If you have been working as a contractor for a while, you are probably no stranger to the numerous payment issues that plague the industry. Payment delays and even nonpayment are all too familiar possibilities contractors need to prepare for every time they take on a construction project.
Because of this, it is essential that you learn more about the tools you can use to protect your payment rights and ensure you are compensated for your hard work.
The most powerful tool at a contractor’s, subcontractor’s or material supplier’s disposal is the mechanics lien, a legal remedy designed to deal with the construction industry’s payment problems. Whether you are a small plumbing and HVAC company or a principal general contractor, you should be aware of how mechanics liens can protect you from getting stiffed.
What is it?
In simple terms, a mechanics lien is a legal claim that you, as a contractor, can file against a property you worked on to secure payment for your unpaid work.
A mechanics lien is an involuntary security interest. Unlike a home mortgage where you and the lender agree that the house will be used as collateral until the loan is paid, a mechanics lien can exist even without the consent of the property owner. And while there are many requirements and deadlines you need to meet when filing a mechanics lien, you can generally submit one without asking for the property owner’s permission.
The lien also attaches a public record to the property’s title. This makes it difficult for the property owner to sell the property or refinance it through a bank or any other lending institution. It gives the property owner an incentive to settle the payment issue and, eventually, release the lien.
All 50 states have laws, in one form or another, giving contractors, subcontractors and material suppliers the right to file a mechanics lien should they not receive compensation for labor or materials they furnished to improve a property. So, whether you worked on a building’s HVAC system or supplied the materials for a home’s plumbing, as long as you provided labor or supplies to improve a property, you have the right to file the lien.
Why should you file one?
Filing a mechanics lien is your best chance to get paid when you have exhausted all other avenues in receiving payment. While seeking to settle payment problems amicably should always be your first move, it is important that you still take the necessary steps to protect your right to file a lien.
Being a legal remedy, a mechanics lien is empowered by the law to compel payment. Not taking advantage of it will make collecting payment from clients much more difficult.
However, filing a mechanics lien does not guarantee you will receive payment from the property owner. The court must determine whether the requirements of the lien have been met. If so, then the court will order that the property be sold and the proceeds be used to pay the existing debts.
For this reason, you need to take note of the requirements and significant dates specified by the laws of your state to ensure that your mechanics lien is enforceable.
How do you file a mechanics lien?
Mechanics lien laws differ across 50 states, so you need to familiarize yourself with the requirements and deadlines specified in your state’s law. You will need to satisfy these requirements before you can file a lien.
It is important to note that not all stakeholders in a construction project can file a mechanics lien. The service provided by a contractor and materials provided by a supplier must go toward the improvement of a property for the right to file a lien to be preserved.
There are generally three steps you need to follow when filing a mechanics lien.
1. Send a preliminary notice. Also known as a construction notice or pre-lien notice, a preliminary notice is a legal document informing the party in charge of the project — typically the property owner, general contractor or the construction lender — of its obligation to pay contractors, subcontractors and suppliers.
Sending a preliminary notice is a requirement in nearly all 50 states. In states where one is indeed necessary, failure to submit one will make you lose your right to file a mechanics lien.
Even if your state’s law does not require serving a preliminary notice, it is still good practice to do so to inform the property owner of your participation in the project. Especially in large projects where some participants are not in direct contract with the primary contractor, a preliminary notice improves visibility and promotes open communication. In addition, it can make you stand out and be prioritized when billing time comes.
Securing your lien rights should be one of your top priorities as you enter into a construction contract. You should send the preliminary notice right when the project begins. It is common practice to send the preliminary notice within the first 10 to 30 days of a project.
2. Serve a notice of intent to lien. If you served a preliminary notice early on in the project, your next step is to send a notice of intent to lien to the relevant parties. It is a legal document announcing your intention to file a mechanics lien. In some cases, sending this notice is enough to compel your client to pay up.
Not all states require you to serve a notice of intent to lien. Only the following states specify the need to serve one:
• Arkansas: At least 10 days before filing the mechanics lien.
• Colorado: At least 10 days before filing the mechanics lien.
• Connecticut: Within 90 days after the last day of rendering service to the project.
• Illinois: Within 90 days after the last day of rendering service to the project.
• Missouri: At least 10 days before filing the mechanics lien.
• North Dakota: At least 10 days before filing the lien.
• Pennsylvania: At least 10 days before filing the lien.
• Wisconsin: At least 30 days before filing the lien.
• Wyoming: At least 20 days before filing the lien.
For states where the notice of intent to lien is optional, it is still highly recommended that contractors file one as an encouragement for clients to release payment.
3. File the mechanic’s lien. Every state specifies a strict timeline to follow when filing a mechanics lien. You need to submit your lien according to this timeline or risk losing your lien rights. In general, the deadline to file your mechanics lien depends on either the date of the project’s completion or the last day you provided labor or furnished materials.
Mechanics lien laws differ across the states. Some require a specific format, while others need you to use a state-provided form. All mechanics lien claims should be filed in the recorder’s office in the county where the construction job is located. Some states require specific mailing methods to deliver the mechanics lien while others permit you to send it by hand.
After recording the lien, you will need to send a copy of it to the parties affected by certified mail, electronic means or deliver it in person. If your client still fails to pay, you will then be free to enforce the lien via a foreclosure.
Protecting your lien rights should always be your top priority when providing your plumbing, heating, cooling and piping services. Knowing the tools that can help you get paid faster, such as the mechanics lien, is the first step in avoiding cash flow issues that can ultimately affect your bottom line.