Avoiding A Mechanics Lien
Avoiding A Mechanic’s Lien
Making Sure EVERYBODY Gets Paid
A Mechanic’s Lien
A mechanicis a tradesman, an artist, or anyone who works with “tools”, i.e. carpenters, electricians, plumbers, roofers, and an assortment of others.
A lien is a legal claim on real property until a debt is paid.
If you employ a tradesperson or contractor to work on your home and then, following a dispute, you refuse to pay, the tradesperson has the right to file a lien. A lien is a claim on real property, such as your house. Rather than the tradesman simply demanding payment from the individual property owner, he/she is able to file a mechanic’s lien making the real estate itself (your house) responsible for payment.
Lien laws are based upon the long-held presumption that, as a direct result of the mechanic’s efforts, during the course of a remodeling project, the property is theoretically being improved (and its value enhanced). Therefore, the property owner AND the improved property are held responsible for satisfying all debts incurred during the course of the improvement or repair.
Avoiding Liens In Remodeling Projects
By James Carey & Morris Carey
“Pay me or I'll slap a lien on your property!” are 10 words you definitely don’t want to hear when remodeling your home.
The threat of a mechanic’s lien is occasionally made by an angry, frustrated contractor to a defensive home owner over a dispute about workmanship, money, or both in remodeling or repair projects.
The ability to file such a lien, however, is not just restricted to the general contractor. A lien can be filed by any company or person who can demonstrate that labor or material to improve or repair your home were supplied and for which they have not received payment under the terms of an agreement.
The mechanic's lien law ensures that those who work on your home get paid for their services. If not, they have legal recourse that ties up your home and property until they are paid or the lien is otherwise resolved.
Any home owner who employs outside labor and material for the improvement or repair of his home is vulnerable to this law. Because this law is based on state statutes and civil codes, you should consult a local attorney for specifics in your area.
Your understanding of this law could prevent you from paying twice for any phase of your project and safeguard you from losing your house to a disgruntled creditor in a nasty foreclosure sale because a material or service bill was not paid.
While it is true that the threat of a mechanic’s lien is usually associated with the general contractor, it is not an action that is exclusively the right of a general contractor. The list of prospective lien claimants may also include:
- Material suppliers, such as those furnishing concrete, lumber or roofing;
- Subcontractors such as electricians and plumbers,
- Laborers your contractor employs to clean up your job.
Even if you pay your contractor as agreed, you can still be hit with a mechanic's lien if your contractor fails to pay a material supplier, subcontractor or individual who furnished labor for your project. The same holds true if a subcontractor doesn't pay his material supplier. For example, you hire Acme Construction Co. to build an addition to your home. Acme hires ABC Roofing to roof the addition. ABC buys the roofing material from XYZ Roofing Supply. You pay Acme, Acme pays ABC, but if ABC doesn't pay XYZ, you could end up paying twice for the roofing material.
Though there are means to prevent a mechanic's lien, your best protection has more to do with your contractor's ability, business experience and integrity -- and your ability to get along with him -- than any other aspect. Your focus should be on finding a good contractor.
Since a mechanic's lien can happen even with the best of contractors, consider the following options for protection.
- Make a list:
It helps to know who is working your job so you can ensure they get paid. Subcontractors and material suppliers are required by law to supply the property owner with a preliminary 20-day notice -- within 20 days from the time they become involved with a project. Since many fail to do so, insist that your contractor supply you with a list of subs and suppliers.
- Pay as you go:
One of the biggest mistakes is to pay a large percentage of the cost before work is performed. A system that offers the consumer better protection -- more leverage and time to hear from a sub or supplier who didn't get paid -- is to make progress payments as a percentage of completion of the work.
- Lien releases are a must:
There are two types -- conditional and unconditional (or full releases). You should not make a payment to your general contractor unless you receive a conditional lien release in exchange. The conditional release will become unconditional when the check clears the bank. You can insist on an unconditional release with each payment if you are willing to provide the contractor with a certified check or a cashier's check. Before making final payment, require your general contractor to furnish unconditional lien releases from all subs and material suppliers.
- Issue joint checks:
You can issue joint checks to the general contractor and a subcontractor or material supplier. This option is not particularly popular with either the home owner or contractor due to the need for additional management on both sides. It also can be a disadvantage to the owner and contractor in that it diminishes the contractor's monetary control over subs and suppliers. An alternative is to issue joint checks for services that put you at the greatest financial risk -- big-dollar items such as lumber, kitchen cabinets, roofing or windows. Keep in mind that joint checks are not issued in lieu of obtaining lien releases.
- Third-party management:
Many banks, escrow companies, construction management firms and consulting architects are set up to provide detailed project accounting and pay construction draws as an agent for the owner. This option generally is reserved for larger-than-average projects and comes with a hefty fee. Be prepared to drop an additional 5 percent to 10 percent of the total contract value for this service.
- Payment and performance bond:
You can require your contractor to supply you with a payment and performance bond that provides that the bonding company will either complete the project or pay damages up to the amount of the bond. In short, it's an insurance policy that you pay for as part of the contract; it usually tacks on about 1 percent to 5 percent of the contract sum. One caveat: Not all contractors are bondable due to longevity in business or financial position. Or, the amount for which the contractor can be bonded is only a fraction of the value of the job. Don't confuse a payment and performance bond with a surety bond, which is required of most contractors and has an average value of $5,000 to $10,000.
- Mechanic's lien release bond:
After a mechanic's lien is recorded, a property owner, general contractor or subcontractor may record a mechanic's lien release bond, which frees the property of the mechanic's lien. Once such a bond is recorded, the real property described in the bond is released from the mechanic's lien and, of more importance, any action to foreclose on the lien is released as well. The bond acts as a substitute for your home as the object to which the mechanic's lien attaches. In other words, once you have a mechanic's lien release bond, the person chasing you for the money must now chase the bonding company.
The mechanic's lien law is complex. Honing design plans and picking appliances, cabinets and flooring are fun and necessary parts of planning a home-improvement project. Choosing a good contractor and understanding the mechanic's lien law are necessary steps in protecting your piece of the Great American Dream and avoiding home-improvement chaos.
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