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Mechanic's liens in Alabama.

The term "mechanic's lien" is the generic name for any lien on realty in favor of persons furnishing labor or materials used in or for the erection of buildings or for making improvements to realty. Generally speaking, the purpose of mechanic's liens is to provide contractors, subcontractors, laborers, and suppliers with a mechanism to secure payment for materials and services provided on private construction projects. The purpose of a mechanic's lien is to prevent unjust enrichment--to prevent persons from enjoying the benefits of another's work or goods without paying compensation.

Like mechanic's liens in other states, a mechanic's lien in Alabama is a creature of statute. The concept of mechanic's and materialman's liens was unknown as common law. Because the Alabama's mechanic's lien was created by statute in derogation of the common law, the statutory requirements must be strictly followed. Mechanic's liens must be claimed and perfected in the manner and within the time limitations specified in the statute.

The Alabama mechanic's lien is intended to secure payment for any work or labor so long as the work or labor constitutes an "improvement" to land. Yet, it is important to note that the contractual relationship between the parties on a construction project affects one's entitlement to a lien right under Alabama law. Only original contractors (those having a direct contractual relationship with the owner of the property or land upon which the buildings or improvements are to be constructed, whether or not such contract is for the furnishing of labor or materials), subcontractors, and their material suppliers and subcontractors possess mechanic's lien rights in Alabama. The Alabama lien statute, therefore, does not extend protection to a supplier of materials to another supplier. In Alabama, mechanics and materialmen who have a direct contract or implied contract with the owner are afforded greater protection than those having no such relationship.

In Alabama, the nature of the services rendered or materials furnished can also affect the claimant's entitlement to a lien right. Generally, the labor or materials must be expended on something that is attached to or has become part of the land and adds substantial value to the property. Work performed or materials furnished for the fabrication of components or equipment off-site, which will be installed on-site, should be subject to a lien. As a general matter, proof of delivery of materials to a building site presumes their use in the improvement, and the owner has the burden of showing they were not used.

Services such as clearing, grading and excavation work, well drilling and the construction of a coal mine have all been determined to be an improvement to property sufficient to support a lien. An architect or engineer who prepares drawings, plans, and specifications for a building and superintends its erection is entitled to a lien; however, a surveyor who stakes out a subdivision and draws maps does not "perform work" for a "building or improvement" within the meaning of the statute such that lien rights would obtain.

The amount of a mechanic's lien is not limited to the costs of the materials or services supplied; rather, the lien also extends to include interest at the legal rate or at a higher rate if specified in the written agreement with the contractor or owner. A mechanic's lien may also include attorney's fees incurred in its collection if the written agreement under which the materials or services were supplied provided for the payment of attorney's fees.

Types Of Mechanic's Liens

The Alabama mechanic's lien statute provides for two types of mechanic's liens--the full price lien and the unpaid balance lien. Those parties having an express or implied contract with the owner are entitled to a flail price lien, that is, a lien for the full price of the materials and services furnished. Every original contractor--that is a contractor having a direct or implied contract with the owner for which the owner is responsible for payment has a full price lien on the amount of its contract with the owner against the land or the buildings and improvements made thereon, or against both the land and improvements, "to the extent in ownership of all the right, title, and interest therein of the owner."

A full price lien is also available to materialmen not in privity of contract with the owner if they provide notice to the owner prior to furnishing the material and enough in advance so that the owner has the opportunity to object in writing before the material is used. It should be noted that the statute appears to make the advance notice full price lien only available to materialmen and not to those supplying labor or services. The form of notice set forth in the Alabama statute is as follows:

To--(owner or proprietor):

Take notice that the undersigned is about to furnish--, (your contractor or subcontractor) certain material for the construction, or for the repairing, altering or beautifying of a building or buildings, or improvements, on the following.--(described property) and there will become due to the undersigned on account thereof the price of said material, for the payment of which the undersigned will claim a lien.

The notice suggested by the statute is inconsistent with the specific requirements of the statute. The statute requires that the notice advise that specified material at specified prices will be furnished and that the furnisher of the material shall have a lien for full price as specified in the notice. The statutory form does not satisfy the statutory requirements. Nevertheless, the statutory form notice has been held to be sufficient by the Alabama Supreme Court.

