Buy Once, Pay Twice? No! The Purpose of Lien Waivers

Homeowners sometimes get blindsided when it turns out the GC they hired hasn’t paid his subs or materials suppliers. The lien waiver in your contract protects homeowners against this.

BY JIM CORY

If you live in Tampa and own a house, count your blessings that you never hired John Iacovino and Ike’s Roofing to replace your roof. If you had, you may have ended up like John Pfaff who paid Iacovino $8,800 to re-roof his home. The roof got replaced, only Iacovino, owner of Ike’s Roofing, never paid for the roofing materials he obtained on credit from Suncoast Roofing Supply. And because, after first sending a Notice to Owner, Suncoast Roofing Supply filed for a mechanic’s lien on the property, Pfaff is now obligated to pay for the $3,700 worth of materials the supplier furnished to do the job. According to the local sheriff’s office, Suncoast Roofing Supply is out about $150,000 and there are now 70 properties with liens on them, thanks to Iacovino, who has a history of drug and DUI arrests.

Secure the Receivable

What that lien could potentially mean for Pfaff is that Suncoast Roofing Supply can force the sale of his home at auction—foreclose on it—to satisfy the $3,700 it is owed.

More likely, however, is that when he goes to sell his property, or if he attempts to refinance it, the amount owed to Suncoast Roofing Supply will be paid from the proceeds of the transaction. A mechanics lien, in legalese, is designed to “secure the receivable.” Goods or services were rendered in good faith, and the lien, to ensure payment, becomes an encumbrance to the sale or transfer of the property.

The mechanics’ lien (standard usage is now ‘Mechanics Lien’) has been around since 1791 and was first conceived in modern form by Thomas Jefferson as a way to encourage construction on the nation’s capital. The concept owes its existence to the economics of the construction business. Mechanics liens were created as a unique legal remedy to protect contractors and those who supply them with labor (subcontractors), materials (supply yards), or specialized services, such as design (architects, etc.), from being stiffed. Wikipedia.com defines the mechanics lien as “a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property.”

On one level, a mechanics lien entitles a contractor to come after a homeowner who refuses to pay. But it also entitles subcontractors or suppliers to come after that homeowner, and specifically the property, should the general contractor fail to pay either party as agreed. Under the law—every state has one and every state’s will differ—the improved property becomes collateral for payment. “A mechanic’s lien has nothing to do with mechanics in the usual sense,” notes legal website Nolo.com. “It’s a legal claim against property being improved, and it can be filed by anyone who provides materials or does work on the project and doesn’t get paid. The property itself becomes responsible for the debt, and the people who are owed money can force its sale at auction if something isn’t worked out.” That is, the lien holder (say Suncoast Roofing Supply, in the example above) could sue for foreclosure to satisfy the debt. Even if sale of the house at auction is not in the picture, “you cannot sell or refinance your home without dealing with the mechanics lien,” notes Colorado law firm Robinson & Henry, P.C.

“Thus when a creditor is owed a few thousand dollars he may record a Mechanics’ Lien against real property which may have a value of hundreds of thousands of dollars. You can see the leverage he has in collecting this debt! This is a great tool for mechanics, tradesmen, subcontractors, labor providers, and material providers. But it must be used properly or the Mechanics’ Lien may be found invalid and thus unenforceable.”

Not That Complicated

If you’re a contractor who’s been stiffed, or a supplier left holding the bag, the idea of taking legal action around the concept of a mechanics lien might sound complicated and expensive. Actually, it isn’t at all hard to file a mechanics lien. In Pennsylvania, for instance, you could simply go to anscers.com, fill out the online forms, submit them, and allow the lien service to file for you. The cost: $290, though the price goes to $850 for a New Jersey residential lien. Generally, counties charge a filing fee of less than $50, but the cost of preparing a lien, which would require a lien service or a lawyer, would be anywhere from $250 to $500.

