Imagine going into agreement with someone and performing a service for them just to not get paid? Unfortunately, it happens more often than you may think, especially when it comes to construction projects.
When a property owner is getting work done there can be a difference of opinions when it comes to the quality of the work. This can cause the property owner to not want to pay the contractor.
The good news is there are such things as construction liens to protect contractors if this happens to them.
What are construction liens though, and how exactly do they help the contractor? Everything you’re wondering about construction liens is in this article.
What is a Construction Lien?
A construction lien is a claim made against a property owner by a contractor to receive payment for work they have done.
This practice is also known as a mechanic’s lien as it began in the mechanic’s industry before the construction industry adopted it.
Construction liens protect someone who has provided labor or certain materials to a project from the risk of not getting paid.
For example, if a property owner is not happy with the work done by the contractor on the property, they may choose to refuse to pay. This is where a construction lien comes in.
Construction liens interfere with selling or refinancing a property because it makes the title to that property unclear. The lien creates an interest in ownership of the property in question, which can lead to the forced sale or foreclosure of a property to provide the contractor the compensation they’re entitled to.
Because of this, buyers will likely not purchase the property because it’s possible they may lose their rights to the property.
Basic Process of Construction Liens
There’s a certain process you must follow in order to file a construction lien.
The process varies slightly between states. It also varies depending on what type of project you’re working on (more on this further down) but the general process is as follows:
Provide the Preliminary Notice
The preliminary notice is sent at the beginning of the project and is a notice telling the property owner that you are working as a contractor on the job.
Many states require the contractor to send this preliminary notice in order to protect their rights to make a lien claim later on if necessary.
However, in the states where this isn’t required, it’s still smart to send this notice as it can improve communication throughout the project.
Send a Notice of Intent to Lien
A notice of intent is a document that lets the property owner aware of the fact that if they do not pay their contractor they risk receiving a construction lien. Typically a notice of intent to lien is all a property owner needs to make the payment.
Because of that, this notice can save the hassle of actually going through with the process of filing the lien.
File the Construction Lien
If the property owner still has not paid the contractor following the notice of intent, the contractor then should actually file the lien.
To do this, the contractor must fill out a lien claim form. This form will include details on the project itself such as the address of the property and what work took place. It also should include the amount of money owed to the contractor.
Typically you fill out this form at the county recorder’s office in the county the project resides.
Release or Enforce the Lien
The lien that gets filed will ask the claimant to follow some steps once receiving it. Once the lien is satisfied and the contractor gets paid, the lien must be released to avoid penalties.
If the property owner still does not pay the contractor, however, the contractor can enforce the lien, resulting in a court action to foreclose the property.
How the Laws Differ Between States
There are certain requirements and laws one must follow when filing a construction lien and, like most laws, they vary between states.
One thing that does remain pretty constant between states is that liens in construction can typically only be filed if there is a written contract that covers what work is going to be done, the materials required for the job, and a price agreed upon by both parties.
One variation from state to state, for example, includes the degrees of separation between the property owner and the lienor in order to make filing a lien possible. For example, if you worked on a property, did not receive payment, and want to file a lien, the laws may be different whether you were the main contractor on the property or the sub-contractor.
Private vs. Public Construction Projects
Rules don’t only differ between states, however. They also differ depending on the type of project you’re working on, whether it’s private or public.
You’re more likely to work on a private construction project than a public one. The difference between the two is that a private project is when it is owned by a private entity while a public project is owned by the government.
Private Construction Projects
Private construction projects include work that is performed on properties owned by private owners or private developers.
If you don’t receive payment while working on a private project, most states allow you to file the construction lien against the property. This gives you, as the contractor, actual interest in the property that you worked on.
You must file the lien within a certain amount of time and if the lien is not paid you must foreclose on the lien. This could cause the property to be sold at an auction in order for you to obtain your payment.
Public Construction Projects
Public construction projects include projects where the work performed and the materials required are in order to improve a government-owned property.
Typically in this case a construction lien cannot be placed because most states, as well as the federal government, prohibit any party from gaining an interest in land that is publicly owned.
Because of this, most contractors working on public construction projects can only proceed if a performance or a payment bond is issued. In this case, the contractor can then file a claim against the payment bond, rather than filing a lien against the property itself.
Rather than the property foreclosing in this case, the claimant goes into foreclosure against the lien, eventually resulting in payment.
Avoiding Construction Liens
In order to avoid construction liens, your best bet is to establish a written agreement right off the bat.
Before any work is done, a written agreement should be in place between the property owner and the contractor. This agreement should include:
- The exact work to be done
- All materials used in the project
- Any other workers that may be hired
- A breakdown of the project cost
Both the property owner and contractor should sign this agreement.
When it comes to payment for any other workers on the job, there must be proof of payment, such as receipts. On this receipt be sure to include important information regarding the project. This includes information such as the date, the name of the worker paid, how much money they received, and what exactly they did to get paid.
Throughout the entire project stay on top of the workers. Ensure everyone is getting paid on time and is receiving the agreed-upon amount. If your contractor fails to pay the sub-contractors, you can wind up being at fault for that as the property owner, therefore you always want to make sure you have the proof of payment.
If you’re in need of placing a construction lien against a property, it’s in your best interest to contact a qualified attorney.
Because the laws differ between states it’s important to be aware of the specific requirements that are in your state. Even the smallest mistake can invalidate your lien and make you unable to file one.
And the amount of time it would take to learn the process yourself can take much longer than the time you’re given before you’ve run out of time to place the lien.
Verhaeghe Law can help you with the process and ensure you receive the payment you deserve for your hard work.
Your Guide to Construction Liens
Whether you’ve gotten a construction lien placed against your property or you would like to begin the process of filing a construction lien yourself, it’s in your best interest to contact an experienced attorney.
Construction liens, as you now know, have very specific laws surrounding them that make it easy to make a mistake during the process, and, in order to receive the payment you’re looking for, you’re going to want to ensure you’re doing everything correctly.
If you enjoyed this article and would like to read more, check out the other articles on our website.