While the Alabama statute requires that the notice be given before the materialman furnishes any material, the statute does not state how much advance notice should be given. Presumably, providing the owner with written notice that allows the owner a reasonable opportunity to object in writing "before the material is used" is sufficient. The notice also must be given to the owner's construction lender, if its identity can be reasonably determined. If the owner does not object after being given reasonable advance notice, the materialman is entitled to a lien on the full price of the materials supplied. In the event an owner exercises its right to object in writing before the material is used, a materialman may still be entitled to a lien if it complies with the statutory requirements for perfecting an unpaid balance lien.

The unpaid balance lien, which is completely separate and distinct from the full price lien, is available to other persons or entities not having contracts with the owner (and who are not materialmen that have provided advance notice of a full price lien); however, unpaid balance lien rights do not extend to suppliers of suppliers. An unpaid balance lien entitles such lien claimants to a lien on the land or the buildings and improvements, or on both the land and the improvements, for the unpaid balance due to the original contractor by the owner at the time the lien is claimed and notice given, provided that the lien shall not exceed the amount of the balance then unpaid by the owner to the contractor. Because the unpaid balance lien is limited to the amount owed by the owner to the contractor, which could be negligible at the conclusion of a job, or, in the case of a contractor's default, may be zero if the owner incurs extra costs to complete the project in excess of the contract price with the contractor, there may be no "unpaid balance" due to the contractor, and in such a case, no lien may be obtained.

Steps In Perfecting A Lien

Mechanic's liens, being statutory creations, can be obtained (or perfected) only by strictly complying with the requirements found in the lien statute. Failure to adhere strictly to the requirements of the statute will result in a loss of lien rights because Alabama courts will not recognize an equitable lien when statutory lien procedures are available. Depending upon the type of lien sought and the entity seeking the lien, there are four procedural steps that must be followed to perfect a lien--providing notice, filing a verified statement of lien, filing suit to enforce the lien and obtaining a money judgment.

Notice Requirements

Notice requirements apply to all mechanics and materialmen, except for the original contractor who has a direct contract with the owner. Materialmen who lack a contract with the owner and seek a full price lien must provide the owner (and the owner's construction lender, if it can reasonably be identified) with written notice of intent to claim a lien before the material is used in connection with the project. The written notice must state that a lien is claimed and must set forth the amount of the lien, the work performed and the person to whom the money is owed. In addition, the materialman must incorporate a clause in the notice that asserts a right to attorney fees and finance charges if he wishes to recover them in a lien suit.

In the case of an unpaid balance lien, the claimant must serve the owner and the construction lender with written notice of intent to file a lien prior to filing a Verified Statement of Lien. If the lien claimant is a subcontractor, it should also give the same notice to the general contractor.

Verified Statement Of Lien

The second step for persons not having contracts with the owner (and the first step for original contractors, who are not required to give notice to the owner) is filing a verified statement of lien in the probate court of the county or counties where the property is situated within the following time limits: (1) laborers must file within 30 days after the last item of work has been furnished; (2) original contractors must file within six months after the last item of work has been performed or the last item of material has been furnished; and (3) every other lien claimant must file within four months after the last item of work or material has been furnished.

Suit To Enforce Lien

The third step for perfection of a mechanic's lien in Alabama (and the second step for original contractors) is filing suit to enforce the lien. Lien claimants may join all parties having an interest in the subject property to the lien enforcement action. Any party not joined by the claimant is not bound by the judgment or proceedings therein. For example, the owner or proprietor of the property is a necessary party to the enforcement action, and in a suit to enforce an unpaid balance lien, the general contractor is a necessary party.

A suit must be commenced within six months after maturity of the entire indebtedness. Ordinarily, this maturity date will be when the last labor was performed or the last materials were furnished. However, the maturity date may also depend upon the lien claimant's billing practices or expectations. Upon filing a suit to enforce a mechanic's lien, a notice of lis pendens must also be filed in the county or counties where the property is located.

Judgment

The final step in perfecting a mechanic's lien in Alabama is for the lien claimant to establish liability for the debt for which the lien is claimed and obtain a money judgment against the debtor. If a lien claimant cannot obtain a money judgment against the original contractor (for example, due to a discharge in bankruptcy), the lien cannot be perfected and enforced. Under Alabama law, a mechanic's lien remains inchoate and loses all force and vitality unless an action is brought and prosecuted to final judgment.

