Mechanic’s Liens Explained
Mechanic’s liens provide a means of relief to subcontractors and suppliers, or in some instances the general contractor of a construction project. Nonpayment for work performed or materials supplied is a common occurrence in the construction industry, especially where there are multiple parties involved, and the parties’ rights concerning payment, which are determined by contract, are often unclear. Mechanic’s liens were developed to provide a means of relief to contractors and suppliers who provide services or materials under such circumstances.
A mechanic’s lien is a security interest granted over an interest in property to satisfy the satisfaction of a debt, connection with the contracting of a service or the supplying of materials in relation to that property, as outlined in Final §162 of the Restatement (Third) of Property. The operative statute setting forth the requirements for filing a mechanic’s lien, the Pennsylvania Mechanic’s Lien Law of 1963, 49 P.S. § 1101 et. seq., creates a statutory lien for "persons performing labor and furnishing necessary materials to a contractor or subcontractor" in the improvement of real property. 49 P.S. § 1102(2). A "contractor or subcontractor" for purposes of imposing a mechanic’s lien under the Pennsylvania Mechanic’s Lien Law of 1963, is broadly defined under Final § 1 of the Restatement (Third) of Property as "a person who has an agreement with a promisee to furnish materials or perform services, or a person who has an agreement with a subcontractor to furnish materials or perform services[.]"
Traditionally, subcontractors providing labor and materials in the construction of residential real estate have lien rights under the Pennsylvania Mechanic’s Lien Law of 1963. However, the Pennsylvania Mechanic’s Lien Law of 1963 also allows for a general contractor’s subcontractors to recover a payments of a debt owed by the general contractor to a third party in the construction of the residence. The Restatement (Third) of Property provides: Lien rights of subcontractors. A subcontractor of a general contractor on a construction project may assert a lien either for a balance owed by the general contractor or for amounts owed subcontractors by the general contractor for services performed and materials furnished by subcontractors to a third person as part of his contract with the owner. The right of a subcontractor to recover against a general contractor is based upon the assumption that, inter alia , the general contractor is under an obligation to use at least some of the materials and services supplied by his subcontractors in connection with his contract with the owner.
Many subcontractors, however, do not have formal contracts with the owner of the property on which they perform work or supply materials. In Pennsylvania, such agreements are not a prerequisite to imposition of a mechanic’s lien. To the contrary, the Pennsylvania Mechanic’s Lien law of 1963 is written broadly to afford a noncontractor the right to file a mechanic’s lien. By allowing a noncontractor to file a mechanic’s lien, the Pennsylvania Mechanic’s Lien Law of 1963 allows for an increase in the pool of lien claimants, thereby enhancing the problem with the priority lien claimants face when faced with other lien claimants seeking recovery from the same property.
In addition to the above mechanisms for asserting a lien claim against an owner, a subcontractor who does not have a contract with the property owner may have a right of lien against the property owner’s real property that is the subject of the construction, provided the real property serves as collateral for a loan made to the owner. To impose a lien against the owner’s property, both the subcontractor and the owner must enter into a written agreement with a third party under which the third party does not fund the loan unless the owner gives a written order directing the lender to make the payment. For example, subcontractors can hope to recover a judgment against a contractor/developer who has created a fictitious "name lending" business as part of a plan to defraud workers and subcontractors. If the plan was accomplished by a third party, such as a bank or a hard money lender, subcontractors may still have recourse against the lender.
With respect to filing a lien claim against a noncontractor, courts have had to address what should occur where a claimant lacks privity with the contractor who caused improvements to be made to the property. Courts have uniformly held that the intent of the mechanic’s lien statute is "to protect all laborers and materialmen who furnish materials, and there is a decided tendency to favor the enforcement of mechanic’s liens." Jones v. Third Nat’l Bank in Phila., 459 A.2d 851, 853 (Pa. Super. 1983). Under Final § 2 of the Restatement (Third) of Property subcontractors and suppliers below the prime contractor in the construction hierarchy are permitted to file a mechanic’s lien to protect subcontractors and others who supply labor or other goods and materials.
