A mechanic's lien is a security interest in the title to property for the benefit of those who have supplied labor or materials that improve the property. The lien exists for both real property and personal property. In the realm of real property, it is called by various names, including, generically, construction lien. The term "lien" comes from a French root, with a meaning similar to link, which is itself ultimately descended from the Latin ligamen, meaning "bond" and ligare, meaning "to bind". Mechanic's liens on property in the United States date from the 18th century.
Mechanic's liens in their modern form were first conceived by Thomas Jefferson, to encourage construction in the new capital city of Washington. They were established by the Maryland General Assembly, of which the city of Washington was then a part.[1] However, it is not likely that Jefferson single-handedly dreamed up the idea.
At the time Jefferson promoted the law, a lien-like privilege already existed in civil law countries like France, the Dutch Republic and Spain, with some laws even tracing their roots to the Roman Empire. And since control of Louisiana had passed between the French and Spaniards, and had largely adopted the French Napoleonic Code, there was a similar privilege concept in that territory.[2]
It seems highly likely that the legislators working on the first U.S. Mechanic Lien laws had knowledge of, and referenced these civil law concepts. Nevertheless, the United States version was original, as it gave builders a more robust right into the land itself (versus just the improvement's value).[3]
With respect to real property, mechanic's liens are purely statutory devices that exist in every state (although in California, as noted below, they have a constitutional foundation). The reason they exist is a legislative public policy to protect contractors. More specifically, the state legislatures have determined that, due to the economics of the construction business, contractors and subcontractors need greater remedy for non-payment for their work than merely the right to sue on their contracts. In particular, without the mechanics' lien, subcontractors providing either labor or materials may have no effective remedy if their general contractor is not sufficiently financially responsible, because their only contractual right is with that general contractor.
Without the mechanic's lien, the contractor would have a limited number of options to enforce payment of the amounts owed. Further, there is usually a long list of claimants on any failed project. To avoid the specter of various trades, materialmen and suppliers attempting to remove the improvements they have made, and to maintain a degree of equality between the various lienors on a project, the statutory lien scheme was created. Without it, Tradesperson A may try to "race" Supplier B to the courthouse, the project site or the construction lender to obtain payment. Most lien statutes instead mandate strict compliance with the formalized process they create in return for the timely resolution and balancing of claims between all parties involved - both owners and lien claimants.
In the state of California, mechanic's liens are a constitutional right guaranteed to contractors by the California Constitution.[4] This right has been implemented in detail by statutes enacted by the California State Legislature.[5] In Texas, the Texas Constitution gives builders the right to lien and sub contractors are given the right under Chapter 53 of the Texas State Property Code[6]
Vehicular definition of a lien sale
A lien against a vehicle that is asserted by an auto mechanic is technically an "artisan's lien" rather than a "mechanic's lien", but it operates in a similar fashion to a mechanic's lien. A mechanic's lien can only arise against real property i.e., land or buildings. If a person (licensed repair facility) has repaired, furnished supplies or materials, towed or stored a vehicle and has not been paid for the services rendered, that person has a lien against the vehicle. The lien arises at the time the registered owner is presented with a written statement of charges for completed work or services. Although if services were performed that were not agreed upon and no written and signed estimate was issued beforehand, a mechanic has no right to keep the title owner from reclaiming the vehicle.[citation needed] If a mechanic asserts a fee that is not reasonably related to the work performed, and refuses to return the vehicle until that price is paid, the owner of the vehicle will be able to recoup a storage fee from the mechanic, as the mechanic is in the wrong for refusing to return the vehicle. In doing so the mechanic would commit the crime of conversion, or embezzlement.
On the other hand, the mechanic can assess certain expenditures from the owner that are related to the work performed. These expenditures are normally towing, storage fees, and the cost of filing the lien.
If the vehicle is towed by a public agency or private towing company, the lien arises when the vehicle is towed or transported. The lien may be satisfied by selling the vehicle through the lien sale process.
To conduct a lien sale, the person/lienholder must have possession of the vehicle and may require lien sale authorization from the State's Department of Motor Vehicles, depending on the State and or value of the vehicle. Interested parties, including the registered and legal owners of record will be notified, by Registered Mail, before the sale occurs.
