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An overview of Illinois Mechanics Lien Law.

The Illinois Mechanics Lien Act (the "Act") offers important protection to parties that provide services, labor or materials for construction projects by granting them a right to record a mechanics lien against real property as a means to secure their right to payment. As such, the Act confers upon such parties an extraordinary right to claim a security interest in another's property and to assert a claim against the owner of that property when such parties may not otherwise have a legal basis for doing so. Because these rights are created by statute alone, however, the Act is strictly construed, and parties must strictly comply with the requirements of the Act in order to enjoy its benefits.

The purpose of this article is to provide a general overview of Illinois' mechanics lien law. This article does not address the complexities that can and do arise, and any person wishing to pursue or defend against a mechanics lien claim should seek proper legal counsel prior to doing so.

Private Construction Projects

A party that provides services, labor or materials for a construction project in Illinois pursuant to a contract to improve property has a lien upon the real estate at issue. A party will not be entitled to enforce its lien, however, until it has properly recorded a valid lien in compliance with the requirements of the Act. As noted below, these requirements may differ depending on whether the party is classified as a "contractor" or "subcontractor" for purposes of the Act. A "contractor" is any party who has a contract directly with the owner or "with one whom the owner has authorized or knowingly permitted to contract," regardless of whether the party is, for example, an architect, engineer, laborer or supplier. (1) A "subcontractor," on the other hand, is any party that furnishes labor, services or material "for the contractor." (2) Although this definition of subcontractor appears limited to first-tier subcontractors in that it specifically refers to work furnished "for the contractor," Illinois courts have found that the term "subcontractor" as used in the Act also includes second- and third-tier subcontractors.

Preparing The Mechanics Lien

The mechanics lien claims of both contractors and subcontractors must be verified by the affidavit of the claimant and must contain:

* a brief statement of the claimant's contract;

* the balance due after allowing all credits; and

* a sufficiently correct description of the lot, lots or tracts of land to identify the same. (3)

In addition, the lien claim should state the claimant's last date of work on the project or, if the claimant's work is ongoing, that the claimant's performance under the contract is not yet complete. Although the Act does not explicitly require such information, at least one Illinois court has found a mechanics lien to be deficient for failing to state the last date of work.

Perfecting The Mechanics Lien

Even if a claimant has properly prepared its lien, the claimant will not be able to enforce its lien against the interests of third parties (such as subsequent purchasers or lenders) until the lien has been perfected. To properly perfect a mechanics lien, both contractors and subcontractors must record their liens within four months of their last date of work. In addition, subcontractors must comply with certain notice requirements. Subcontractors working on an existing, owner-occupied, single-family residence, for example, must serve a notice on the occupant of the residence within 60 days from their first day of work. This notice must state:

* the name and address of the subcontractor or materialman;

* the date on which the claimant started to work or deliver materials;

* the type of work done and to be done or the type of materials delivered; and

* the name of the contractor requesting the work.

The notice must also contain the warning set forth in Section 5 of the Act, advising the home occupant of the subcontractor's right to file a mechanics lien in the event of nonpayment.

Subcontractors on all private construction projects (including owner-occupied, single-family residential projects) must also give notice to the owner or his agent, architect, or superintendent having charge of the property, and the lending agency, if known, of their intent to file a lien. Subcontractors must give this notice within 90 days following their last date of work, and the notice should be consistent with the form provided in Section 24 of the Act. The Act requires this notice to be sent via registered or certified mail, restricted delivery, return receipt requested.

There is only one exception: subcontractors that fail to give the 90-day notice may nevertheless record a mechanics lien if the owner of the property was given notice of the subcontractor by means of a Contractor's Sworn Statement. (4) Under this exception, the subcontractor may record a lien for an amount equal to or less than the amount shown on the last Contractor's Sworn Statement only, regardless of whether that amount is correct. Subcontractors that fail to give the 90-day notice and who are not named in the Contractor's Sworn Statement have no enforceable lien rights.

Recording The Mechanics Lien

Section 7 of the Act provides that the claim for lien may be fired "at any time after the contract is made." Nevertheless, contractors and subcontractors generally wait until they have performed at least some portion of the work before recording a mechanics lien. Notably, some commentators believe that substantial performance of the contract is a prerequisite to recording a lien.

As stated above, contractors and subcontractors must record their lien within four months after their last date of work in order for the lien to be properly perfected. All mechanics liens must be recorded in the office of the recorder of the county in which the subject property is located.

Enforcing The Mechanics Lien

To enforce a mechanics lien, a lien claimant must file suit within two years after its last date of work on the project. Note, however, that the lien will not be enforceable against third parties unless the lien is properly perfected as described above. A claimant does so by means of a foreclosure action in which the lien claimant asks the court to order the property that is subject to the mechanics lien to be sow and to apply the proceeds of the sale to the claimant's unpaid claim. Subcontractors who choose to fire a foreclosure action must sue the owner and the contractor jointly for the amount due.

Note that the two-year time period for filing suit may be accelerated by a demand made pursuant to Section 34 of the Act. If a lien claimant receives a Section 34 demand, the lien claimant must initiate suit to enforce its lien within 30 days or the claimant will forfeit its lien.

The two-year time period may also be suspended or "tolled" if the owner files for bankruptcy.

