow lien rights to be revoked in advance of delivery. In other words, if someone offers to buy X amount of specialty materials from a material supplier but then puts in the sale contract that the supplier must waive lien rights to win the bid, this isn't enforceable. It is only enforceable as a clause that states that lien rights will be revoked after payment for the supply delivery is finalized.
How do liens affect property owners?
Liens affect property owners immediately and -- if not addressed -- can continue to affect them long-term. If you as an owner feel that a lien was filed erroneously or frivolously, take immediate steps to address it with the person who filed it. If that doesn't work, you may need to bring in a lawyer or contest the filing yourself. If ignored, here are some of the most common consequences:
- Foreclosure is the most serious consequence of an unpaid mechanic's lien.
- If a property owner is in the midst of another project when a lien is filed, the lender may freeze financing for the current project.
- For as long as the lien is valid, any attempts to sell a property or refinance a loan will pull up the lien -- and most likely halt the transaction.
- An unpaid lien remains on your credit record for up to 10 years.
How do prospective buyers learn about liens on a property?
One of the main purposes of a title search is to look through county property records for unpaid liens on a property. This step should always be taken before closing on a property. A further step that cautious buyers take is to get title insurance on the property...just in case a creditor with a grudge slipped through the initial search.
A lien can be valid even when the property owner has paid in full
This is particularly important to note, for property owners and tradespeople alike: A lien can be filed by a subcontractor or supplier for work they completed under a general contractor and were not paid for -- even if the property owner most likely knew nothing about it. Suppliers and subcontractors will often use a lien as an extra measure in trying to collect payment from a general contractor. Putting a lien on property forces owners to, ahem, lean on the general contractor to get their books squared away.
Mechanic's liens are an unpleasant reality of the construction industry
Even if you don't have any experience with or desire to be in the construction industry, as a property owner, you need to be familiar with mechanic's liens. Realize that they can be filed even for relatively small outstanding bills and that they are a laborer's best way to get paid if normal billing doesn't work. Stay on top of your bills so you don't accidentally get hit with a lien, and know how to protect yourself from an inaccurate one.
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