The Lowdown on Liens-Don't pay twice for your building project

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Legal Disclaimer/Important notice to readers: The following overview of construction liens is presented as general information only. It is not legal advice, that is, the application of law to an individual"™s specific circumstance. Because lien law is a complicated area of law that varies with each state, and because the following information is not a complete analysis and may not include recent changes in the law, it is essential to obtain competent legal counsel to discuss the facts of your specific situation.

Although most construction projects are completed without significant problems, sometimes disputes occur which often involve payment, or rather non-payment for services rendered.If this dispute goes unresolved, a claim of lien may result. Unfortunately, many owners are unfamiliar with lien law even though it may cause them to pay twice for labor and materials or risk losing their property as a result of the lien.

Construction liens

Although most construction projects are completed without significant problems, sometimes disputes occur which often involve payment, or rather non-payment for services rendered. If this dispute goes unresolved, a claim of lien may result. Unfortunately, many owners are unfamiliar with lien law even though it may cause them to pay twice for labor and materials or risk losing their property as a result of the lien.

Collateral has long been used to secure debts, especially when the debt is great. Consider, for example, a mortgage. When you borrow money to buy a house, the bank holds the title until the debt is paid. Why? Because when collateral secures a debt, the stakes are higher and the debt is likely to be paid. As the saying goes, "you have a horse in the race."

One unusual aspect of the construction industry is an unpaid contractor"™s or supplier"™s ability to secure a debt by recording a claim of lien on the property where the work was performed. When a claim of lien is recorded, the property becomes collateral until the matter is settled.

Liens and lienors

A claim of lien is a recorded document that secures a debt owed to a lienor"”an unpaid contractor or supplier who is eligible to claim a lien per state law. Depending on which state you live in, lienors can include general contractors, architects, subcontractors, sub-subcontractors, laborers, and material suppliers. Again, because the word "lienor" can readily be misunderstood as only those who claim a lien, it must be emphasized that lienors also include anyone who is eligible to claim a lien per state law. It does not mean that the lienor will do so.

When a claim of lien is placed on a property, there are serious consequences. First, a claim of lien clouds the title of a property. As a result, the title is no longer "clean" and easily transferred. This creates problems for both buyers and sellers. For example, perhaps you want to sell your property. If there is a claim of lien attached to your title, the buyer may not be able to get financing until the claimed amount is paid (or dismissed by other means). But there is much more at stake than the possible problems with financing.

Lien laws also contain provisions that may force you to sell your property with the money from the sale going toward payment of the lien amount.

Foreclosure sales

Unless you have been directly affected by lien law, it is easy to underestimate its power. Lienors that file a claim of lien can take legal action (more specifically, file a lawsuit to foreclose) that may force you to sell your property. This is significant when you consider that in Florida, for example, there are generally only three instances in which you can be forced to sell your permanent residence (i.e., homestead): They are when:

1. Federal, state, or local taxes are owed.
2. Your mortgage goes unpaid.
3. Improvements or repairs of the homestead go unpaid and a lien is filed and awarded.

Therefore, your unpaid plumber shares some of the same powers as the IRS and banks. This may seem unfair, especially if you must pay twice to settle the claim of lien.

Unfair?

Laws often create controversy because sometimes they benefit one party at the expense of another. States that enacted lien law felt the need to protect the interests of lienors who improve a property and are not paid. Lienors extend thousands of dollars in credit to property owners by providing materials and labor to the jobsite before getting paid. If this debt goes unpaid, it is highly unlikely that these lienors will be able to recover their material and labor costs. The lumber is nailed in the wall. Plumbing pipes are cut, glued, and buried deep in the ground. In fact, law may prevent them from repossessing these items. Therefore lien laws help to ensure that lienors are paid, even though it may come at a cost to you.

An alarming aspect of lien law is that you may be forced to pay twice to settle the claim of lien. For example, your property could become subject to a claim of lien even when you paid the general contractor whose duty it is to pay the subcontractors and suppliers. If the general contractor did not pay them, lien laws may require you to pay these lienors in order to prevent or satisfy a claim of lien. That means you pay twice, once to the general contractor and again to the subcontractor or supplier who improved your property. Therefore it is important to take action to avoid claims of lien from occurring altogether.