Creation
Mechanic's liens exist to secure payment for services, labor and material on both personal and real property. However, the creation and enforcement mechanisms differ depending on whether real or personal property is involved. The law of mechanic's liens on real property governs the creation and enforcement of these liens on items of personal property that have been attached to real property in such a way as to be a fixture.
Creation and enforcement – personal property
The English common law recognized mechanic's liens respecting only personal property. The lien was created by operation of law by the fact of the artisan working on the personal property item or attaching additional material to it. However, to maintain the lien, the artisan had to retain possession of the article until he or she was paid. If the property were returned to the owner before that time, the lien was lost. The lien was enforced by a "self-help" sale of the property and applying the sale proceeds to payment of the amount owed for the workmanship. The sales were non-judicial, i.e., they were held in the same way as a sale of property pawned for a debt.
In America, 34 states now appear to have statutes providing for mechanic's liens on personal property.[7] These statutes tend to modify the common law rules. For example, in Virginia, a mechanic's lien can only be enforced up to the amount of $625, and if the property is valued at over $5,000, it must be sold at a sheriff's auction ordered by the court of appropriate jurisdiction.
Creation, perfection, priority and enforcement – real property
Mechanic's liens on the title to real property are exclusively the result of legislation. Each state has its own laws regarding the creation and enforcement of these liens, but, overall, there are some similar elements among them.[8] Many States distinguish between the types of real property upon which a mechanics lien can be filed.
Under the principle of sovereign immunity, real property of the government (public property) is ordinarily not subject to the claims of private parties. Therefore, unless the state specifically so provides, mechanic's liens do not attach to the title owned by the state or its administrative subdivisions, such as cities. Similarly, mechanic's liens under state law are invalid on federal construction projects. To protect subcontractors and suppliers working on federal projects where the contract price exceeds $100,000.00 the Miller Act requires general contractors to provide a payment bond which guarantees payment for work done in accordance with the terms of the contract.[9][10] Many state and municipal governments similarly require contractors on public works projects to be bonded under so-called "Little Miller Acts." Theoretically, the payment bond under the Miller Act or Little Miller Act stands in place of the government's property, and qualified claimants make claims against that bond similar to how they would file an ordinary mechanic's lien.[11]
In many states, the legislature has created extra procedures in order for a mechanics lien to be placed on residential property. In New Jersey, which enacted the strictest of these regulations, a mechanics lien can only be placed on residential property after a Notice of Unpaid Balance and Right to File Lien has been filed within 60 days of the lienor's last date of work and an arbitration award has been issued by an American Arbitration Association arbitrator permitting a mechanics lien to be filed.[12]
The act itself of filing a mechanics lien can be difficult. Most States simply require the filing of the mechanics lien with a county or court clerk within a defined amount of time from a triggering event. However, Maryland requires an application to the Court in order to file a mechanics liens. In Maryland, corporations must hire an attorney to make an application to the court.[13]
Creation and perfection
Under the statutes, the lien is usually created by the performance of labor or the supplying of material that improves the property. Just what type of contribution counts as a valid basis for a mechanics lien varies, depending on the particular state statute that applies. Some common examples are:
offsite fabricators of specialty items that are ultimately incorporated into the project.
Often, there is no simple dividing line that is useful in every state, or even in every case, for determining this eligibility. Deciding whether a party has a legitimate lien right may depend on examining court cases that have either upheld or rejected lien claims in the same state.
Unlike other security interests, in most states, mechanic's liens are given to contractors and material suppliers who may or may not have a direct contractual agreement with the owner of the land. In fact, this is often the norm because in most cases, the owner of the land contracts only with a general contractor (often called a "prime contractor"). The general contractor, in turn, hires subcontractors ("subs") and material suppliers ("suppliers") to perform the work. These subs and suppliers are entitled to liens on the owner's property to secure their payment from the general contractor.
However, to have an enforceable lien, it usually must be "perfected." This means that the holder of the lien must comply with the statutory requirements for maintaining and enforcing the lien. These requirements, which contain time limits, are generally as follows:
Providing the required preliminary notice to the property owner disclosing the entitlement to the lien (some states). Formally this involves serving a Notice of Intent to Lien
Filing notices of commencement of work (some states).
Filing notices in the required public records offices of the intention to file a lien if unpaid (some states).