Owner's liability For Subcontractor Claims

If judgment is entered against the owner on a subcontractor's lien claim, the owner will be liable for no more than the amount that was due or to become due from the owner on the underlying owner/contractor agreement at the time the owner received notice of the subcontractor's claim. If that amount is less than the total amount of perfected lien claims, then each subcontractor lien claimant will recover its claim on a pro rata basis. Notwithstanding the foregoing, an owner that pays in good faith reliance on the amounts set forth in the Contractor's Sworn Statement will not be liable for lien claims in excess of the amount shown on the sworn statement, regardless of whether that amount is correct. This rule does not apply if the owner paid the contractor in bad faith or for some improper purpose, such as fraud or collusion.

Priority

A property perfected mechanics lien attaches as of the date of the contract between the owner and the contractor. This fact is significant because the priority of a lien claim is determined by the date of its attachment to the real estate. Liens filed prior to the recording of other secured interests, for example, will have priority over those interests. Although this "first in time, first in right" principle is the general rule, mechanics liens are also given priority over certain interests that were recorded prior to the lien. Thus, for example, a mechanics lien will have priority over a previously recorded mortgage to the extent that the lienor can prove that its work enhanced the value of the property. In this case, the mechanics lien will attach and have priority to the extent of the enhanced value.

Waivers Of Lien

The Act prohibits a party from agreeing in its contract for the project to waive its right to enforce or claim a mechanics lien. As such, any contractual provision in which a party is required to waive such rights or otherwise agrees to waive such rights is void and unenforceable.

Subsequent to entering into its contract for the project, however, a party may waive its mechanics lien rights by way of a lien waiver. There are three main types of lien waivers. A "waiver of lien to date" waives a party's right to lien for all amounts owed to that party under the contract, including all extras and change orders, as of the date stated in the lien waiver. A "waiver of lien to amount paid," on the other hand, waives a party's right to lien for the amount (specified in the waiver) that the party has been paid. Finally, a "final waiver of lien" completely waives a party's right to file a mechanics lien for any amount due under its contract for the construction project, including all amounts due for extras and change orders. Note, however, that a waiver of mechanics lien rights does not waive a party's right to pursue its other remedies under the law.

Renovation and Repair Work

The Illinois Mechanics lien Act does not treat a party that performs renovation or repair work differently than other parties to a construction project. Thus, a party performing such work will be entitled to record and enforce a mechanics lien as long as it complies with the Act's requirements discussed above.

Subdivision And Utility Improvements

The Act also does not treat parties that perform subdivision or utility improvements differently. Parties that perform work on multiple properties (as is often the case with subdivision or utility work) should be aware, however, that the Act authorizes blanket liens for work performed on multiple properties pursuant to a single contract. A blanket lien must sufficiently identify the individual properties, the amounts owed on each such property, and the completion date for each property. The blanket lien must be timely filed as to each property.

Tenant Work

Work requested by tenants is subject to lien if the owner of the premises consents to the work, the owner has notice of the work performed and the materials furnished for the work, or if the tenant has authority to order the work. The work must be of a character for which liens are typically given.

Leased Equipment/Rentals

The cost of leased or rented equipment may be included in a lien under the Act if the equipment was used to perform work or supply materials and the lease or rental cost was included in the price of the work or materials. For example, the cost to lease a cement mixer is lienable by the contractor leasing the mixer where the mixer was used to provide cement for a project and the lease cost was part of the cement manufacturing costs charged to the owner. The contractor is not required to separately identify the lease or rental cost in the lien and may file a lien for the total amount of work performed or materials supplied.

Public Construction Projects

A party providing labor, services or materials with respect to a public construction project should be aware of some key differences between mechanics liens on private versus public projects. These differences are briefly discussed below. Note that Section 23 of the Act, which pertains to mechanics liens for public improvements, does not distinguish between "contractors" and "subcontractors." Thus, the following applies equally to all parties entitled to lien.

Unlike a lien on a private construction project, a mechanics lien on a public project is a lien on the funds due or to become due from the public entity to the contractor, not the underlying real estate. To perfect the lien claim, the claimant must notify the clerk or secretary of the public body of its claim. The Act does not specify a particular form for this notice but only requires that the notice be in writing. The Act also does not specify a time period for issuing this notice. The claimant must file suit for an accounting (rather than a foreclosure action), however, within 90 days after serving the notice.

Amendment

Note that the Illinois Mechanics lien Act was amended on August 18, 2005 and that the amendments will take effect on January 1, 2006. The amendments do not impact any of the foregoing.

This article has been prepared for the general information of readers. It is not intended to provide legal advice with respect to any specific matter.

(1.) 70 ILCS [section] 60/1

(2.) 70 ILCS [section] 60/21

(3.) Stating the common address and legal description of the property is usually sufficient.

(4.) A Contractor's Sworn Statement is a document prepared by the contractor for the owner to advise the owner of which parties are supplying services, labor or materials to improve the property and, with respect to each subcontract, of the amount of the subcontract, the amount that has been paid to date, and the balance left to be paid.

Heidi Hennig Rowe is an Associate at Schiff Hardin LLP's Chicago practice, focusing on construction litigation. She may be reached by e-mail at hrowe @schiffhardin.com or by phone at 312.258.5534.

Steven D. Welhouse is an Attorney at Schiff Hardin LLP's Chicago practice, focusing on construction litigation. He may be reached by e-mail at swelhouse @schiffhardin.com or by phone at 312.258.5655.
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Title Annotation:NACM's 110th Credit Congress & Exposition; construction Projects
Author:Rowe, Heidi Hennig; Welhouse, Steven D.
Publication:Business Credit
Geographic Code:1U3IL
Date:Feb 1, 2006
Words:2356
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