A mechanic’s lien is a powerful tool for many construction participants on private projects and a major source of risk for owners. A mechanic’s lien is an involuntary lien and a statutory right that protects contractors, subcontractors, suppliers, laborers and others from non-payment for work performed. If a mechanic’s lien is filed on a project, it could potentially be foreclosed, resulting in the sale of an owner’s real estate and other property.
Unsurprisingly, mechanic’s liens are loathed by owners. Not only can a lien be an event of default in an owner’s loan documents and cloud an owner’s title, an owner could also be at risk of double-paying for work. For instance, an owner may pay a contractor, but that contractor may not pay its subcontractor. If the subcontractor files a mechanic’s lien and the contractor fails to resolve the lien, then the owner may be forced to pay the subcontractor to release its lien and stop the owner’s property from being sold at a sheriff’s sale following foreclosure proceedings. Therefore, owners should take note of the following ways to potentially avoid mechanic’s liens.
I. Insert a No Lien Clause in the Construction Contract Documents
If allowed by state law, an owner may insist that a construction contract include a “no lien clause,” which is a waiver of a construction participant’s ability to lien a project before even starting work. No lien clauses are generally disfavored by law or unenforceable in many states. Yet, if permitted, and the parties agree, no lien clauses are an excellent protector of an owner’s title.
II. Bond Your Project
The parties to a private construction project may agree that a project should be “bonded.” This means that a contractor may acquire a payment bond from a surety that will act as substitute security for a mechanic’s lien. As substitute security, any claims made by contractors, subcontractors, suppliers or others will no longer be in the form of a mechanic’s lien against the property, but will instead be made against the bond. Owners likely prefer that a construction project is bonded so no liens can encumber the property over the life of a project. The primary hurdle for bonding private projects is that many contractors lack sufficient assets to acquire bonds to cover a commercial construction project.
III. Insist on Lien Waivers
As a condition to receiving payment for work performed, the parties may require by contract that laborers or suppliers execute lien waivers. A lien waiver is an acknowledgment by the laborer or supplier that it has been paid for its work and that it waives any right to file a lien relating to the work performed. Lien waivers can be executed at many junctures in a construction project, whether upon completion of a project milestone or after final completion of work. An owner’s lender may prefer to see lien waivers at important project milestones so the lender can audit the project, its schedule, and the likelihood of whether liens or disputes are likely at a later date.
IV. Issue Joint Checks
A joint check provides an owner with assurance that its contractor will pay a subcontractor or material supplier. The check will be made out to both the contractor and the potential lien claimant, thus forcing both the contractor and potential lien claimant to endorse the check. By issuing joint checks, an owner mitigates the possibility of double-payment described above.
Unfortunately, mechanic’s liens are common and frequently occur when disputes arise over the quality or timeliness of work. Nonetheless, the tips from this article should provide proactive owners with ammunition to limit or avoid mechanic’s lien fights.