Filing the notice or claim of lien in the required public records offices within a specified period of time after the materials have been supplied or the work completed (all states). The law varies from state-to-state on both the triggering event and the timing of this. Some states require the filing within a period measured from the time when the claimant completes its work, while others specify the event as being after all work on the project has been completed. The filing time periods after the triggering event vary.
Because of the difficulty often associated with the filing of mechanics liens and compliance with mechanics lien laws, many lienors use attorneys or mechanics lien filing services to ensure that their mechanics lien is filed correctly.[14]
Priority respecting other interests
The statutes creating mechanic's liens usually give them a higher priority with respect to other interests in the title than the law gives most real property security interests. Among other things, priority is the attribute that determines which of several competing security claims will have the first claim to the funds of a foreclosure sale. In this context, the priority of a mechanic's lien is determined either by the time the lien attaches to the title to the property or by the point in time to which it "relates back." With some exceptions, the lien attaches or relates back to a time prior to the time that any notice of it appears in the public records. In many states, this is specified as the time when the first visible construction commences on the building site. In others, it is when the contract is executed for the work to be done. In still others, each contractor or supplier's lien attaches at the time when it commences its own work. Therefore, persons dealing with the owner of the title to the property risk having their interests unexpectedly subject to mechanic's liens of which they had no knowledge.
Special provisions are made in some states for determining the priority between a mechanic's lien and the lien of a mortgage that is financing the construction on the land. For instance, in the State of New York, the appearance of specified language in the mortgage to the effect that it is a construction loan preserves its priority over mechanic's liens arising out of the construction, as long as subsequently filed lien claims that are legitimate are not ignored. In other states, such as Florida, it is an all or nothing proposition.[15] There, the recording of the construction mortgage before the filing of a statutory notice of commencement of construction provides the mortgage with absolute priority over mechanic's liens arising out of the construction. Still other states, such as California, provide priority for a construction loan mortgage recorded before the visible commencement of construction where the lender is obligated to disburse the funds. In the State of Illinois, there is a statutory funds disbursing scheme that, if followed, provides construction loan mortgage priority. In other states, there are still other arrangements and some states, such as Colorado, provide almost no practical means for a construction loan mortgage to obtain priority at all.
Enforcement
Mechanic's liens are enforced exclusively through judicial foreclosure sales, i.e., through court proceedings similar to mortgage foreclosures. The court must determine whether the requirements of the statute have been met and, if so, the priority of the mechanic's lien being foreclosed relative to the other liens or encumbrances on the title. Once that is determined, the court will order the property sold and the proceeds of the sale applied to the liens in the order of their priority.
Limitations
States may have various limitations on mechanic's liens. In California Law a contractor must wait to take advantage of the lien rights until any of the following conditions occur; otherwise the lien will be considered premature:
a) The work is completed according to the contracted scope of work,
b) the project has stopped (cessation), or
c) the person is prevented from finishing the work (terminated).
Each of these required events occur at the end of the project life-cycle (or at the end of the scope of work for the subcontractor, the project may be far from completed). The end of the project may not be remotely close to the actual time when the work was performed (and the time at which labor and materials were paid out of pocket for the work by the contractor).
Also, the work must go directly toward the work of improvement of the property. This may seem obvious, but there are numerous construction costs that are not subject to mechanics' liens. A portion of construction costs may not qualify for a mechanic's lien because the work did not improve the property. A good example are items that are not intended to be permanent, but nevertheless, necessary in the course of construction. A temporary construction fence may be required, may serve a valuable function in safety and security, but is never expected to become part of the realty, so therefore is not a cost that is permitted under a mechanic's lien.
The attractive nature of the mechanic's lien is that the lien is secured by real property and the property can be sold in order to pay the lien. This is powerful tool, but not always efficient.[16] In reality, this is a drawn out process that is not very efficient. However, given the economic conditions, and that lenders' usually have priority, the sale of the property may not be sufficient to pay for the value of the lien.
What is often overlooked is that the contractor is now financing the project when they perform work and do not receive prompt payment for that work. The contractor is now tying up valuable capital that could be used elsewhere while waiting for the end of a project. In addition, the contractor must bear the cost of litigation in order to enforce their mechanic's lien rights. For disputes of a minor value, a mechanic's lien is not going to be a cost-effective method of obtaining payment for services.
