Understanding Mechanic's Liens

• What is a mechanic's lien?
• Why mechanic's liens are allowed
• How mechanic's liens work
• Avoiding mechanic's liens

What Is a Mechanic's Lien?

A mechanic's lien is a legal claim against a home or other property. A mechanic's lien is typically used by subcontractors and suppliers when they haven't received payment for improvements they made to a property. Also known as a construction lien, it's a way for laborers and material men to seek payment for remodeling or building a home.

You can face a mechanic's lien even if you weren't the one to miss a payment. For example, suppose you remodeled your bathroom, and the general contractor did not pay the material supplier who supplied the bathtub. In that case, the material supplier can place a lien against your house to recover the money. As the homeowner, you will be responsible for these payments when sub-contractors, laborers, or suppliers don't get paid.

What can surprise most homeowners is that it doesn't matter if they already paid the general contractor for the bathtub. If the prime contractor doesn't pay a subcontractor or supplier, the law allows the subcontractors to:

1. Come after you, and
2. Come after the real property that was improved (which is often your house)

Ultimately, filing a lawsuit against the general contractor may be costly. You may be responsible for paying for the work twice: once to the dishonest general contractor and again to the subcontractors they didn't pay. If a legitimate lienholder forecloses on their mechanic's lien, they can force the sale of the property against which it was recorded. That means you might have to sell your house. Thus, it is important to understand how mechanic's liens work and how to avoid them.

Why Mechanic's Liens Are Allowed

It may seem unfair that you can end up paying for the general contractor's irresponsible behavior. The rationale for allowing mechanic's liens prioritizes laborers and suppliers. Suppose you hire a crew to do landscaping and pay their boss (the prime contractor). If the general contractor doesn't pay their crew, then:

Between the person with improved property (you) and those who worked on the construction project, the suppliers' needs to get paid are greater.

The law also presumes that you can, in turn, sue the general contractor. While true, this doesn't help you in the short run. Suppose a supplier places a mechanic's lien against your house because the general contractor failed to pay them. The general contractor could have irresponsibly lost all their money gambling.

You can certainly file a lawsuit against the general contractor for breach of contract. Over time, you may be able to garnish their wages or force them to sell their property. But that takes time and money. Furthermore, it can be difficult to wring money out of someone who doesn't pay their subcontractors and suppliers. Meanwhile, you owe thousands of dollars and have days or months to pay the supplier. Otherwise, your house could get sold to meet the mechanic's lien against you.

How Mechanic's Lien Law Works

To get a mechanic's lien, the subcontractor or supplier will usually need to do the following:

1. The lien claimant (the subcontractor/supplier) must give preliminary notice to the homeowner of what it contributed. For example, if they supplied labor and materials for a bathtub, they typically have 20-30 days of the contribution to give notice.
2. If the subcontractor/supplier doesn't get paid, they must give a notice of intent to the homeowner about the filing of their lien claim. Afterward, they can perfect their security interest against the homeowner's property.
3. To perfect their lien rights, the subcontractor must file a "claim of mechanic's lien" in the county where the property is. Typically, they must do this at the county clerk's or county recorder's office. The lien form must include a description of the property. A lien must also have an affidavit about the services the supplier provided.
4. Depending on your state, a subcontractor/supplier has around two to six months to work out a solution with the property owner or file a lawsuit. The lawsuit allows the subcontractor to begin foreclosure against the property. If they miss their last filing day, the lien may get invalidated.

If the lawsuit isn't filed within the given timeframe, then in most states, the lien should have no further effect. This may result in an automatic lien release by operation of law. But, getting a court order well after the lawsuit should have been filed is still worth your time. This helps clear your property of the lien and get an attorney's fees award against a bad faith lien claimant. Otherwise, you may have problems selling the property or collecting all its equity.

Avoiding Mechanic's Liens

So, how do you prevent a mechanic's lien on your property? It's helpful to put into your written contract that the general contractor must pay their workers. But that's implied in the spirit of the construction contract, anyway. So what else can you reasonably do? Here are some tips:

1. Pay With Joint Checks. One way to ensure subcontractors and suppliers get paid is to write a series of checks jointly to the general contractor and the particular subcontractor or supplier. The checks can only get cashed if the ultimate beneficiaries endorse them. This helps ensure the subcontractor or supplier gets paid.
2. Get a Lien Waiver. Another way to avoid mechanic's liens is to have the contractor put a lien waiver provision on the construction contract. This would keep the property owner from paying everyone the contractor must pay. In many states, a contractor must provide a waiver for all work for which the contractor has been paid before accepting further payments from the owner. Remember that a mechanic's lien can't be waived in many states until payment is made. But, a few states allow waivers before payment.
3. Pay Subcontractors/Suppliers Yourself. Have the general contractor give you their whole crew's phone numbers and information. List the subcontractors and track who is working on your property. This is the least favorable option, but you can directly pay the subcontractors and suppliers and deduct those payments from the general contractor's amount. The difficulty with this option is that you can look like the employer of the subcontractor or supplier. This would make you responsible for doing things such as withholding income for taxes and Social Security. To avoid ambiguity, try the first two options before even considering this.

Final Advice on Avoiding Mechanic's Liens

You should keep all the receipts and paperwork from the contractor, subcontractor, or supplier. You should keep notices from subcontractors or suppliers of services or goods rendered. As the project is finishing up, it may also be helpful to follow up on those notices to determine whether the subcontractors and suppliers have gotten paid. If they haven't, you can request waivers from them when you next meet with the general contractor.

Get Professional Legal Help Understanding Mechanic's Liens

Liens on your property can prevent you from getting a loan, refinancing, or selling your property. You may need legal advice if you have a mechanic's lien on your property or are about to have repairs done. A local real estate lawyer or construction law attorney will be able to ease your concerns and protect your interests.