Chapter 20 Mechanics' liens.
In this chapter we describe mechanics' liens generally. Mechanics' lien laws vary in detail from state to state, but the basic principle is the same in each. After studying this chapter, you should know the purposes of mechanics' lien rights, how they help the participants in the construction process, and when they should be exercised.
ORIGINS OF MECHANICS' LIENS
Knowledge of the origins of mechanics' lien laws aids in understanding how landscape contractors can use these laws to help them recover money owed to them. Under common law, someone who works on the personal property of others (e.g., an automobile) and thereby increasing its value, has a "possessory lien" on the property for the value of the work done, so long as the personal property remains in the possession of the person doing the work. The person who has done the work doesn't have to give up possession until paid for the work. If the person isn't paid, a court could order that the personal property be sold and that the proceeds of the sale be applied first in payment for the work done. This outcome is considered to be fair because the person who did the work increased the value of the property; accordingly that person should have the benefit of the work done rather than have the benefits of the work accrue to the owner and any creditors who didn't pay for the work. In other words, the owner and any creditors shouldn't be unjustly enriched.
This common law is applicable only to personal property (being chattels such as wagons, furniture, and, these days, automobiles) not real property (being land and improvements attached to the land). Under common law, someone making improvements to land doesn't have possession of it and so can have no possessory lien on the land and cannot require it to be sold to recover the costs of making the improvements. This outcome is a disadvantage to owners because contractors are reluctant to build improvements and suppliers are reluctant to supply materials for those improvements to land unless they are paid in advance. It is also a disadvantage to contractors and suppliers because, if they aren't paid in advance, they are just like other creditors seeking payment for their work, even though they have improved the property from which the owners and other creditors would benefit. To remedy this situation, in the late 1800s and early 1900s most state legislatures passed mechanics' lien laws.
Such laws are appropriate because, when owners or general contractors are bankrupt, often the main assets available to pay those who improved the land are the land and improvements themselves. By providing that mechanics' lien holders have priority over other creditors from the proceeds of the sale of the land and improvements, mechanics' lien laws are of great assistance in recovering payment by those who do work or supply materials for the improvement of land.
Mechanics' liens directly benefit those who have contracts with owners (e.g., general contractors and architects or engineers) and also those who have contracts with general contractors and subcontractors (e.g., laborers, suppliers, and other subcontractors).
In principle, mechanics' lien laws are the same in all states, but the specifics vary from state to state--for example, the time and place for filing mechanics' liens and whether owners must retain a portion of funds otherwise payable to general contractors for the benefit of mechanics' lien claimants. You should check the law in your state or consult with a lawyers when proposing to exercise mechanics' lien rights because mechanics' lien laws impose strict limits on the time for exercising those rights. In some states, such as New York, the law provides that "... substantial compliance with its several provisions shall be sufficient for the validity of a lien ...", but this provision should not be relied on to excuse late filings. If filings aren't made within the time required by the law, mechanics' liens cease to exist. Landscape contractors should know the details of the mechanics' lien legislation in the states in which they operate.
CREATION AND TERMINATION OF MECHANICS' LIENS
Work Done and Materials Supplied
Under most mechanics' lien statutes, mechanics' liens for the value of work done for an improvement on or materials supplied for improvements to land come into existence at the time the work is done or the materials are delivered, without the necessity of preparing or filing any documents. In most states, (e.g., Pennsylvania), if a supplier delivers construction materials to a site, it is "presumed to have been used therein in the absence of proof to the contrary," but in the enforcement of the lien, the lien claimant must prove delivery to the site. However, even if a supplier could prove that its products were used in an improvement, if the first supplier sold the products to a second supplier and not directly to a subcontractor, the first supplier would not have a valid lien.
Another example of differences in state laws is that in Ohio it has been held that there is no right to a mechanics' lien for demolition work, but in New York there is an express provision permitting mechanics' liens for demolition work.
Mechanics' liens will cease to exist, automatically, if lien claimants don't protect their liens by making the filings required under the mechanics' lien law of the state where the land subject to the lien is situated. For example, in Pennsylvania the statute prescribes the following terms for proceeding with a claim and for its resolution.
Notice of Intention to File a Claim. No claim by a subcontractor is valid unless at least 30 days before filing the claim the subcontractor has given to the owner a formal written notice of its intention to file a claim. An owner who has received notice of intention to file a claim, or of the filing of a claim by a subcontractor may retain, out of monies otherwise payable to a contractor, an appropriate amount to protect the owner from loss.
Filing and Notice of Claim. A claim for a mechanics' lien ceasees to exist unless the claimant
* files a claim in the county court for the county where the land is situated within four months after completion of the work, and
*serves written notice of the filing on the owner of the land within one month after filing the claim.
Legal Action Enforcing a Claim. A claim for a mechanics' lien also ceases to exist unless the claimant commences legal action to enforce the claim within two years of filing the claim.
