Enforcing payment for goods, services and rentals - Know the pitfalls of mechanic’s lien law
by James Waite and Don Galvez
Question: I’ve rented and sold equipment to a customer for construction work, but I haven’t been paid. Can I file a mechanic’s lien on my own to get the money I’m owed?
Answer: Yes, but the requirements are highly technical and strict. If you miss a deadline or fail to meet any of the state’s statutory notice and filing requirements, your mechanic’s lien — also referred to as a construction lien — will be void. You will still be able to pursue a lawsuit against your customer, but one of your most valuable pieces of leverage — your right to file a lien on real estate improved with your equipment — will disappear. For that reason, we always advise engaging a lien law professional to serve notices and file mechanic’s liens.
Mechanic’s liens are claims against private property. In some cases, this is personal property, such as vehicles or equipment. In some cases, it is real estate. Most people understand the concept of a security interest in everyday life, but as a refresher, a mechanic’s lien on a construction project involves a claim that encumbers or clouds title to real estate improved with a supplier’s labor, equipment and/or materials.
If properly and timely filed, a mechanic’s lien can, among other things, make it impossible for the owner to sell or borrow against that real estate. In many cases, it can enable the holder of the lien to foreclose on the property and take ownership — subject, of course, to the interests of other surviving lienholders.
Mortgages on real estate. Homeowners typically understand that a lender has a security interest in or mortgage on their home until the lender’s loan is paid off. The mortgage contract binds the homeowner to timely pay the loan. If the homeowner defaults, it gives the lender or lienholder the right to repossess the home and sell it to satisfy the debt.
Contractual liens on non-real estate personal property. The same concepts apply to financed vehicles and machinery, as well as to consigned inventory. Common to both mortgages and contractual personal property liens is the fact that a security interest is created by contract — whether that’s a mortgage, lease, security agreement, rental agreement or other document which grants a security interest or lien to the party providing the equipment and/or financing.
Mechanic’s liens don’t require contracts. By contrast, a mechanic’s lien is a statutorily created security interest in favor of providers of goods and services. Their liens generally apply only to the property which benefits from goods and/or services — e.g., real estate which is improved through the use of rented equipment. This security interest, like the previous examples, gives such providers the right to foreclose on and sell the property so benefitted in order to satisfy the debts owed to such lienholders.
So why do states need to pass mechanic’s lien laws to create these types of liens, but not others? Broadly speaking, it’s because parties to mortgages and contractual liens are engaged in direct contractual relationships. That, however, is typically not the case with respect to the majority of suppliers on construction projects. In most cases — such as with respect to subcontractors and suppliers of equipment, tools, construction materials, etc. — such providers have no direct contractual link known as privity of contract with the owner of the property being improved. Instead, they usually enter into contracts with the general contractor or a lower-tier subcontractor, which makes it impossible for these providers to create a contractual security interest against the property to protect such providers’ payment rights.
This lack of contract privity, of course, leaves subcontractors and suppliers in an extraordinarily weak position. With no contractual lien rights, they could be faced with either having to demand payment in full in advance or attempting to recover after project completion with no collateral to serve as security for payment. As a consequence, the various states have stepped in and created statutory lien rights in favor of such suppliers. Under these statutory regimes, if a customer fails to pay a supplier for goods and services properly provided, in most states, the supplier will have the right to file a mechanic’s lien, which creates an encumbrance against the improved property. If the debt continues to go unpaid, a court can foreclose the lien against the property, which allows the sale of the property to pay the supplier’s bill. As one can imagine, this creates powerful leverage in favor of suppliers, which in some cases has resulted in abuses — the reason states also have generally elected to construe their lien statutes rigidly and strictly, forcing lien claimants to exercise extreme caution. Note that filing an invalid lien can result in severe penalties, and in some cases, even felony charges.
Uniform inconsistency. The first mechanic’s lien law in the United States was Thomas Jefferson’s Mechanic’s Lien Act passed by the Maryland legislature in 1791. One might, therefore, be tempted to assume that, after 220 years, the various states could have figured out how to draft a simple, uniform mechanic’s lien law. One would be wrong. In truth, despite the fact that a proposed Uniform Construction Lien Act was introduced by the National Conference of Commissioners on Uniform State Laws in 1987 in an effort to replace the vast array of differing notice and filing requirements and deadlines existing throughout the country, not one state has adopted it. Instead, each state, as well as the District of Columbia, continues to maintain its own unique mechanic’s lien law. Disconcertingly for suppliers, all are strictly enforced, requiring compliance with various notice requirements and deadlines, many of which are difficult or impossible to discern and calculate with certainty. While the acknowledged purpose of these laws is largely the same across all states protecting suppliers’ rights to payment for the goods and services they provide, suppliers often find, to their great surprise, that they’ve made a mistake, which has limited or nullified their lien rights.