Know thy lienors

Because a claim of lien can have serious consequences, lien laws contain provisions that protect you against claims of lien. But this protection requires you to obtain specific documents from your lienors. Before you can do this, you need to know who these lienors are. (Again, lienors are those individuals and businesses with lien rights, not only those entities who file a claim of lien).Each state"™s lien laws have provisions that address who has lien rights. This information is contained in your state"™s statutes, which can be readily accessed online. Also, because lienors are often required to send a "Notice to Owner" (NTO) in order to secure their lien rights, you are made aware of them through this notice. Consider the NTO a letter of introduction because they are introducing themselves to you as lienors.

Owner"™s duties under lien law

Now that you know who your lienors are, you must perform certain duties to protect your property from liens. Your primary duty? To ensure that your lienors are paid. In Florida, if you make proper payments under the lien statute, you have a complete defense against claims of lien. Proper payments are those in which a lien release (also known as waiver of lien, release of lien, and waiver and release of lien) is exchanged for a payment. A lien release is a brief document that states that the lienor waives any right to claim a lien for the labor, services, and materials provided through the date of the waiver. Therefore a lien release acts as a receipt and must be provided by all lienors in exchange for payments to them. Lien release forms are often found in your State"™s statutes.

Upon completion of the job, it is essential to obtain final lien releases from all lienors including the general contractor who should provide you with a Contractor"™s Final Affidavit in exchange for final payment to him or her. By executing this affidavit, the general contractor swears under oath that all the work under the contract has been fully completed and all lienors under the direct contract have been paid in full except those listed on the affidavit. If unpaid lienors are listed, the amounts they are owed are also stated.

Unpaid lienors

Because there are instances when a general contractor requests final payment before he or she pays the subcontractors and suppliers, you may see unpaid lienors listed on the final payment affidavit. If this is the case, you must ensure that these lienors are paid in full and obtain their final lien releases. The manner in which you accomplish this can vary and should be discussed with your general contractor or legal counsel. A couple of possibilities may be:

1. Write one joint check (containing the names of the general contractor and the unpaid lienors) for the balance due the general contractor, and obtain final lien releases from all these entities in exchange for payment.

2. Pay the lienors directly, obtain their final lien releases, and then deduct these amounts from the general contractor"™s final payment amount. Because the final payment amount to the general contractor would change, and the unpaid lienor would be eliminated, the final payment affidavit should be edited to show these changes.

You should also know that there may be provisions in your state"™s lien laws that require the contractor to provide you with information such as a statement of accounts as well as contracts with lienors. In the Florida statutes, these provisions fall under "Section 713.16: Demand for copy of contract and statement of account."

As an extra precaution against liens, you can ask your subcontractors to sign a sworn document which states that all of their suppliers and/or sub-subcontractors have been paid in full. Absent a prohibition in your state"™s lien laws, such language could be incorporated into the subcontractor"™s final lien release.

Know thy lien laws

The right to claim lien has been enacted in a majority of states and each one has unique and complicated lien laws. Strict compliance with these requirements is generally necessary for a claim of lien to be legally binding. A contractor who does not abide by these rigid requirements may lose monies owned him. On the other hand, if you do not make proper payments under a lien statute, you may pay twice for work performed as the result of a claim of lien. If this debt goes unpaid, your house may be sold in a foreclosure sale with the monies going toward the amounts claimed by lien.

Because lien law is very complex and unique to each state, and because liens can be financially devastating, many state statutes recommend that you consult a construction attorney who is knowledgeable about state lien law. These attorneys practice "preventative construction counseling" in an effort to prevent costly problems before they occur. Therefore if you do not understand lien law, or if you do not have the time to properly manage lien-related documents, it is prudent to seek council with a knowledgeable attorney who specializes in construction law at the outset of your project. This professional can provide legal advice specific to your remodel, repair, or new construction project.