Judgment. A claim for a mechanics' lien ceases to exist if judgment isn't entered within five years (plus permitted extensions) from the filing of the claim. The purpose of this requirement is to prevent claimants from commencing legal action, not proceeding with the claim, and in the meantime impugning the title of the owner to the land.
Enforcement of Judgment. The normal judgment on a successful lien claim is for the land to be sold and for the lien claim to be paid out of the proceeds of the sale. Sales and distribution of proceeds rarely occur because the law is relatively clear, and an owner usually will sell and/or pay valid claims prior to a sale and distribution of proceeds by the courts.
Contents of Claim for Mechanics' Liens
The information that must be contained in a claim or notice of a lien is similar in most states. It should be sufficient for others to know the nature and amount of the lien. In New York, for example, that information must state
* the name and residence of the claimant and, if the claimant is a partnership or a corporation, certain further particulars;
* the name and address of the claimant's attorney, if any;
* the name and interest of the owner of the land;
* the name of the person by whom the claimant was employed or to whom materials were furnished or the contractor or subcontractor with whom the claimant had a contract;
* the labor performed or materials furnished and the contract price;
* the amount to be paid;
* the time when the first and last items of work were performed and materials were furnished; and
* a description of the property subject to the lien sufficient for identification.
Verification of Lien Claims
To discourage a claimant who purports to be owed more than is properly payable in the hope of forcing a favorable settlement with an owner, Minnesota law requires the information contained in the notice to be verified by affidavit. In New York, if a lien claimant willfully exaggerates the amount of the claim, the lien is to be declared void.
Place of Filing Lien Claims
In most jurisdictions the place for filing a lien claim is in the county court of the county in which the land subject to the lien is located. In some jurisdictions a claim is to be filed in the land registry office. For example, in Minnesota a claim is to be filed with the county recorder or, if registered land, with the registrar of titles of the county in which the land is located. In Oregon a claim must be filed in the recorder's office in the county in which the land is located.
Waiver of Lien Rights
In some states (e.g., New York) waiver by a lien claimant of the right to file and enforce a mechanics' lien is void as being against public policy and is wholly unenforceable. In other states (e.g., Pennsylvania) a contractor or a subcontractor is expressly permitted to waive their right to file a claim.
EFFECTIVENESS OF FILING A MECHANICS' LIEN CLAIM
Landscape contractors shouldn't file mechanics' liens unless they are concerned about payment and there is no other effective way of securing payment of what is owed them. Mechanics' liens, once filed, are troublesome to owners and general contractors and claimants alike.
Owners and general contractors are reluctant to deal with "trigger-happy" landscape contractors who file mechanics' liens unnecessarily. If one mechanics' lien is filed against a parcel of land, most other parties entitled to mechanics' liens will file their claims. If mechanics' liens are filed, most mortgage lenders won't advance funds under their mortgages on properties because the mechanics' liens usually will have priority over the monies advanced as a charge against the lands. In Pennsylvania, on receipt of a notice of intention to file or a notice of the filing of a claim for lien by a subcontractor, an owner may retain out of monies otherwise payable to a contractor, an amount sufficient to protect the owner from loss until the claim is settled.
The filing of mechanics' liens requires owners or general contractors to go through costly legal procedures to have the liens removed, and they may have to pay money into court to secure the removal. Upon payment into court of the amount claimed under a mechanics' lien, a court will usually order removal of the lien and hold the money in escrow. The filing of mechanics' liens also raises concerns about the credit of the owners and general contractors, so they may not cooperate in settling lien claims out of court, requiring lien claimants to go to the expense of proving their rights in court. If a mechanics' lien is filed against property, most prospective purchasers will require the lien to be removed before proceeding with the purchase. Therefore mechanics' liens that have been filed will usually be paid eventually provided that they are kept in force by legal action commenced within the time required.
If a payment bond covering labor and materials is in force, the bonding company should pay claims of those entitled to mechanics' liens, so many subcontractors and materials suppliers consider it unnecessary to file claims for mechanics' liens. We discuss payment bonds in Chapter 21.
However, if owners or general contractors actually go bankrupt, or if general contractors abandon the work, mechanics' liens should be filed promptly because liens will give landscape contractors appropriate protection. In those circumstances the owners and general contractors cannot properly object to landscape contractors filing mechanics' lien claims.
MECHANICS' LIEN RETAINAGE
Under some mechanics' lien statutes, owners and others liable under a contract for payment for work done or materials supplied for an improvement to land must hold back a percentage on the money otherwise payable under the contract. For example, in Texas, 10% of the value of the work done must be retained by owners for 30 days after completion of the work. Lien claimants may claim against this retainage, and they can also claim against the land. If owners prepay the retainage amounts to contractors, and the contractors fail to pay their subcontractors, the owners will be obliged to pay that amount again to the subcontractors and supplier lien claimants for release of their liens. Sometimes owners will release the holdback so that general contractors can pay subcontractors who have completed their work because they believe the general contractors are financially sound and can protect the owners against lien claims.