Property Subject To A Mechanic's Lien

In order to be able to claim either a full price lien or an unpaid balance lien, it is necessary that the services rendered or the materials furnished constitute a building or improvement. As a general matter, the labor or materials must be expended on something which has been attached to or become a part of the land and adds substantial value to the property. The courts determine what constitutes a building or improvement on a case-by-case basis.

Furthermore, the extent of the property made subject to a lien depends upon whether the property or land is situated within the corporate limits of a city or a town. When the buildings or improvements on which the lien is claimed is made on land situated in a city or town, the lien extends to all of the rights, title, and interest of the owner of the land "to the extent in area of the entire lot or parcel." If the property is not in a city or town, the lien extends to the owner's interest in the improvements and "one acre in addition to the land upon which the building or improvements is situated."

Effect Of Ownership Of Land, Building And Improvements

Property Owners

It is important to understand that to be able to enforce a full price lien upon an owner's property, building, and improvements, an enforceable contract, either express or implied by law, must exist between the lien claimant and the owner. The owner or proprietor (or its agent, architect or trustee) of the land on which the buildings or improvements are made must authorize the contractor or materialman to perform the work or supply the materials via an express or implied contract. Unless the contractor or materialman has such a contract or the owner acquiesces in the construction, the lien claimant has no lien on the land, buildings, or improvements. Ownership at the time of contracting is critical, and therefore a potential lien claimant should verify that the contracting party actually owns the land or has a leasehold interest prior to contracting for the work.

Lessees

In the situation where a lessee arranges for construction or improvements to property and fails to pay and the mechanic or materialman claims a lien against the property, the lien will not attach unless the terms of the lease allow the construction or improvement of the property to be made. If the lease prohibits the tenant from contracting for the improvements without the permission of the landlord, there would be a significant question about whether the mechanic or materialman has any lien right. Moreover, if a lien right does exits, the lien does not attach to the realty (the land), but only to the improvement and to the tenant's leasehold interest.

If the situation arises wherein the tenant does not pay the debt, a lien claimant (after perfecting its lien) could conceivably take over from the tenant and begin paying rent to the landlord and have the right to act as if he were the assignee of the lease for the rest of the lease term. Alternatively, the lien claimant's other remedy is to try to remove whatever improvement was made, including removing the entire building, if that is what was built. If this remedy is chosen, care must be taken not to damage the landlord's property or other improvements. Finally, the landlord has the right to pay the lien claimant the amount due to prevent removal of the building or improvement.

Government Entities

Alabama's mechanic's lien laws do not apply to public buildings and the lands upon which they are situated. If title to the land is held by the state or a political subdivision thereof, no mechanic's lien right is afforded mechanics or materialmen working on the project. Projects owned by industrial development boards, however, are subject to mechanic's liens.

Waiver Of Lien Rights

The right to a mechanic's lien created by the Alabama statute may be subordinated, waived or released by contract. There exists a refutable presumption that the right to a mechanic's lien exists if the lien claimant has brought itself within the protection of the statute by complying with all of the statutory formalities. An owner claiming that a lien claimant has expressly or impliedly waived its claim for a lien has the burden of showing that the lien claimant "knowingly surrendered or waived" its right to the lien.

Priority Of Liens

Competing Mechanic's Liens

As between competing mechanic's liens, all claimants are on an equal footing, except for the original contractor, who is subordinated to the claims of his subcontractors, materialmen, and lower tier laborers and suppliers. Under Alabama law, mechanic's liens do not have priority based upon the date of filing of the Verified Statement of Lien, or upon the date that notice is given to the owner of the claim or upon which the entity began supplying material first. If the property is sold to satisfy the lien, and the funds from the sale (coupled with funds from the owner) are insufficient to satisfy all liens in full, the funds are distributed pro rata among each of the lien claimants that obtains a judgment establishing its lien. As previously noted, the original contractor holds the last priority among lien claimants and will be paid out of any remaining balance after the liens of all of its subcontractors and materialmen have been paid.