The key is to move quickly and not let the situation drag on. You snooze, you lose. In New York, for instance, “you must file your mechanic’s lien within four months of the time that you last provided labor or materials to the project,” according to the website for New York Mechanic’s Lien. The time frame will differ in every state. So, similarly, is the requirement that preliminary notice—Notice of Intent to File a Lien—must be given, or, in some states, you as a subcontractor or supplier forfeit your right to file a lien. (Click here for a state-by-state breakdown of requirements for preliminary notice.) So, for example, in Florida, to collect for the materials it supplied to John Iacovino and Ike’s Roofing, Suncoast Roofing Supply would have to have served John Pfaff with a Notice to Owner (NTO)—preferably by registered, Global Express Guaranteed, or certified mail— “within 45 days from first furnishing services or materials.” That’s not a huge amount of time. Note that, according to the site: “Failure to
provide the notice within the statutorily mandated time frame is fatal to the lien claim in Florida.” The lien itself would need to be filed with 90 days of the date the materials were supplied and must be notarized to be valid.

In the state of California, mechanic’s liens are a constitutional right guaranteed to contractors by the California Constitution. This right has been implemented in detail by statutes enacted by the California State Legislature.

Lien Waivers

What Pfaff could have done to save himself the aggravation and expense of the mechanics lien filed by Suncoast Roofing Supply was to demand a waiver of liens, or a subcontractor lien waiver, in the contract he signed with Ike’s Roofing, if in fact he signed one. “With a lien waiver, when the project is successfully completed, both parties sign off and state that the contract obligations have been met, including the general contractor [in this case, Iacovino] making all necessary payments to materials suppliers, subcontractors or vendors,” advises the Angie’s List review site. “If the general contractor doesn’t agree to sign off on the subcontractor lien waiver, you can withhold payment until he or she has proved they’ve paid their suppliers or subcontractors.”

As for Pfaff, he can take some small amount of comfort in knowing that mechanics lien claims … very rarely result in a piece of property getting put up for auction and sold. As in, almost never. According to the source, and based on a survey of mechanics lien filings from 2011, 64 percent of lien claims were paid within three months, “without any additional legal or collection efforts whatsoever.” Which means that the mechanics lien functioned as Jefferson intended. So Pfaff will almost certainly keep his house. But unfortunately for him, he paid 50 percent more for that home’s roof than he ever thought he would have to.

 

ABOUT THE AUTHOR

Philadelphia-based freelance writer Jim Cory is a senior contributing editor to Professional Remodeler who specializes in covering the remodeling and home improvement industry. Reach him at coryjim@earthlink.net.

 

This article originally appeared on Professional Remodeler’s website. To read the original story, click here.

 

What’s a Defective (or Improper) Mechanic’s Lien, and How Does it Impact the Construction Project, by Sergey Garanyants

In certain instances, a mechanic’s lien filed by a contractor, subcontractor or material supplier can become either “improper” or “invalid” under relevant lien statutes, or “defective” on its face. In such cases, the owner is entitled to remove and/or discharge the mechanic’s lien so that the property is no longer burdened by it.

Many states provide for a different process to properly record a lien against a residential property, as compared to a commercial property. Nevertheless, the process of discharging an improper or invalid lien is largely the same.

Some of the most common situations that give rise to a defective lien occur when: 1) the lien claim is without basis, 2) the amount of lien claim is excessive or misstated, 3) filing of the lien claim was not performed in accordance with the relevant lien law statute, or 4) filing of the lien claim was not performed in time prescribed by the relevant lien law statute. In such situations, lien claimants generally forfeit their lien rights, and, in some instances may forfeit additional or subsequent remedies.

Moreover, many states mechanic’s/construction lien statutes punish contractors, subcontractors and suppliers who willfully fail to remove or release such improper lien claims, especially, if the notice of invalid lien was given by a party challenging its validity.

If it has been determined that your lien claim is invalid or improper, you must first provide the appropriate notice to the property owner challenging the validity of your lien and, in some situations, to the general contractor. Once such notice is given, lien claimants generally are allowed some period of time to discharge or release their lien claims by making appropriate filing with the state’s real estate records. The period of time to release an improper lien varies depending on the state. If the improper lien was not released, a property owner may file a complaint with the court in the state where the lien was recorded. Many state statutes will allow property owners, who were forced to pursue court action to remove or release an improper lien, to recover court costs and legal fees incurred in pursuing such action.