In some jurisdictions (e.g., Minnesota) even if claims for mechanics' liens aren't filed within the time required, trust provisions of the statute apply. Money paid to general contractors or subcontractors, which are in turn payable to subcontractors or suppliers, are subject to a trust for payment to them. The monies are not subject garnishment, execution, levy, or attachment. For example, if a general contractor has not paid a subcontractor, any moneys paid by the owner to the general contractor are subject to a trust in favor of the unpaid subcontractor. If the general contractor uses these funds for other purposes, the general contractor is guilty of theft and subject to punishment.
ENFORCEMENT OF A MECHANICS' LIEN CLAIM
Mechanics' liens are rarely continued through to their final conclusion in court. Usually before that time, owners need mortgage advances or want to sell the property, and a requirement of the mortgage lenders or the prospective purchasers is that the mechanics' liens be released, so the matter gets settled. Usually there is little in dispute because it can be proven that the work has been done or that the materials have been supplied, and the amount is rarely in dispute.
However, in the unlikely event that the matter does proceed to trial, if the lien claimants prove that the money is properly owing and that their liens are valid, a court should order that the property be sold, with the proceeds of sale being paid to the lien claimants in accordance with their priority. Mortgage money advanced in good faith prior to notice of filing of the lien claims usually takes priority over the lien claims, but mortgage money advanced after the filing of the lien claims are subject to the priority of the valid lien claims.
In many states (e.g., New York) owners may secure the release of all liens against property if they pay monies or deposit bonds in an amount equal to the aggregate amounts of claims into court or the clerk of the county.
RIGHTS TO INFORMATION
In many jurisdictions (e.g., New York) subcontractors, laborers, and suppliers are entitled to get information from an owner about the prime contract under which they are claiming and particulars of monies due under the contract. The owner is entitled to get itemized information from the contractor and subcontractor lien claimants about their claims.
This information is important for owners, contractors, and subcontractors alike in determining their respective rights under the applicable mechanics' lien statute. In New York, if owners who are required to give information fail to do so, they are liable for the resulting loss; if lien claimants fail to give information as required, their liens may be canceled.
Mechanics' liens are created by legislation and do not exist at common law. Rights under mechanics' lien statutes are similar to the rights of those at common law who, as a result of work done, have a possessory lien on personal property of others while that property is in their possession. They need not give up possession until they have been paid. If not paid, they can require that the property be sold and that they be paid out of the proceeds of the sale.
Mechanics' liens for work done or materials supplied for improvements to land come into existence as the work is done or materials are supplied, but they cease to exist if claims for the mechanics' liens aren't filed within the time required by the law. They also cease to exist if legal action isn't taken to enforce the liens within the time required by the law.
The claim for mechanics' lien is a written statement stating particulars of the claim.
Mechanics' lien claims are troublesome to owners and general contractors. Landscape contractors shouldn't file them unless they have real concern about payment for their work and there is no other suitable security for payment. Payment bonds may be acceptable security for payment.
Under some mechanics' lien statutes, owners and general contractors are required to hold back a percentage of the money otherwise payable to contractors, subcontractors, and suppliers. Lien claims have a claim against these moneys, as well as against the land and improvements.
In some jurisdictions, money paid to contractors and subcontractors for payment to subcontractors and suppliers are subject to a trust for payment to them. If not paid, the contractors and subcontractors can be liable for theft.
Claims for mechanics' liens are enforced in the courts. If mechanics' liens aren't paid or released by payment of required holdback, the land subject to the lien may be sold and the proceeds used to pay the liens.
Owners, general contractors, subcontractors, and suppliers are entitled to obtain certain information from the others relating to contracts and subcontracts and payment of money.
CHAPTER REVIEW QUESTIONS
1. What is the purpose of mechanics' lien statutes? How is its purpose achieved?
2. How are mechanics' liens created? What information usually is required to be in a claim for a mechanics' lien?
3. When do mechanics' liens cease to exist?
4. What actions usually must be taken to preserve the validity of mechanics' liens? When must this action be taken?
5. What are the advantages and disadvantages to a landscape contractor of filing a claim for a mechanics' lien?
6. What are the difficulties of owners and general contractors if landscape subcontractors file claims for mechanics' liens?
7. What is mechanics' lien retainage? What is its purpose? When should it be paid?
8. In the states that have trust provisions in their mechanics' liens laws, what do those provisions provide?
9. How do mechanics' lien claimants enforce their liens? Why are mechanics' liens seldom enforced to their final conclusion of sale of property subject to the liens and payment of the sale proceeds to lien claimants?
10. What information are owners, general contractors, subcontractors, and suppliers often required at law to provide each other? Why would the recipients require the information?
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|Title Annotation:||PART 4 JOB ADMINISTRATION|
|Publication:||Landscape Estimating and Contract Administration|
|Article Type:||Professional standards|
|Date:||Jan 1, 2002|
|Previous Article:||Chapter 19 The cash flow accounting process.|
|Next Article:||Chapter 21 Insurance and bonding.|