Releases of Lien
A lien release, also known as a release of lien or a cancellation of lien, is a document that may be voluntarily provided by a lien claimant, such as a subcontractor, in exchange for payment or a promise of payment from a general contractor or a property owner. Negotiations may be tricky, as lien claimants generally want to be paid before they release a lien, while the owner of the property subject to the lien will generally want the lien released before they make payment. Unlike a lien waiver that negates the right to file a lien in the future, a lien release cancels a lien that has already in effect.
Prior to making any payment, the property owner should request a release of lien from every supplier, contractor and subcontractor, which covers the materials used and the work performed on the project. A release of lien is a written statement that releases the property from the threat of lien. If the contract requires partial payments be made before the work is completed in full, then the property owner may request a partial release of lien covering all labor and materials used up to the time of payment.
Before final payment, a property owner should obtain an affidavit from the contractor that lists all unpaid parties who performed labor or services, or provided materials to the property. The property owner should make sure the contractor obtains releases from all of these parties before making final payment.
Often a mechanic's lien is discovered long after it has been filed in the public records, but by taking a few proactive measures, property owners can ensure their properties are protected from the burdens imposed by such mechanic's liens.[17]
Notice of commencement
File a Notice of Commencement before beginning any home construction or remodeling project. Record the form with the Clerk of the Circuit Court in the county where the property being improved is located. Post a certified copy at the job site, too. The Notice notes the property owner's intent to begin improvements, the location of the property, description of the work and the amount of bond (if any). It also identifies the property owner, contractor, surety, lender and other pertinent information.
A property owner who fails to record a Notice of Commencement or incorrect information on the Notice could result in having to pay twice for the same work or materials. Request a list of all subcontractors and suppliers who have a contract with the contractor to provide services or materials to the property.[18]
At the end of the project and after the contractor is paid in full and obtained all of the necessary Releases of Lien and affidavits as described above are obtained, file a Notice of Termination of Notice of Commencement with the Clerk of the Circuit Court in the county where the property being improved is located.
Challenging a lien
States typically have a process by which the land owner may challenge the claimant's prima facie entitlement to the liens on grounds such as proper identification of the property, compliance with notice requirements, and timing. If the lien claim survives those challenges, the owner may "bond off" the lien by filing a surety bond with the court in which the lien action has been initiated. This, in effect, frees the property from the lien and allows for sale of the property. The ability to bond off the lien is especially crucial where developers desire to proceed with the sale of newly built homes, which would otherwise remain unsold and unoccupied during the lien litigation process.[19]
Outside the United States
Countries that recognize mechanic's liens often provide for very different rights and procedures than those of the United States.[20]
Some provinces of Canada (including Quebec) and New Zealand recognize a process somewhat analogous to a mechanic's lien. The Canadian province of Newfoundland and Labrador allows for liens similar to those of the United States.
With the exception of Mexico, mechanic's liens are generally not recognized throughout Latin America.
Some countries, such as the United Arab Emirates, specifically prohibit the lien, except where voluntarily undertaken.
A lien is a form of security interest granted over an item of property to secure the payment of a debt or performance of some other obligation. The owner of the property, who grants the lien, is referred to as the lienee and the person who has the benefit of the lien is referred to as the lienor or lien holder.
A mortgage is a legal instrument of the common law which is used to create a security interest in real property held by a lender as a security for a debt, usually a mortgage loan. Hypothec is the corresponding term in civil law jurisdictions, albeit with a wider sense, as it also covers non-possessory lien.
Title insurance is a form of indemnity insurance, predominantly found in the United States and Canada, that insures against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. Unlike some land registration systems in countries outside the United States, US states' recorders of deeds generally do not guarantee indefeasible title to those recorded titles. Title insurance will defend against a lawsuit attacking the title or reimburse the insured for the actual monetary loss incurred up to the dollar amount of insurance provided by the policy.
Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.
A performance bond, also known as a contract bond, is a surety bond issued by an insurance company or a bank to guarantee satisfactory completion of a project by a contractor. The term is also used to denote a collateral deposit of good faith money, intended to secure a futures contract, commonly known as margin.
In finance, a surety, surety bond, or guaranty involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. Usually, a surety bond or surety is a promise by a surety or guarantor to pay one party a certain amount if a second party fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. The person or company providing the promise is also known as a "surety" or as a "guarantor".
