Most people in the construction industry have heard of the term “mechanic’s lien.” But if you ask anyone to explain what a lien is, how it works or even how the word is spelled, you will likely learn that their knowledge about mechanic’s liens is basic at best. Aside from a general awareness that liens exist, perhaps the only other shared understanding is that liens are unfavorable.
Conceptually, mechanic’s liens are not that complicated. The general rule is this: If you take part in a private construction project by furnishing labor, materials, equipment or services that permanently improve the property, then you are entitled to secure that claim by filing a lien against the
property—which means that the property itself can be sold to pay you what you’re owed. Most public construction projects, however, are typically not covered by mechanic’s liens. The bond claim process is generally used instead.
Theory vs. Practice
Liens sound pretty simple, right? Why, then, is there so much confusion surrounding them? The short answer is that, because liens are so powerful, they are tightly regulated by a number of complicated requirements and rules about deadlines, notices, language, processes and much more that must be strictly followed. And here’s the kicker: Each state’s lien laws are different. That means that the mechanic’s lien process for a California-based construction project is completely different from that of a project located in Texas.
Despite the complications involved with the process—and even though the circumstances for each project are different—the fact remains that mechanic’s liens are generally quite effective at getting claimants paid. The following are 10 ways that mechanic’s liens work for the advantage of the business owner’s bottom line.
- Creates the leverage needed to speed up payment conversations—This is perhaps the most important aspect of a mechanic’s lien. The truth is, no one goes into a new project hoping to file a lien. Filing is bad for everyone involved and is to be avoided at all costs. However, the fact that this powerful and unique right exists for the construction industry means that there is a proven method that helps to get parties to the table in attempt to work out payment disputes.
- Encumbers the property, not the person—A mechanic’s lien attaches to the underlying property being improved upon during the course of the construction project. This means that the property itself becomes the security for the debt to be paid. When you file a mechanic’s lien, the document is
actually recorded with land records and appears on a title search of
- Remains good through bankruptcy—While declaring bankruptcy can help to discharge personal or business debts and obligations, it won’t remove a mechanic’s lien because it is attached to the property. It’s complicated, but generally, a mechanic’s lien allows any individual party’s money trouble to
- Gets the attention of the lender—Lenders control the disbursement of money to the project and don’t want to see anything disrupt that flow. Lenders have a security interest in the property (the mortgage) to avoid nonpayment and are sensitive to any matter that may indicate trouble on the project or that may devalue their own protection. In some states, a lien can actually take priority over the lender’s interest. This is a big deal to lenders, and they usually step in to demand action after a mechanic’s lien is filed.
- Sets a firm deadline for payment—Sometimes, the issue isn’t whether or not you are going to get paid, but when. It takes longer to get paid in the construction business than in just about any other industry. Filing a mechanic’s lien is helpful in this
scenario because it sets a firm deadline for resolution of your claim.
- Speeds up payment discussions and helps to avoid other complicating issues—Construction projects are incredibly complex endeavors with many different participants, challenging conditions and moving parts. As such, payment issues on construction projects are no less complicated. However, other disputes that contribute to payment issues (such as workmanship) generally cannot prevent the filing of a mechanic’s lien, even if those disputes are later proven valid. Therefore, a mechanic’s lien cuts to the chase and separates the underlying payment issue from other
- Is difficult and expensive to challenge—Mechanic’s liens are a powerful tool and represent a significant legal right, codified by laws that exist in all 50 states. Therefore, it’s not easy for a lien defendant to simply do away with the issue.
- Escalates the payment issue without having to immediately file a lawsuit—In nearly every state, filing a mechanic’s lien is not equal to filing a lawsuit. A lawsuit comes later, through a lien enforcement/foreclosure action. A lien filing is a serious step, but it still gives parties one last chance to work out the dispute without having to resort to expensive, time-consuming litigation.
- Entitles you to attorneys’ fees and other costs—If a lien claim does progress to a lawsuit (a lien enforcement or foreclosure action), most states have statutes that allow you to collect attorneys’ fees and other costs in addition to the original lien claim. This makes it riskier for property owners and others on the project to dispute your debt. If they do refuse to pay, every day that they delay payment subjects them to more expense.
- Prompts payment—There is a document called a Notice of Intent to Lien that can be sent prior to actually filing a mechanic’s lien. Sending this document is actually a good-faith effort by the claimant to bring the parties together to work out the issue before resorting to a lien. Just the credible possibility of a lien is usually enough to garner payment without ever having to actually file.
The majority of the construction industry actually has it right when it comes to liens. That is, liens are an undesirable project outcome. Once a project gets to the point that a lien has been filed, something in the payment chain has broken, and something on the project has gone wrong.
It’s not fair to blame the lien claimant outright—being on the wrong end of an unresolved payment issue is a terrible place to find yourself. With tight margins and cash-flow challenges that are endemic to the construction business, just one payment issue can endanger the survival of even the best-run company.
It’s not fair to automatically blame the paying party, either. In fact, most payment issues are not the result of deliberately punitive measures, willful negligence or any other type of untoward behavior. Often, payment issues are the result of unintentional miscommunication between parties on a project, and not of the intentional bad behavior of any one project participant. The best way to avoid liens is to prevent payment issues from occurring in the first place. And the way to do that is by improving project communication and increasing stakeholder visibility.