When a Contract is Not Required for a Lien to Be Valid
A common question is whether a subcontractor with no formal written contract may still file a lien. The answer is yes, but the answer is not the same for all states. In some states, a subcontractor may file a lien even if you did not sign a contract at all, and in other states, the absence of a contract is fatal to any potential lien right. If your subcontractor has no contract, jury certainly needs to take a look at the statutory framework based on where the property is located.
For example, assume a subcontractor works on your property, but there was no formal contract. In Illinois, constructive contracts may be enforced by subcontractors even though they were oral or implied. An oral agreement may be deemed to exist if the circumstances indicate that they are based upon a tacit understanding, or that work has been performed upon the property and accepted, the nature and extent of the work has been agreed upon, or the work was specially ordered. However, it must be shown by evidence other than the oral testimony of the claimant that he did furnish material to the improvement and the value thereof. The court must therefore look only to such non-verbal circumstances as to impress the parties with the significance of the supply of furniture, labor and services. The contract may be broken by acts. Where one act is done, which can be explained on no basis save that it was done in pursuance of a contract, the intention of the parties can be incorporated into the contract to fill in the blanks of the memorandum.
In Nebraska, it is not necessary that the contract to be written. Even if there was no actual contract with an owner, there may be a lien if the parties intended to create a loan. Intent is often sufficient. An implied contract exists when there is no express contract but the circumstances clearly imply a contract. Anderson v. Morton Protective Serv., Inc., 653 N.W.2d 713, 719-20 (Neb. 2002). An implied contract may be found depending on the facts and circumstances of each case. Kozlik v. Patel, 589 N.W.2d 327, 331 (Neb. 1999). An implied contract exists when there is no express contract but the circumstances clearly imply a contract. Henneman v. City of Bellevue, 677 N.W.2d 467, 479 (Neb. 2004). An implied contract is implied or presumed to exist where there has been a mutual and simultaneous assent to the object or design thereof, even without any express agreement as to the terms.1The intention of the parties is the essence of the matter. Id. at 479-80.
In Alaska, a subcontractor’s lien may also be available although the analysis is different. A materialman’s lien exists in favor of a subcontractor without a direct contractual privity with the owner. There is no requirement that the subcontractor show a privity of contract with the owner. State ex rel. Alyeska Pipeline Serv. Co. v. Ounalashka Corp., 565 P.2d 359, 362 (Alaska 1977). Generally, a materialman’s lien cannot be obtained unless the materialman contracted either directly with the owner or with a contractor linked to the owner, although an exception to this rule has sometimes been recognized. Id. at 363.
How to Handle Oral Contracts
Verbal agreements are legally enforceable in many situations, but the application of that principle in the context of contractor-subcontractor relationships is not as straightforward. For one thing, just because terms were verbally agreed to doesn’t preclude the application of other law, such as the California Business and Professions Code sections that expressly require written agreements for different types of contractors and/or work. Another complication, however, is that contractor-subcontractor relationships can blur the lines over possible owner-principal relationships, especially if the subcontractor was hired by an original prime contractor for only some of the work on a project. Subcontractor’s right to lien the project is based on their contract with a prime contractor, but for lien purposes the law has different considerations for what constitutes that contract between the two entities.
The case of Clayton v. Civil Constructors, Inc. (2007) 156 Cal.App.4th 766 is instructive on the issue of whether a subcontractor has a valid line claim when they do not have a written agreement with the general contractor. This case arises from a $1.1 million judgement in favor of a subcontractor to whom the general contractor owed $44,000 in remaining balance on work completed plus a few other various amounts. The general contractor argued that the agreement between the two parties was not legally enforceable because it was never reduced to writing in a formal contract, which was purportedly required by CA Bus.&Prof.Code § 7159(a)(2)(A), governing direct contract from general contractors to subcontractors. That section states that no contract that falls under its legal definition "shall be enforceable against the owner or general contractor unless it is in writing and signed by the party to be charged." (emphasis added)
The appellate court disagreed with this argument by the general contractor. They held that the relationship between the original contractor and the subcontractor warrants certain independent consideration distinct from, for instance, a contract for the sale of goods in respect to enforcement. They cited other sections of California’s Civil Code including §1622, which states that an express contract is not required for an agreement to be enforceable or deemed binding. The Court further stated that the legislature included § 7159(a)(2)(A) to address concerns about fraud and misunderstandings for consumers but also made it clear that not every provision in that section should be equated to a written contract.
