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Getting Paid on a Construction Project: The Right Tools Can Make All the Difference – Ong Market Place
Getting Paid on a Construction Project: The Right Tools Can Make All the Difference
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Part 1: Mechanic’s Liens
Contractors know that having the right tool can sometimes mean the difference between success and failure. The same principle applies when facing a payment dispute on a construction project. This two part article will identify some of those tools or strategies and attempt to show why they are useful to an unpaid contractor or supplier and can help secure payment.
Your Company’s Invoices or Pay Applications are Outstanding … What Do Can You Do?
At some point, it is almost inevitable that a business or company in the construction field will face a payment dispute or have the unenviable task of trying to recover unpaid amounts on pay applications or invoices. When phone calls, emails and demand letters do not result in payment, what can you do?
Unfortunately, filing a lawsuit does not always lead to the quick recovery of the amounts owed. Indeed, before you can recover, you must obtain a verdict or award, often after a lengthy and expensive, pretrial discovery period and the conclusion of a trial. Due to a backlog in many jurisdictions, taking a case to trial is a process that can take years. Appeals can make this process even longer. After that occurs, you must then go through the process of collecting the judgment, while facing the risk that the defendant will file for bankruptcy, become insolvent or otherwise be “judgment proof.”
Are there tools that can be used to encourage delinquent producers/contractors to voluntarily settle or pay the disputed amounts or that can otherwise help you avoid the risk that the judgment won’t be collectable? The answer is “Yes.” The article will discuss one of those “tools,” the mechanic’s lien. Part two in the next issue will discuss two other “tools” – payment bonds and Prompt Pay Statutes..
What is a Mechanics Lien and Why is it Such an Effective Tool to Compel Payment?
A powerful and particularly effective tool that is available to an unpaid contractor, subcontractor or supplier is a mechanics’ lien. Why is a mechanic’s lien such an effective tool? The answer relates to both what the lien effects and its timing.
A mechanic’s lien is a lien against the property on which the construction work was performed. It attaches to or is against the underlying property interest, rather than the non-paying owner or contractor. This is significant for several reasons. First and foremost, it allows the lienholder to foreclose or sell the underlying real estate interest to “satisfy” the lien. This means that a mechanic’s lien can still serve as an alternative source of potential recovery if the defaulting contractor is bankrupt, insolvent or judgment-proof.
In some states, like Ohio and New Yorki, a mechanic’s lien can also attach to an oil and gas lease or the mineral estate. Mechanic’s liens can therefore provide a means to recover from the proceeds of the oil and gas produced from the property.
A mechanic’s lien also creates a “cloud” against the owner’s title, which can prevent the sale or transfer of the owner’s interest in the property without the satisfaction of the lien or payment of the lien amount. A lien also typically causes problems for an owner if there is a mortgage on the property or the owner has pledged the property as security for another loan. Indeed, because a lien can jeopardize the security pledged as a condition for the loan, the filing of mechanics’ liens constitutes an act of default under virtually every mortgage or loan agreement.
Obviously, property owners do not like when their property is at risk of being sold or when they learn that they may only receive a portion of the proceeds of sale of that property due to a mechanic’s lien. Mechanic’s liens therefore have the tendency to jeopardize a producer or contractor’s relationship with an owner and typically result in pressure on the producer to pay or to force its contractors to release withheld amounts.
The timing or effective date of a mechanic’s lien is also important. In an ordinary lawsuit, the plaintiff must first obtain a verdict/award (often after a lengthy pretrial process) and enter judgment on that verdict/award before it attaches and becomes a lien against a defendant’s property. In contrast, a mechanic’s lien serves as a lien against the property from the date it is filed and its priority (or the date it is deemed to attach) typically relates back to the date when the first contractor or supplier performed work or supplied material to the project. This means that a mechanic’s lien is a way to quickly and inexpensively obtain a lien without having to wait for a verdict from the court or arbitration award.
A lien’s “priority” or the effective date when the lien attaches can also be significant. This significance flows from the general principle that distributions from the proceeds of a judicial or sheriff sale are paid in order of priority. If there are sufficient proceeds to satisfy all liens against the sold property, the order of priority is not important. However, if the mortgages, judgments and other liens against the property exceed the amount recovered in the sale, the order of priority can determine whether a party recovers all or any portion of the amounts they are owed.
Why aren’t Mechanic’s Liens Used More Often?
The preceding section discussed the importance and effectiveness of mechanic’s liens as a collection tool. Why then are they not utilized more regularly? The answer lies in the nature and uniqueness of this remedy. Indeed, few subjects are as foreign to a layperson as mechanic’s liens. In most jurisdictions, the average attorney rarely encounters, let alone files a mechanic’s lien. Unfortunately, this lack of familiarity can lead to problems as few legal remedies contain as many potential pitfalls.
