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Mechanic’s Lien Law |
This definition comes from Black’s Law Dictionary:
A Mechanic’s Lien is a claim created by law for the purpose of securing priority of the payment of the price of value of work performed and of materials furnished in erecting or repairing a building or other structure and as such attaches to the building as well as to the land.
In other words, a mechanic’s lien is a claim against real property created by having performed work or services or having provided material there. It’s a priority claim, and this is very important. The law says that someone has given value to your home, and that it is unfair for that person to come after someone else who might claim your home as an asset, since he’s the one that created the asset for you. The actual physical builder—the one who lays the bricks, frames the roof, installs the flooring—comes first. Without him there would be no home to borrow money on. That’s why the mechanics have a higher priority than most other claims.
The mechanic’s lien laws vary from state to state, but the players are usually the same, and it is important to know them. They are:
(1) The owner
(2) The general contractor
(3) The subcontractors, including:
(a) Mechanics: plumbers, electricians, drywall men, carpenters, etc.
(b) Materialmen: the companies and individuals who supply material such as drywall, lumber, cinderblocks, etc. (Under the law, there is no distinction between mechanics and materialmen.)
(4) The lender
(5) The Internal Revenue Service (to some extent).
The general contractor, the materialmen, and a mechanic who is a subcontractor can file liens on your property. Judgment creditors and the IRS can also file a lien on your house, but they will not have the potential priority that a mechanic has.
What about an employee of a contractor or subcontractor who has worked on your house and is due money from the contractors or subcontractors? Can he file a lien on your house? No. Employees cannot file a lien on a house. Contractors and subcontractors can, but not their employees.
If you are an employee of a contractor, your claim for nonpayment is against the contractor. This is important, because there will be times when there is a dispute between the contractor and his employees, and frequently an employee will call you and say: “I’m John. I worked on your house and I haven’t been paid in a month. So I’m going to file a lien against your property.” If so, you need not worry, because employees have no lien rights.
There are two types of liens: voluntary and involuntary. A voluntary lien is created when you borrow money to build or to buy your house. You give the lender a voluntary lien on your property.
There are three types of involuntary liens.
(1) If you don’t pay your taxes to any jurisdiction, you will have a lien very quickly. It could come from the federal government, the state government or the city government.
(2) If you are sued for something concerning your business or personal affairs, and somebody obtains a judgment against you, that judgment has nothing to do with your house. But if you do not pay up, within a very short period of time that judgment can be filed in the county where you live, and if it is a personal judgment against you the judgment becomes attached to your house.
(3) Another involuntary lien arises when a mechanic or materialman who performs work or provides services or material is not paid and files a lien.
Generally speaking, the lien with the highest priority (the highest claim to the property) is the first deed of trust (or the mortgage). It follows that the second lien filed against your property is called the second trust and right on down the line. It also follows that the higher your lien priority the greater likelihood that you will be paid the money due you if your property has to be sold.
Remember, a lien may be voluntary or involuntary. Accordingly, if the IRS filed a lien against your property, their lien priority would be based on their place in line.
Here’s how it works. You borrow 
100,000 to build your home. The lender files his lien, which is the first trust. Then you run short of money and borrow 10,000 from a friend, who now has a second trust. You forget to pay your taxes, and the IRS files a lien on your property. It has a third trust. You don’t pay the plumber and he files a lien. His lien is in fourth position. It is easy to determine lien priorities: first come, first served.
There is, however, one very important exception applicable in some states, although it is not as important to you as it is to the lender. This exception is called “piercing the trust.” If a mechanic files a lien and it ultimately proves to be valid, that lien will jump ahead of the construction loan first deed of trust. It’s one of the few exceptions to the priority rule.
The IRS must stand in line like everybody else, but in a little more than half the states in the country a mechanic can jump ahead in front of the line. As a result, when a lender in some states advances money to you on your construction loan, he runs the risk that his money will not be in a first trust position. If somebody does 10,000 worth of work on your property and you don’t pay him, and he files a lien and ultimately sues and wins, he can foreclose on your property. The first 10,000 from the sale of your property will go to the lien holder. In states that do permit piercing the trust, the lender is now in second position. This is done to protect the contractors. In states where piercing the trust is not allowed, when a contractor files a lien it is subordinate to the total amount of the loan. So if you are a lender in a state that permits piercing the trust, you could be put in a subordinate position every time a contractor files a lien. Thus, in these states, every time a lender advances money he requires that the lawyer who does the title work go to the courthouse and check the title to see that a lien has not been filed. This is called a title bringdown.
Only when the lawyer notifies the lender in writing that there are no liens will the lender advance the money. Usually the lender will also require that you secure a lien waiver from the contractor, documenting the fact that you have paid him and that he has paid his subcontractors. Requiring a lien waiver and a title bringdown is double coverage. If you do not have a lender, you should go through the same process to protect yourself.
In piercing-the-trust states, lenders usually require affirmative mechanic’s lien coverage (AMLC). It protects the lender’s position in the event a valid lien is filed and attached to your property.
Only the lender is protected by an affirmative mechanic lien coverage. There is no insurance that will protect you from somebody filing a lien against you. You must protect yourself.
Here is how a mechanic’s lien is usually filed. The creditor, who could be the general contractor, a materialman, or a mechanic, has a certain number of days (generally 90) after the performance of the work or the completion of the home (whichever occurs later) in which to file a lien. He fills out a document that is very technical and records it at the courthouse.
