Avoiding Construction Liens

Avoiding Construction Liens

The excitement and joy of building a new home can quickly be overshadowed by a construction lien, or as it is more commonly known, a mechanic’s lien.

Construction liens exist because it guarantees that a contractor will be paid for the work and materials that they put into a home or building. It allows a contractor to collect the money that they are owed for their time.  Yet many home and business owners are rightfully concerned about the possibility of lien because it gives contractors an interest in the home until they are paid.

Understanding how a construction lien is created, what makes an enforceable lien, and how to remove and avoid liens can be invaluable to property owners hoping to develop their land to ensure that they can keep using their home for years to come.

Construction Lien Basics

A lien is a type of security interest in real property.  A construction lien is a lien that is given to contractors, suppliers, and other people who invested time and materials. This lien allows these parties to collect the payments owed to them as payment for the building projects.

Each state has its own set of rules to create and register a lien on a property, so professionals and property owners need to check these rules to make sure they understand their rights.  By creating this lien, the mechanic is given an interest in the real property, meaning that it will be encumbered by the lien until the amount is paid off.  This means that the property cannot be sold with a clear title, which often makes it difficult to sell.

In cases where the costs of the lien are great, it could force the sale of the property to pay for the costs.  Liens are public records and attach to the property itself, so it will be found if the owners try and sell or refinance the property.

Additionally, the contractor that creates the lien does not need to be one of the contractors known to the owner.  If a subcontractor is not paid by the contractor, they can file a lien on the party as well.

Elements of a Valid Lien

 For a lien to be validly filed, there must be a written contract between the parties that has the following elements:

  • Nature of the Work: The contract must describe what the contractor is responsible for completing and how and when it is to be completed. This does not need to be incredibly detailed, but detailed enough that the contractor can claim that they completed the work or supplied the materials necessary.
  • Material Used: The contract must also spell out the materials that the parties plan to use in the build. This protects the owner if the contractor does not use the correct materials, but ensures that the contractor can order materials without worrying that they will not be able to use them on the project.
  • Agreed Price: The parties will also need to include the price that they agreed would be paid. This again helps protect both the contractor and the owners so that the parties are in full agreement on the price from the beginning.

In addition to the contract, each state will have specifics that must be completed for the lien to take effect.  For example, in Minnesota, a contract must be registered with the state, if they are a contractor that normally needs to be registered, to file a lien. Most states will also require notice of some kind to be given to the property owner so they can pay or secure a waiver, which will be discussed later on.

Avoiding a Lien

Because liens often interfere with the enjoyment of a new home or commercial space, it can be beneficial for owners to avoid them.  Additionally, ensuring that a contractor is paid for their services will be beneficial for a contractor.   Several key considerations should be made at the beginning of a project to avoid the necessity for a lien.

These considerations are:

  • Research: One of the best things that a property owner can do is research the general contractors that they are thinking of hiring. If a contractor is consistently running into payment issues, or they often have issues with their clients, they may not be the best option.  Understanding the level of their work and even the subcontractors that they hire can be all the difference in picking the right person.
  • Finance First: Before hiring a contractor, it is important to have the financing lined up. This will allow the owners to make decisions based on what they can afford rather than guessing what they will be able to pay when contacting contractors.
  • Manage Payments Everywhere: Another important consideration when trying to avoid a lien is to communicate with everyone and manage all the payments. It is acceptable to ask for proof of payment for subcontractors to ensure that a lien does not come later from a bill that should have already been paid.
  • Waivers: Some subcontractors and suppliers will be willing to sign lien waivers, which means that they agree that any payment not received by them from the contractor will not result in a lien. This usually is done with the caveat that the owner needs to pay the contractor on time.
  • Pay on Time: Paying everything on time will help ensure that a lien does not result from the project.

Staying on top of the payments for contractors and subcontractors alike, as well as researching the people who will be doing work is the best way to attempt to avoid a lien.

Removing or Releasing a Lien

Even with the best practices above, payment may be missed, and a lien may end up on a property.  When this happens, the lien may be removed or released in several ways depending on the validity of the lien.  As noted above, each state will have rules on the validity of liens.

In some states, subcontractors will not be able to file a lien on a homeowner if the general contractor was paid in full.  If it seems like a lien does not follow the rules of the state or someone is trying to be paid twice, the owner has a couple of options.

  • Objections: A property owner can file an objection to a lien if it does not follow the rules of the state for filing liens. When the owner challenges, the court will decide the outcome.
  • Lawsuit: Alternatively, the owner can file a lawsuit against the person asking for the lien. This will result in a full trial and can be more expensive than the payment.

If the lien seems to be valid or the owner knows that they owe the money to the contractor, there are several options to attempt to remove the lien. These are:

  • Negotiation: When a lien happens, it can be helpful to negotiate with the contractor bringing the lien to attempt to reach a payment plan.
  • Surety: A surety is a firm that will provide the county with a bond that proves the county that the debt can be paid if the court orders it.
  • Lawsuit: In some cases, the payment was not made because the parties were unhappy with the work that was done. In these cases, it may be best to sue the contractor, even if the lien is valid.

Liens are helpful tools in ensuring that a contractor gets paid, but for peace of mind for everyone involved, it is best to avoid them when at all possible—ensuring that the property remains unencumbered and ready to enjoy.

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