Source: “Removing Invalid Construction Lien”, the National Lien law Review, September 15, 2016, http://www.natlawreview.com/article/removing-invalid-construction-lien, Copyright © 2016, Stark & Stark.

Sergey Garanyants runs CMA’s Construction Forms Filing Services, helping CMA members in the construction industry protect their lien rights in all 50 U.S. states. For information about CMA’s construction forms filing services, visit http://creditmanagementassociation.org/services/construction-forms-filing/

Why Are Lien Waivers Important?, by Sergey Garanyants

Lien waivers and releases, which were once just a way for owners and general contractors to make sure they wouldn’t have to pay for the same work or material twice, are now became something much more broader affecting much more than just a mere mechanic’s lien rights.

Mechanic’s liens (a.k.a. construction liens) are designed to provide additional protection and way to ensure payment for contractors, subcontractors or suppliers for the work provided or material supplied. A mechanic’s lien essentially gives the person or company an interest in the property equal to the unpaid amount, affecting the owner’s ability to convey or transfer the property free and clear without paying the amount owed. While such laws aim to protect contractors and subcontractors, it also creates a risk for property owners and real estate developers of paying for the same work or material twice. In an attempt to protect themselves, developers, property owners and contractors are now increasingly insistent on the practice of obtaining a signed waiver or release of lien rights to the extent actually paid, as condition to furnish any payments to contractors and subcontractors working on the project. However, signing such waivers may directly or indirectly cause for contractors and subcontractors to “sign away” many of their rights to dispute contractual and related project issues.

Modern-day construction lien waivers and releases became much broader than simply addressing mechanic’s liens. In some instances, signing a release not only waives the right to file a mechanic’s lien, but also waives the ability to file claims for any other related issues, such as breach of obligations by a party to a contract, delays caused by mismanagement of the project, or additional expenses incurred. Contractors, subcontractors and suppliers should remember to preserve their own rights when executing any construction waivers or releases. For example, if a subcontractor is concerned about underpayment, it could refuse to accept payment until the general contractor has been paid in full, or the subcontractor could accept payment, but note on the release that it was reserving the right to make certain additional claims.

Many projects usually only have one general contractor, and each general contractor knows all of its subcontractors or suppliers, each of whom may be eligible to file a mechanic’s lien. However, many state construction lien laws are now allowing tier 2 and tier 3 subcontractors, including suppliers and others with whom the general contractor has no direct relationship, to file mechanic’s liens, thus creating a much larger and potentially unknown number of parties that are able to create liability on the project. That is why many general contractors require their subcontractors to acquire signed lien releases from all other subcontractors and suppliers on a periodic basis before issuing any payments. One of most common issues challenging the ability to secure signed lien releases on a monthly basis is the struggle of many companies to maintain enough cash flow to make all of their payment obligations in time. It can be easy for companies to find themselves in a difficult situation in which they can’t afford to pay their subcontractors or suppliers right away, and, in the same time, they can’t obtain payment from the general contractor or the owner without first providing a signed release stating in turn that they have already paid everyone.

It is vital that general contractors and subcontractors review the proposed contractual language carefully in order to ensure the appropriate cash flow and lines of credit, so they are able to fulfill their payment obligation when required. Carefully review the exact terms of any release or waiver you are expected to sign. Exercise care before accepting any payment, particularly if the payment is not for the full amount owed. Most importantly, always remember that lien waivers are separate obligations, and no matter how unfair the underlying result may be, courts are very likely to uphold provisions of signed waiver or release.

Source: Joshua R. Lorenz: “Mechanic’s Lien Waivers Place Burden on Contractors and Subcontractors; Construction Law”, the Legal Intelligencer (Online), September 6, 2016; Copyright 2016 ALM Media Properties, LLC.

Sergey Garanyants runs CMA’s Construction Forms Filing Services, helping CMA members in the construction industry protect their lien rights in all 50 U.S. states. For information about CMA’s construction forms filing services, visit http://creditmanagementassociation.org/services/construction-forms-filing/