The creditor also files a lawsuit. He has a certain period of time after he files his lien to file the suit, and here is where most liens die. In the heat of an argument the contractor goes down to the courthouse and files a lien. But after thinking it over he says: “Hell. I’m not going to pay a lawyer 100 or 200 an hour to sue some guy for 1200.” So even if you owe him money, he will very likely never get around to filing the lawsuit. And after the prescribed time for filing has lapsed, if he has not filed the lawsuit, it lapses by law. It will not necessarily eliminate the claim against you, but does extinguish his lien on your property.
This is how it works in most states. The exception is in states where the lien and lawsuit could pierce the trust, threatening the lender’s first position. In those states the lender sometimes will not advance any more money until the matter is resolved. Resolution for the lender could come either by settlement of the matter between borrower and contractor or the borrower securing a bond protecting the lender if the lien is held valid. With this bond the lender is assured and can continue to advance funds to the borrower from the loan. Check you state law to see if a mechanic’s lien can pierce a trust. Then, check the time frames in your state for filing a lien and for filing suit to perfect the lien.
Since liens are potentially foreboding, the system has developed an orderly process for dealing with liens and potential liens. It is called a lien waiver. When a mechanic performs work on your home, he has the right to file a lien until he has been paid. When he is paid he then waives this right.
Each time you pay a mechanic you should have him sign a lien waiver for the work he has done and for the amount he has been paid. This lien waiver is added protection for you, as well as assurance for your lender that you have paid the mechanic.
Suppose you pay the general contractor, but the general doesn’t pay the subcontractor. This could cause problems. To be super careful, you should require that your contractor provide you with a lien waiver from the subcontractor to extinguish any lien rights on your property.
Even if you pay all of your bills, if you are not careful, you could still end up with a valid lien filed against you. The potential problem comes from the owner/contractor/subcontractor relationship. Keep in mind that anyone who contracts with the owner, regardless of what he does, is a general contractor. In the same way, anyone who contracts with the contractor to do work for the owner is a subcontractor.
Suppose you contract with a general contractor to build your house. He then hires a plumber to install the plumbing. The plumber plumbs your house. The general contractor submits a 2,500 bill to you for the plumbing. You inspect the plumbing and pay him 2,500. The general contractor gives you his lien waiver for 2,500 for the plumbing. What happens if the general contractor does not pay the plumber and the plumber files a valid lien?
You are not liable unless you had notice or knowledge that the plumber had not been paid by the general contractor when you paid him. If you did have knowledge, either actual or constructive, that the plumber had not been paid, and you paid the general contractor despite this knowledge, then the plumber’s lien would prevail. If the plumber’s lien prevailed and the general contractor were able to get by without making the payment good, you would end up having to pay twice for the plumbing.
The key is not to pay the general contractor when you have actual or constructive notice that he owes money to a subcontractor. What is actual notice? When the plumber, whom you have never met, calls you at night and says, “I haven’t been paid for plumbing your house,” that’s actual notice. Do not pay when such actual notice exists.
What is constructive notice? When the plumber files a lien on your property, that’s constructive notice. So before you pay a general contractor, check the courthouse to see that no liens have been filed. If no liens have been filed and you have no reason to think that the plumber has not been paid, then you can pay the general contractor with some confidence. In a trust-piercing state, the lender will go through the same process to protect his first trust state.
There is another point to remember. Anyone can file a lien. But if the contractor files a lien for improper reasons, it is slander of title, and he could be sued for hundreds of thousands of dollars. If you are going to file a lien, the law says you must be positive you have a valid claim. You do not have to win, but you cannot go around arbitrarily filing liens and suing people merely as a way of threatening them.
First of all, always pay by check. Identify what you are paying for on the check. When you pay, ask for a lien waiver, a waiver that surrenders the right to file a lien based on the amount of the check you are giving the recipient. If you pay the contractor 2500 and he has done 2500 worth of work, and you have a check, it is evidence of payment. So it is highly unlikely that he will file a lien. Every time you make a payment, ask the contractor to sign a lien waiver for the amount of the work that he has done since the last payment, and require lien waivers from the subcontractors if there are any. Your lawyer can provide you with all the lien waiver forms you need.
There are two types of lien waivers: the short form and the long form. There are legal differences between these two that are not important to you. The main practical difference is that the long form has a place for all the contractors and subcontractors to sign while the short form is usually for the contractor alone. With the long form you can end up with one form and fifty names; with the short form, you might end up with fifty forms. The problem with the long form is that you might have forty-five signatures and then lose the document. With each additional name on the long form the document becomes more critical. The loss of one short form waiver is only that: one missing waiver. Hence we recommend dealing with separate lien waivers for each contractor.
Suppose you owe your general contractor 2500 for plumbing. Suppose you hear that the plumber is owed 2000 by the general contractor. The general contractor asks for his money, and you say that you will not pay him until he provides proof (lien waiver) that the plumber (subcontractor) has been paid. He replies he cannot pay the plumber until you pay him. This is not an infrequent experience. The general contractor also says that he cannot continue without payment.
Is your project now dead in the water? Not at all. Write a check for 2000 payable to both the general contractor and plumber and write another for 500 payable to the general contractor alone. Ask for lien waivers from both. Now everybody is paid, you have your lien waivers, and the project can proceed. Caution: Do not write a 2000 check made out only to the plumber. There may be a genuine dispute between the general contractor and the plumber. Your contract is with the general contractor. If you pay only the plumber, you could lose. So pay them both with one check, and let them resolve it.