A contractor or builder, is responsible for the day-to-day oversight of a construction site, management of vendors and trades, and the communication of information to all involved parties throughout the course of a building project.
In finance, a security interest is a legal right granted by a debtor to a creditor over the debtor's property which enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. One of the most common examples of a security interest is a mortgage: a person borrows money from the bank to buy a house, and they grant a mortgage over the house so that if they default in repaying the loan, the bank can sell the house and apply the proceeds to the outstanding loan.
A secured loan is a loan in which the borrower pledges some asset as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan. The debt is thus secured against the collateral, and if the borrower defaults, the creditor takes possession of the asset used as collateral and may sell it to regain some or all of the amount originally loaned to the borrower. An example is the foreclosure of a home. From the creditor's perspective, that is a category of debt in which a lender has been granted a portion of the bundle of rights to specified property. If the sale of the collateral does not raise enough money to pay off the debt, the creditor can often obtain a deficiency judgment against the borrower for the remaining amount.
In Mechanics lien law a Preliminary Notice is a notice sent by the general contractor, subcontractor, materialmen, equipment lessors or other parties to a construction project not to create a Mechanics lien but rather to establish the right to file a Mechanics lien in the event of nonpayment. The distinction is important. If the Preliminary Notice is sent but the claimant's bill is paid, the Preliminary Notice has no further legal effect. However, if the bill is not paid the claimant may now file a Mechanics lien on the owner's property. Most states do not allow the filing of a Mechanics lien without claimants being able to prove they first sent a Preliminary Notice.
In the mechanics lien process, a lien waiver is a document from a contractor, subcontractor, materials supplier, equipment lessor or other party to the construction project stating they have received payment and waive any future lien rights to the property for the amount paid. There are typically four types of lien waivers:
A maritime lien, in English and US law and elsewhere, is a specific aspect of admiralty law concerning a claim against a ship for services rendered to it or injury caused by it.
Subordination in banking and finance refers to the order of priorities in claims for ownership or interest in various assets.
Construction law is a branch of law that deals with matters relating to building construction, engineering, and related fields. It is in essence an amalgam of contract law, commercial law, planning law, employment law and tort. Construction law covers a wide range of legal issues including contract, negligence, bonds and bonding, guarantees and sureties, liens and other security interests, tendering, construction claims, and related consultancy contracts. Construction law affects many participants in the construction industry, including financial institutions, surveyors, quantity surveyors, architects, carpenters, engineers, construction workers, and planners.
PACE financing is a means used in the United States of America of financing energy efficiency upgrades, disaster resiliency improvements, water conservation measures, or renewable energy installations in existing or new construction of residential, commercial, and industrial property owners. Depending on state legislation, PACE financing can be used to finance water efficiency products, seismic retrofits, resiliency, and other measures with social benefits.
The Miller Act requires prime contractors on some government construction contracts to post bonds guaranteeing both the performance of their contractual duties and the payment of their subcontractors and material suppliers.
A "Little Miller Act" is a U.S. state statute, based upon the federal Miller Act, that requires prime contractors on state construction projects to post bonds guaranteeing the performance of their contractual duties and/or the payment of their subcontractors and material suppliers.
Retainage is a portion of the agreed upon contract price deliberately withheld until the work is complete to assure that contractor or subcontractor will satisfy its obligations and complete a construction project. A retention is money withheld by one party in a contract to act as security against incomplete or defective works. They have their origin in the Railway Mania of the 1840s but are now common across the industry, featuring in the majority of construction contracts. A typical retention rate is 5% of which half is released at completion and half at the end of the defects liability period. There has been criticism of the practice for leading to uncertainty on payment dates, increasing tensions between parties and putting monies at risk in cases of insolvency. There have been several proposals to replace the practice with alternative systems.
In Mechanic's lien law a Notice of Intent to Lien is a type of preliminary notice that warns the property owner, prime contractor, and/or other party on a construction that a mechanics lien or bond claim will be filed unless overdue payments are made within a certain period of time.
In Mechanics lien law a Texas Fund Trapping Notice is a preliminary notice that parties on construction projects who are not directly contracted with the owner send in order to preserve the right to file a mechanics lien in the event of nonpayment in Texas. This document is called a Fund Trapping Notice because its purpose is to inform the party making payment of the value of a contract to ensure that they retain sufficient funds to pay the party furnishing labor or materials.
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