The complete guide to the mechanic’s lien process.
In general, a lien is a type of property right which grants a creditor an interest over specific property of the debtor named in the lien. The lien is used as security for the debt or for performance of some act. A mechanic’s lien is a security interest in the title to property for the benefit and protection of those who have supplied labor or materials that improve the property. Despite its name, mechanics are not the only individuals entitled to such a lien. Mechanic’s liens are used to ensure payment of debts related to real property (such as land or real estate) and personal property (such as an automobile or equipment).
For example, in terms of personal property liens, when you take your car into a repair shop the mechanic is entitled to a lien on your automobile which is not released until you pay her for the services and materials provided. Along the same lines, such liens are available against real property when a contractor or other service provider makes improvements on the land or buildings. Imagine you are a contractor enlisted to build a dream kitchen for a client. You install new cabinets, granite countertop, and a stainless steel range but the client never pays up. As the unpaid contractor, you are now entitled to file a mechanic’s lien against the client’s home to collect your debt.
When discussing real property, a mechanic’s lien is also known as a construction lien. It is also sometimes known as a materialman’s lien or supplier’s lien when referring to those supplying materials, a laborer’s lien when referring to those supplying labor, and a design professional’s lien when referring to architects or designers who contribute to a work of improvement. In regard to personal property, it is also called an artisan’s lien. All 50 states as well as the District of Columbia provide legislation allowing laborers to obtain a mechanic’s lien to ensure payment for services. In some states, only private projects are subject to a mechanic’s lien. Other states, such as New York, also allow for liens against public or government projects. Some states require additional notice against residential properties only. Be aware that in most states, if the work performed requires a license, unlicensed individuals may not be allowed to file a lien.
The lien is a useful device for contractors, subcontractors, and material or equipment suppliers because it creates an encumbrance (a burden or impediment) on the property which can cause problems affecting a future sale. This means that future potential buyers may be wary of purchasing the property subject to a lien, which gives the owner an incentive to pay for the work or materials provided so the lien can be discharged. Most title insurance companies will also refuse to clear title unless the lien is affirmatively removed by either obtaining a release from the lien claimant or through a court order. Even invalid liens can create a “clog” on title.
The lien thus creates pressure on the property owner to resolve it through paying the lien claimant or at least motivating him to come to some resolution with the contractor or service provider. Additionally, the lien holder may eventually foreclose on the lien, usually by filing a lawsuit within the statutory period, which in turn forces a sale of the property entitling the lien holder to payment after the foreclosure sale is completed. However, if there are multiple lien claimants (often the case when there are multiple contractors involved), issues of priority arise.
Mechanic’s liens on real property can only be obtained by strict compliance with each state’s lien filing process. Many states also impose sanctions ranging from forfeiture of the lien to criminal penalties if the lien claim is exaggerated or fabricated in any manner. Therefore, accuracy and thoroughness is required in drafting a mechanic’s lien against the owner of real property. The lien claimant must be certain to base the amounts claimed on the contract price along with any reasonable overhead and additional work performed as necessary. Inflating or exaggerating a claim can be fatal to a lien and your right to payment. Attorney’s fees usually cannot be included in the lien amount although they may be recovered if the lien is enforced through filing a lawsuit.
In order for a lien to be enforceable, it must be “perfected” through compliance with the legal requirements for maintaining and enforcing the lien provided by each state’s lien law. Perfection refers to the additional step of ensuring one’s claim to a security interest in order to help assure that no other party, such as another creditor or a bankruptcy trustee, will be able to claim a right to the same property. State lien statutes outline the guidelines for creating a lien including any form of pre-lien notice as well as the requirements for timing and service (the formal delivery of a document such as a writ or summons) of all notices.
Typically, the timeline for filing a mechanic’s lien begins with filing a notice of commencement of work. This notice is required in some but not all states. Filing requirements for notice of commencement differ according to state, but usually it must be filed in a public records office as well as served through certified mail on the owner. Some states also require a notice of intent to lien to be filed before the actual lien. This is typically used when the project remains unpaid.
The holder of the lien must comply with the statutory requirements for maintaining and enforcing it. These requirements, which contain strict time limits, are generally as follows:
- Provide the required preliminary notice to the property owner disclosing the entitlement to the lien (some states).
- File notices of commencement of work (some states).
- File notices in the required public records offices of the intention to file a lien if unpaid (some states).
- File the notice or claim of lien in the required public records offices within a specified period of time after the materials have been supplied or the work completed (all states).
Mechanic’s lien law differs from state-to-state in regards to timing of filing as well as what events trigger when filing is necessary. Some states require the filing to occur within a timeframe following the completion of the claimant’s own work while other states allow filing only after all work has been completed. Typical time periods range from four to six months.
Once a lien has been filed, it can only be released by the owner, generally through payment of a bond (usually one and a half times the lien amount) or through lien claimant’s filing of a release after payment has been provided.
When there are multiple lien claimants (such as the prime contract, subcontractor, or sub-subcontractors), each claimant is entitled to payment according to the rules of priority. This means when a sale is forced through foreclosure, each party claiming a lien receives payment according to where they stand in the chain of claimants. Usually laborers have first priority, followed by all persons other than the general contractor. The general contractor typically falls last in line. Proper recording of all required lien documents in accordance with the strict deadlines will help ensure you retain your priority of payment.
In summary, a mechanic’s lien is a fairly simple mechanism for contractors and other labor or material providers to ensure payment through the threat of possible foreclosure on the owner’s property. Since buyers are wary of purchasing property subject to a lien and title insurers are also hesitant to insure such property, the lien is a powerful motivation for a property owner to either pay what he or she owes or at least come to the bargaining table. As long as a lien claimant follows the guidelines of his or her respective state’s lien law including the filing deadlines and adhering to the proper format for each required document, a mechanic’s lien offers a form of protection that guarantees payment for work completed.
Each case is unique, so contact an attorney with specific questions or for complex situations.