Mortgages

Mechanic's liens enjoy priority over mortgages and other encumbrances created subsequent to "the commencement of work on the building or improvement." Moreover, if the building or improvement upon which the mechanic's lien is claimed is separable from the land, without impairing the value of the security of any prior mortgage or encumbrance, the mechanic's lien will have priority over the prior encumbrances with respect to the separable improvements.

Understanding the meaning of "commencement of the work" is a key to determining the priority of interests in a piece of property upon which a mechanic's lien is claimed. Within the Alabama mechanic's lien statute, the term means the time when the material for which a lien is sought is actually incorporated into the building or improvements or at least furnished at the construction site. Construction lenders should be careful to ensure no materials are furnished and no work is performed prior to the execution and recordation of the construction loan mortgage. In instances where construction has begun before the construction loan is closed, the construction lender will usually require a written subordination of all lien rights signed by all those who have furnished labor or materials.

Subsequent Purchaser Of Property

Whether a mechanic's lien will have priority over the interest of one who purchases property depends upon whether the purchaser had knowledge (actual or constructive) of the existence of the mechanic's lien. If the purchaser had no knowledge of the lien, the innocent purchaser has priority over the lienor. This rule applies only where the lien for repairs or improvements is claimed for an existing structure and the notice of lien is filed after the purchaser has taken title. Where the structure is new (completed less than six months after the commencement of work and prior to the time the statute of limitations for filing the Verified Statement of Lien has run), the purchaser will be found to have had "constructive notice" even where he or she has no knowledge whatsoever. Alabama courts have held that the fact that the work was in progress or recently completed is notice to all who deal with the property or who contract to purchase it.

Wrongfully Filed Liens

A lien that has been filed in error by a lien claimant should be discharged and released immediately upon discovery of the error. Common errors include: an incorrect property description attached to the Verified Statement of Lien, which might cause the lien to attach to property other than the property upon which the improvements were made; payment had been made and not properly credited to the contractor's or owner's account; or the materialman had no contract with the owner, contractor, or a subcontractor and was not entitled to file a lien. These types of mistakes are generally not actionable unless made intentionally and with malice. A lien claimant, however, must remember that the statement of lien is a verified statement made under oath and subject to an action for a false statement or oath, particularly if damage or injury occurs to the owner of the property.

A lien claimant who with malice files a lien upon property knowing that the claim for which the lien is sought is false and which results in damages to the owner can be liable to the owner for slander of title. Malice under Alabama law for purposes of an action for slander of title cannot be found if the lien claimant filed the lien against the property in good faith or had probable cause to believe the truth of its claim.

Providing A Substitute Security In The Place Of A Lien

Alabama law permits owners of property upon which a mechanic's lien is imposed, to have the lien discharged by putting in place a substitute security. This removes the lien encumbrance from the real property. The procedure to have the lien discharged involves filing a copy of the lien with the court in which the action is brought and then either: (1) depositing with the court an adequate sum of money, or (2) filing a bond executed by an acceptable surety, with the deposit or bond conditioned upon the owner paying any judgment or decree which may be rendered for the satisfaction of the lien. Unless the lien claimant objects to the sufficiency of the substitute security, the real property is released from the lien, and the lien is, in effect, transferred to the substitute security. This results in the real property being free and clear of the lien.

Conclusion

Alabama's mechanic's and materialman's lien law, although created to protect mechanics and materialmen, is full of pitfalls for those not familiar with the intricacies of the statute. This article touches upon a number of those pitfalls and discusses the necessity for strict adherence to the procedural and notice requirements of Alabama's lien statute. The article, however, is a brief introduction, rather than a comprehensive guide, to Alabama lien law. Readers thus are encouraged to seek legal counsel whenever they are confronted with situations that may involve mechanic's liens in Alabama.

Axel Bolvig III is a partner with the law firm of Bradley Arant Rose & White, LLP in Birmingham, Alabama, where he practices construction law. Rhonda C. Andreen is an Associate with Bradley Arant in its Birmingham office, where she practices construction law. They can be reached by telephone at 205.521.8000 or by e-mail at abolvig@bradleyarant.com or randreen@bradleyarant.com.
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Title Annotation:CONSTRUCTION CORNER
Author:Bolvig, Axel, III; Andreen, Rhonda C.
Publication:Business Credit
Geographic Code:1U6AL
Date:Sep 1, 2006
Words:3752
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