Construction Accounting Article -
Preserve Your Lien Rights to Ensure Timely Payment

Target Audience: Construction Industry Professionals, General Contractors, Subcontractors, Bonding Companies, Lien Rights Interest

Lien rights are an important consideration for all contractors, but they’re especially essential for subcontractors. A general contractor usually has an advantage in this area because it typically has direct contact with the owner. A subcontractor, however, doesn’t have this contact, so one of the only ways to take action against an owner or general contractor that fails to pay up is to preserve your lien rights.

KNOW THE RULES

Specific rules vary from state to state, but the basics of lien rights are fairly uniform. In fact, the concept of a mechanic’s lien goes back centuries, when it was common to give a laborer an interest in the improvements made to a property if he wasn’t compensated for his work.

Generally, mechanics’ liens provide subcontractors with the right to file claims for the labor, materials and equipment they contributed to a construction project. For the purposes of lien rights, subcontractors arethose who are working on a project under contract with another contractor (for example, with the general contractor or a prime contractor).

A subcontractor can be six degrees from Kevin Bacon, so long as Kevin Bacon and each contractor between Kevin Bacon and the subcontractor all have contracts to work on the same project. For example, an HVAC contractor hired by the job’s general contractor is a subcontractor, just as the insulation contractor hired by that HVAC contractor is.

FOLLOW THE THREE STEPS

Subcontractors typically must follow three key steps to preserve their lien rights:

1. Obtain a notice of commencement. At the project’s beginning, you need to be on the lookout for the owner’s notice that the project has, in fact, started. Often called a “notice of commencement,” this document includes important information about the job, including the identities of the owner, bonding company and lender(s), and a legal description of the property being improved.

In addition, and perhaps most important, the notice may include instructions for how you should file notice that you’ve begun work.

2. Provide a notice of furnishing. After receipt of the notice of commencement, you ought to have everything you need to provide notice to the project owner and/or contractor with whom you have contracted that you have started work and intend to preserve your lien rights. Do this as soon as possible with a notice of furnishing. In some instances, there may be time limits to filing, so be sure to look for them.

3. Perfect the lien. If you’re in a position where you’re not getting paid, you must “perfect” the lien, which sounds more complicated than it is. To do so, simply prepare a mechanic’s lien affidavit that covers the work completed to date, record the affidavit in the applicable jurisdictions, and deliver a copy of it to the owner or contractor who hired you.

Once again, be sure to look for time limits and other filing requirements, as they can differ depending on the contract and jurisdiction. After perfecting your lien, you have effectively secured the value of your lien against the property for a set period of time.

APPLY THE RIGHTS

If the time comes when you aren’t being paid what you’re owed and you have perfected your lien, the good news is that you have a secured interest in the property if it’s foreclosed on or sold, thanks to your perfected mechanic’s lien. The bad news is that, while a preserved lien protects your rights, it doesn’t always guarantee payment.

When a property is foreclosed on or sold, the pecking order of a mechanic’s lien can be a complicated matter and can differ depending on the facts and circumstances of the case. For instance, a tax lien or a laborer’s lien will generally have a higher priority than other liens

The lien can sit on the property for a long time. The owner can try to force you to begin a legal action to settle your rights, or you can initiate a lawsuit or foreclosure on your own. If you get to this point, it’s usually a good idea to consult legal counsel and carefully consider the costs vs. the potential benefits of acting on your lien rights. In other words, what will it cost to litigate the process? And is there really any money to collect?

PROTECT YOURSELF

Remember, the rules regarding lien rights — particularly the applicable time periods and the process of applying those lien rights — vary by state. Nevertheless, subcontractors who regularly practice perfecting their lien rights will give themselves a head start toward protecting themselves from a lack of payment.

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