In particular, the right to file a mechanic’s lien is purely a creation of statute (iii). Because of this (and possibly due to the unique nature of mechanic’s liens), the Courts in most jurisdictions will strictly construe mechanic’s lien (iv).
This means that they carefully scrutinize mechanic’s lien filings to assure rigid compliance with the requirements of the applicable mechanic’s lien statute.
It is therefore important to know and understand the requirements of the applicable mechanic’s lien statute. Unfortunately, there are no uniform nationwide codes that apply to mechanic’s liens. Instead, each state has its own statute that establishes the requirements for filing a mechanic’s lien in that state. These laws can vary dramatically. More importantly, each statute provides a number of potential opportunities for a claimant to fail when it tries to file and perfect its lien. Among other requirements, these statutes identify: (1) on what types of projects liens can be filed; (2) who is eligible to file a lien; (3) what types of work or improvements give rise to lien rights; (4) what property interest the lien attaches to; (5) the deadline for filing a lien; (6) the form and required content of the lien filing; (7) where the lien must be filed or recorded; and (8) the deadlines for foreclosing on or enforcing the lien. Some statutes also provide opportunities for owners to limit their potential exposure to liens through affirmative steps taken before or at the time the project commences.
For example, on certain projects in Pennsylvania and in Ohio (v), the owner can file a “Notice of Commencement.” The filing of this Notice of Commencement allows an owner to identify and limit subcontractors and suppliers with potential lien rights by trigging an obligation for subcontractors/suppliers to provide a document called a “Notice of Furnishing” within a specific timeframe (vi). If a subcontractor or supplier fails to file its Notice of Furnishing by the established deadline (i.e.¸ within 45 days of commencing work in Pennsylvania), the subcontractor/supplier loses its right to file a mechanic’s lien (vii).
Some states’ mechanic’s lien laws also place additional requirements upon subcontractors and suppliers. For example, both Pennsylvania and Maryland require subcontractors to provide written notice to the owner of their intent to file a lien before they can file their mechanic’s lien claim (viii). In each state, the failure to fulfill these conditions will eliminate a subcontractor’s right to file a lien (ix).
The deadlines for filing liens also varies from state to state. For example, the applicable mechanic’s liens statutes establish the following deadlines for liens in the Marcellus and Utica shale regions:
6 months from the completion of work (x)
21 days from the date when the last labor or work was performed or material was supplied to an oil/gas well or facility or 75 days from the date last labor or work was performed or material was furnished by the party claiming the lien on a commercial construction project (xi).
100 days from the completion of the contract or last day performing work or supplying material to the project (xii)
8 months after completion of contract (xiii)
90 days after completion of work or supplying of materials (xiv)
180 days after the final date that work, services or materials were furnished by the party claiming the lien (xv)
The preceding paragraphs in the part of this article are in no means meant to serve as an exhaustive list of the requirements to properly file and enforce a mechanic’s lien. There are other requirements that are specific to each state’s mechanic’s lien law must be met to validly pursue a lien claim.
These paragraphs are also not meant to discourage unpaid subcontractors and suppliers from exercising their mechanic’s lien rights as part as their collection strategy. Indeed, for the reasons identified above, a mechanic’s lien remains a powerful and effective tool to secure payment. Instead, this section is meant to demonstrate why it is important to understand the specific requirements of the mechanic’s lien statute in the jurisdiction where the work is being performed. The author further recommends that anyone who is considering a mechanic’s lien claim retain the services of knowledgeable counsel before embarking down that path.
See Ohio Rev. Code §1311.021; NY CLS Lien §4.
See 49 P.S. §1508; Ohio Rev. Code §1311.13; W. Va. Code §38-2-17.
See Freeform Pools, Inc. v. Strawbridge Home for Boys, Inc., 228 Md. 297, 302 (1962).
See e.g., Crock Constr. Co. v. Stanley Miller Constr. Co., 613 N.E. 2d 1027, 1030, (Ohio
1993); Wyatt Inc. v. Citizens Bank of Pa., 976 A.2d 557, 564 (Pa. Super. 2009); Badger
Lumber Co., Inc. v. Redd, 583 S.E.2d 76, 79 (W.Va. 2003).
49 P.S. §1501.1 and §1501.3; Ohio Rev. Code §1311.04 and §1311.05.
49 P.S. §1501.03; Ohio Rev. Code §1311.05.
49 P.S. §1501; Md. Real Property Code Ann. 59-104.
49 P.S. §1502.
Ohio Rev. Code §1311.06.
W. Va. Code §38-2-24.
NY CLS §10.
N.J. S. 2A: 44A-6.
Md. Real Property Code Ann. §9-105.