Should you file a mechanics lien claim? 3 things to consider
Thursday, May 07, 2015
Those who furnish labor or materials to a construction project have the right to file a mechanics lien claim in the event of nonpayment. This is a remedy first established in America by founding fathers Thomas Jefferson and James Madison to protect suppliers and contractors against a project's financial risks, and the remedy has persisted throughout the nation's history with laws in every state.
Those unpaid on a construction project, therefore, may find themselves contemplating the use of the mechanics lien remedy. This article will explore some things to consider when deciding whether or not to use this remedy.
1. Is the mechanics lien remedy available?
While the mechanics lien remedy is established to protect contractors and suppliers against nonpayment, there are many more nuances and qualifications aside from simply being unpaid. Here are some factors that will determine whether the lien right is even an available option:
What work or materials were provided? The lien right is (largely) available on construction and improvement projects. Was the project and the work of a type contemplated by the state's lien laws?
Did notice get sent? Most states will require contractors or suppliers to send a "preliminary notice" at the start of the project. If the notice was not sent, the lien rights were forfeited. Determine whether a notice was required and if it was sent accordingly.
Is there time to file? Mechanic lien claims must always be filed within a certain (rather short) period of time from when materials and labor were last furnished. Determine whether there is time left to file.
All of these factors vary state by state and project by project. Consider consulting a 50-state guide to the mechanics lien laws to answer some of these key questions. If the mechanics lien remedy is available, the next step is to determine whether filing will make any difference.
2. Will filing the mechanics lien make a difference?
Discussion of this point will start with a small disclaimer: Filing a mechanics lien claim is almost always going to make some difference or impact.
When parties have a payment dispute, the remedy typically available is to file a lawsuit and then to fight — through months and thousands of dollars in litigation — to get to a judgment. The judgment will be "unsecured," which is to say that there will be nothing guaranteeing that the claim is paid.
Mechanic lien filings, however, actually create a secured debt, and the secured debt is created right away — before the need for any litigation. This is a much more desirable position for a creditor. Just ask banks, which universally refuse to give unsecured loans.
Nevertheless, there are some desperate situations that will hardly be impacted by a mechanics lien filing. Some states give lenders priority over lien claimants, and if a property is overleveraged, this circumstance can present dim prospects. Likewise, if there aren't many parties involved with a project, and the project goes into bankruptcy, this may prove problematic.
It's a good idea, therefore, to understand the complete financial situation around a project property. It may be a rare situation in which the lien will not make a difference. Nevertheless, even in these circumstances, filing a mechanics lien is likely prudent. The cost is so low, and the potential upside so big.
If a party has a mechanics lien right available, the only real consideration is the relationship consequences from a filing, discussed in the next point.
3. What will be the relationship consequences from a lien filing?
Many companies will consider the relationship consequences of filing a mechanics lien claim, and appropriately so. While mechanics lien claims are filed every day and are rather commonplace in the construction industry, they are still adversarial instruments and will sometimes ruffle feathers.
In fact, since the lien instrument can carry so much relationship baggage, some will push companies around financially and bring them to the brink of a lien filing only to threaten them with "ruining the relationship" if they proceed to file.
Filing a mechanics lien can not only negatively impact industry relationships with the nonpaying party, but also with the owner/developers, general contractors and others affected by the filing on the project.
For this reason, it's important to not only keep relationship consequences in mind, but also to leverage the mechanics lien right in favor of making relationships stronger.
In most instances, relationships are soured when lien claims get filed out of nowhere. Owners, developers, lenders and GCs usually are highly motivated to get everyone paid and avoid lien claims, and bad lien circumstances usually arise when something unsuspected goes awry.
Those with lien rights can actually improve their relationships by being transparent and communicating the nonpayment and lien situation to the appropriate parties before filing. Something like this is commonly done with a notice of intent to lien document.
When thoughtfully used, the mechanics lien remedy can eliminate all major receivables risks and problems. Determining whether to pull the trigger with a lien filing, however, can be a complicated decision. Companies must know that the lien right exists, must understand how it will help them, and ultimately, must prepare and take steps to avoid any negative impact to industry relationships.
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