The court noted that while the original contractor could have objected to the subcontractor’s right to lien the property because there was not a written contract as required by § 7159(a)(2)(A), they could not defend themselves on the basis of that provision if the original contractor agreed to those terms and was in a position to do so. The Court could not expand the statutory limitation to the detriment of the party entitled to contract in order to prevent a lien claim from succeeding due to a lack of a contract.
Key Features of a Lien Claim
A subcontractor must be able to prove that it was hired for the work, that it did the work, and that it was not paid. We typically see the contract as evidence of this, but sometimes it is no longer available, or simply was never written down in the first place. In this case, liening a property can be more difficult, but not impossible. Documentation such as bills, emails, or even photographs of the work can often be used in lieu of a contract. To stand up in court, the proof must establish four essential elements: In other words, if a sub can offer enough proof that it did a specific portion of work on a job and that it was not paid for the work, then even if no formal contract exists, the sub will have a good chance of winning its lien claim. A contractor may also subcontract work to other contractors. If sufficient proof has been kept to support a subcontractor lien claim, the general contractor can similarly support a lien for work performed by a subcontractor. A general contractor will also not receive its final payment if a sub has not been paid for its work, meaning the GC will be similarly hurt if it cannot lien to recover its unpaid balance. Likewise, the employer of a sub-sub can support a lien for work performed by its subcontractor. Keeping track of all these documents is why it’s essential to work with an experienced construction attorney. But it shouldn’t mean you need to go digging through dusty old boxes. At this point it is best to consult a construction attorney to ensure you get the most benefit from your time and efforts.
Differences in Lien Statutes between the States
Because construction liens are creatures of state statute, we must understand how the laws vary by state. It is not a question of if our rights exist, but rather where and how these rights are asserted. In addition to local statutes, some states have their own lien forms, lien deadlines, and enforcement mechanisms. That alone should build a sense of urgency for all subcontractors to understand lien law. For example, a subcontractor working in Texas may have ten times the amount of time to file a lien as a subcontractor working in Florida. Both states, however, have a relatively short statute of limitations.
Fortunately, there are legal counsel throughout the country that are experienced and fascinated by construction law. However, there are also those lawyers who dabble in construction law and never have to think through these issues. With fourteen different lien states in 2010 over the course of my career, I have encountered almost every possible reaction or position regarding subcontractor’s rights against a general contractor without a contract. Take a couple minutes to review the following list of states with short summaries:
Delaware Members of the construction community in this state may be the only ones feeling more stressed. The time to file a mechanic’s lien in Delaware is the shortest of any state. A subcontractor must file his lien by the 90th day after the earliest work or material was furnished to the project. Delaware has no intermediary deadline for using a Notice to Owner or preliminary notice.
Georgia All subcontractors and suppliers may file liens but general contractors need to look at the statute carefully before relying on it to file a lien. Several districts have held that a general contractor may not file a lien without a contract nor can a general contractor , who is a subcontractor to an owner, file a lien under the act unless the contract provides for a lien.
Hawaii Hawaii does not permit liens by anyone without an express agreement.
Kentucky A prime contractor can enforce right to file a lien with respect to itself if it is a subcontractor to a general contractor.
Nebraska, South Carolina, and Virginia These states are restrictive and require an express contract for lien rights to attach.
Puerto Rico must counselors to reach Falstaff.
South Dakota and Utah These states do not explicitly prohibit liens by subcontractors without a contract. However, these states require that a subcontractor send a notice to the general contractor before filing a lien. Compare this to Minnesota which only requires a notice for residential projects.
Tennessee, Mississippi, Florida, and New Jersey Subcontractors and suppliers can also file mechanics’ liens under the law.