Some general concepts survive. Despite the confusing differences in mechanic’s lien laws from state to state, most follow a similar formula for creating, and executing on, a lien:
- Who is protected? Mechanic’s lien laws are generally intended to protect those who provide goods or services for the improvement of real property. However, not every state defines who falls within the definition of a provider of goods and services the same way. Suppliers of labor and materials are protected in all states, but only some states include equipment lessors, architects, engineers and design professionals in this definition. Consequently, determining what, if any, lien rights a supplier might have in a given state before providing equipment, goods and/or services, can be crucial.
- Required notices. Every state requires the provision of notice to, at a minimum, the owner of the project and/or real property against which you might file a lien. Some states go further by requiring delivery of a right to lien notice to the owner and/or general contractor prior to or upon commencement of the supplier’s provision of equipment, goods and/or services. These notices are intended to motivate the owner and general contractor to take steps to ensure that downstream suppliers are paid before any mechanic’s liens are filed. They may also be required in order to give suppliers rights to make claims on required retentions — the amounts owners and/or upstream contractors are required to withhold from their subcontractors and/or suppliers as a means of ensuring proper completion and/or payment of their own subcontractors and suppliers.
If the required notice(s) is/are not correctly drafted, not properly served, not served on time or not served on the right people, the supplier may well be barred from filing a mechanic’s lien and/or have its mechanic’s lien deemed wholly or partially invalid.
Note that interpretations vary from state to state regarding whether missing a notice deadline bars the filing of a lien claim or merely limits the amount the supplier can recover. They also vary with respect to whether suppliers are required to serve notices on parties other than the property owner, such as general contractors, downstream contractors or other suppliers, or even lenders. Complying with these requirements can be daunting, often discouraging suppliers from even bothering.
- Required information. The next step is to provide all state-required information. Not surprisingly, the information required also tends to vary significantly from state to state. Most states require at least the name and address of the supplier; the name of the owner; the name of the party to/for whom the supplier provided equipment, goods and/or services; the total value contracted for; the total value actually provided; the outstanding amount owed; and a description of the property against which the lien is claimed. And as if the process weren’t complicated enough already, many states’ lien laws fail to clearly indicate what, when, where and/or how such information must be provided.
- Applicable deadlines. The last basic requirement for filing a mechanic’s lien is meeting all time requirements. Every state has its own deadlines for serving the notices discussed above, as well as for the lien filings themselves. Tardiness can result either in surrender of the right to be paid all or some portion(s) of the amount outstanding because most such statutes eliminate claims retrospectively — generally looking back from two to six months and invalidating anything older than the statutory lookback period(s). Deadlines for filing the actual mechanic’s liens are even more strict. Missing a filing deadline by even one day can entirely nullify a lien right under many state mechanic’s lien laws. This, of course, makes the calculation of deadlines critical. Unfortunately, because some are based on when provision of equipment, goods and/or services commenced, while others are based on when such provision and/or the project itself was completed, calculating lien notice and filing deadlines has become a far more laborious and risky undertaking than it arguably should be.
- Filing suit. If you, as a supplier have managed to get this far, having complied with the litany of statutory notice and filing deadlines and other requirements, you should be congratulated, but don’t stop here. Your efforts may prove to be fruitless, unless you actually enforce your lien rights. Again, each state maintains its own specific procedures for serving notice of the enforcement and foreclosure action, providing accurate information, and meeting the prescribed filing deadlines. This makes engaging a local attorney — meaning one not only licensed in the applicable state, but also one who practices in the local jurisdiction where local rules are also likely to apply — more important with respect to lien foreclosures than with respect to most other types of legal disputes.
Obviously, mechanic’s lien filings can be deceptively complex undertakings. Getting this wrong can yield, at best, impaired or surrendered lien rights and, at worst, severe penalties, perhaps including jail time. Thus, the real question is not whether you can file a mechanic’s lien yourself, but whether you should. My very strong recommendation is that you should file a mechanic’s lien yourself only if you are trained and experienced in doing so and you are familiar with the specific requirements of the states where your equipment, goods or services is/are being, or about to be, provided. Otherwise, seek assistance from a mechanic’s lien specialist before you begin. Doing so could mean the difference between having lien rights on a big house and being sent to one.
James Waite is a business lawyer with more than 25 years in the equipment and event rental industry. He authored the American Rental Association’s book on rental contracts and represents equipment lessors throughout North America on a wide range of issues. Don Galvez is an associate attorney with James Waite Law. They can be reached at 866-582-2586 or email@example.com.