What is a construction lien? Learn about these legal claims if you work in construction or you’re having a property built.
- What liens are
- What they’re used for
- Who can file them, how to file one
- How to avoid having one filed against you
What Is a Construction Lien? A Definition
A construction lien is a legal claim against a debtor’s property. Specifically, it gives the creditor the right to retain the property as collateral for the money owed to them. Note that this makes the title to the property unclear. This, in turn, makes it difficult to refinance or sell the property. Why? Because lenders and buyers are reluctant to take on a property encumbered by a lien.
In the construction industry, a claim of lien is often known as a mechanic’s lien. The term is borrowed from the practice of auto mechanics filing liens against the car titles of vehicle owners who fail to pay for services. Mechanic’s liens are often filed by general contractors, subcontractors or material suppliers when the property owner or another party involved in a construction project fails to pay them on time.
In general, mechanic’s liens only may be filed on private construction projects. Note that for public projects and other projects guaranteed by surety bonds, the equivalent recourse is called a bond claim.
Preliminary Notice, Notice of Intent to Lien and Mechanic’s Lien
A mechanic’s lien is normally filed only after sending a pair of documents that come earlier in the lien process:
- Preliminary notice
- Notice of intent to lien
A preliminary notice is sent by a contractor or supplier to participants of a construction project. Sent early in the project, the notice advises them that in the event of nonpayment, the sender reserves the right to claim a lien. This is a standard operating procedure that protects the right of the sender to declare a lien. Moreover, it is intended to encourage timely payment and doesn’t imply that there has been any actual payment delinquency.
A notice of intent to lien is sent after a party has defaulted on a payment obligation but before filing an actual lien. It’s a warning that a lien will be declared if payment isn’t forthcoming.
What Is a Lien Waiver?
A document closely related to a lien is a lien waiver. Basically, it acknowledges payment and gives up future lien rights claims. Lien waivers can be granted for payments in progress. In such a case, they’d apply to pending change orders (alterations to the original scope of a contract) or withheld retainage (payment withheld until project completion). They also can be granted for final payments, in which case they apply to lien rights on all remaining payments.
Both progress and final lien waivers may be either conditional upon payment being received or unconditional and valid upon being signed. Unconditional lien waivers are valid even if a check is returned or payment is stopped, so preferably, they are avoided until all work is done and checks have cleared.
What Is a Lien Release?
A lien release is a form filed with the county recorder’s office removing a claim to a lien. It must be filed after the debt which prompted the lien to be filed has been repaid in full.
Note that lien release requirements vary by state, and some states specify deadlines requiring lien releases to be filed within a set time frame.
How Does a Lien Work?
When a mechanic’s lien is filed, the party filing the lien, known as the lienholder, is claiming what is called a security interest on the title to property. This means that the lienholder claims a legal right to use the property as collateral to pay for the debt which is owed.
Because of this claim, a lien puts the ownership of the property title in doubt, a condition known as having a cloud on the title. When a property has a clouded title, no one has an undisputed claim to title ownership, called a clear title.
A clouded title makes it difficult to refinance or sell a property because lenders and buyers face the risk that the lienholder may claim the right to sell the property to pay off debt. Before the property can be refinanced or sold, the lien must be released to restore a clear title to the property owner.
What Are Construction Liens Used For?
Putting a construction lien on property provides a strong tool for compelling debt collection. It promotes debt collection by putting significant pressure on several key parties involved in real estate projects:
- Property owners
- General contractors
Property owners have a strong incentive to get a lien removed. They can’t easily refinance or sell a property with a lien on it. A lien further harms their credit score making it more difficult to obtain any type of financing.
Lenders share property owners’ aversions to liens. A lien claim can conflict with a lender’s own security interest in a property, because in some cases a lien claim takes priority over other security interests. In some states, the law makes lenders liable for protecting properties from liens by ensuring that all debts to contractors and suppliers are being paid.
Likewise, general contractors may be bound by construction contracts to protect property owners against liens. This gives general contractors an incentive to avoid the potential expenses liens can incur for them.
Because liens can be costly for everyone involved in a construction project, they serve as a powerful motivation for timely payments. You don’t even need to file an actual mechanic’s lien to benefit from the leverage a lien gives you. A preliminary notice or notice of intent to lien can be sufficient to compel payment by invoking the implied to explicit threat of a lien. No one wants to face a lien.
Who Can File a Construction Lien?
Construction liens can be filed by parties who are owed money for permanent improvements on private construction projects and haven’t been paid on time, including:
- General contractors
- Materials suppliers and laborers
In most cases, to be eligible to file a mechanic’s lien, you previously must have sent a preliminary notice by a designated deadline. You also may be required to send a notice of intent to lien before you can file a lien. Note that laws and regulations vary by state.
How Do You File a Construction Lien?
Filing a construction lien is done in the county where the construction project is located.
- Doing a title search to verify property ownership and details
- Filling out some short lien paperwork, identifying the creditor and debtor and property involved, along with an attached bill for the amount owed
Usually, lien paperwork is filed with the property recorder or clerk of court. While some counties may allow you to mail your paperwork in, often it is best to deliver it personally. This helps avoid delays and to verify that you’ve filled out everything correctly.
The paperwork must be submitted by the deadline applicable in that county. Regulations and procedures vary by state and even by county. So, it’s best to consult an attorney specializing in construction when filing a lien.
Note that you will pay a fee for filing a lien. Also, you may be required to notify the property owner and other parties of the lien.
What Happens After You File a Lien?
Although many debtors will pay you promptly after you file a lien, some won’t. In this case, you may need to enforce your lien by filing a foreclosure suit on the property within a specified deadline. This will require filing a legal claim in court and should be done in consultation with an attorney.
After the debt prompting a lien has been paid, you must file a lien release as specified by applicable state law.
How Can You Avoid Having a Lien Filed Against You?
If you’re a property owner, the best way to avoid having a lien filed against you is to track payments on your project to make sure everyone is being paid on time. Note that this may be difficult because your general contractor will be dealing with subcontractors who have no direct contact with you.
Communicate with your general contractor, attorney and accountant about how payments are being tracked.
What Should You Do If Someone Files a Lien Against You?
If you’re facing a lien, consult an attorney specializing in construction law. Your attorney may be able to identify factors that invalidate the lien claim. This could include failure to send required notices or meet required deadlines. It’s possible the amount being billed is incorrect.
Even if a lien claim is valid, other parties besides you may be liable for creating the conditions that led to the lien. If so, they may be responsible for paying the associated debt. An attorney can help you sort through these issues.
Understand Construction Liens to Protect Your Rights
A mechanic’s lien grants a contractor, subcontractor or supplier who hasn’t been paid a legal claim against the property involved. This makes the claim to the property title unclear, making it difficult to refinance or sell the property.
Typically, mechanic’s liens are filed only after:
- Sending preliminary notices, which declare the right to claim a lien in the event of nonpayment
- Sending notices of intent to lien, issued after actual nonpayment to warn that a lien is imminent if payment isn’t forthcoming
After the debt which prompted a lien has been satisfied, liens may be waived and released.
Mechanics liens are used to protect:
- The party filing the lien
- Other parties who may be affected by nonpayment on a construction project
They can be filed by general contractors, subcontractors, suppliers or laborers. Mechanics liens usually are filed in the county where the construction project is located with the property recorder or clerk of court.
Property owners can avoid mechanic’s liens by working with general contractors to track project payments closely and make sure that all parties are being paid on time. If a lien is filed, an attorney can help ascertain whether the filing was done properly and which parties may be liable for causing the conditions which prompted the lien.