Direct Deadlines and How to File
As with any statutory liability, there are hard and fast deadlines for the filing of subcontractor liens in South Carolina. First and foremost, a subcontractor will need to file its South Carolina lien within 90 days of the last day of furnishing materials or labor to the project, even if no written contract exists. (A more detailed breakdown of the 90-day window is available in my November 1, 2012 post titled "Subcontractor Liens without a Written Contract"). This window applies to animosities where no written contract exists. A subcontractor cannot extend this period by sending written notifications demanding payment or requesting an extension of time to perform. Pursuant to S.C. Code Ann. § 29-5-90, liens are strictly statutory claims. Every aspect of the claim must be performed within the time period set by statute. Any items that fall outside of the statute are irrelevant to the lien. Therefore, although it may seem unfair to deny a subcontractor the right to perfect a lien based on an error in counting days between the last day of performance and the date the claim is filed, the Supreme Court of South Carolina has interpreted the statute to require just that.
Second, a subcontractor must file its claim of lien with the local clerk of court. As of January 1, 2013, all documents relating to a lien must include a cover sheet (a sample cover sheet can be found at the end of this article). The cover must include the title of the document and its complete contact information for future reference. Pursuant to S.C. Code Ann. § 15-36-100, at the same time a subcontractor pays its filing fees for the lien, it must also pay a $25 fee to the clerk of court for the filing of the document, including its cover sheet. Subcontractor should keep in mind, the fee for filing the claim of lien may vary according to the county. Although the filing process itself may be straightforward, disregarding a deadline or filing procedure could be catastrophic to a subcontractor’s ability to pursue a claim for compensation relating to its performance on a project.
How to Forego a Contract Dispute
Even without a formal written contract in place, there are a number of practical steps that subcontractors can take to resolve disputes about whether they can file a lien. Negotiation. Whatever the dispute, the first step in making sure you claim in a lien is enforceable is just trying to resolve it. The party that will be on the hook for the lien, usually the general contractor, might be willing to resolve the matter either because it will make his job easier or because he has been sued by the owner so he has an interest in the matter. The earlier you raise the issue the better; having secured some type of agreement will be extremely helpful later. Mediation. If negotiation fails, you may want to try mediation. Mediation is an informal process that seeks to assist the parties in finding a mutually agreeable solution to the dispute. It is often successful because the parties are encouraged to be open and honest about their respective positions and generally have one desired outcome: simply to get the matter resolved in an amicable manner. It is also less expensive and time-consuming than going to court to resolve the issue. Arbitration. Sometimes the owner or the general contractor will agree to go to arbitration. Arbitration is a much more formal process in which the parties present their evidence to a judge or commissioner at a hearing, and the arbitrator will then issue a ruling in favor of one party and against the other. Just as you may need to weigh the cost-benefit in bringing a claim or going to court, likewise you will have to consider whether to go to arbitration. Legal Action. If you cannot resolve the dispute informally, you will have to decide whether to proceed with litigation. You will need to file a complaint with the court and serve the general contractor with the complaint. Be prepared for the legal fees and expense of discovery. You should also know that even though you may win your case, you still may not end up getting paid. Ultimately, the effectiveness of your judgment is dependent on whether the other party has the ability to pay.
Potential Fallout from Filing an Invalid Lien
There are a number of consequences of filing an invalid lien. First and foremost, the lien claimant runs the risk of having the lien expunged. In addition, the lien claimant may also be liable for damages suffered by the owner as a result of the improper filing-including the attorney’s fees the owner incurs to have the lien expunged .
Subsubcontractors who file an invalid lien without a proper contract may face even greater financial exposure, because near the top of the list of financial considerations is the fact that all contracts must be in writing if subcontractors want to be able to place liens; and, if they do not, they are not only liable for expungement damages, but may also be barred from subsequently pursuing a lien and may also be barred from filing a mechanics lien lawsuit. So, the next time a subcontractor is thinking about filing an invalid lien, or one without a written contract, he might be better served to weigh the likelihood of success of recovering his unpaid balance alongside the potential financial exposure should he fail to prevail.