From: The Grassroots Newsletter, February 2000
This month's topic is an issue that not many in the contracting industry like to talk about. It may be a boring topic. But, as a contractor you need to be informed about your rights and privileges under your state lien laws. Each state has differing regulations but there are basic truths about liens that are standard. These need to be discussed here.
What is a lien?
The dictionary defines a lien as "a claim on the property of another as security against the payment of a just debt."
A lien is a specific legal process that can be used by contractors and others as a lawful remedy for securing payment for labor or materials that have been used to improve another person's property. Lien laws are based on the theory that if an owner's property has been enhanced, the owner should not receive the benefit of the enhancements unless he pays for them. Lien laws are designed to give some protection to laborers and material suppliers in the event of default by a contractor or property owner.
When a lien is recorded with the appropriate governmental agency, it serves as a cloud on the owner's title to the property. In the worst cases the property can be foreclosed and sold at sheriff sale with the proceeds used to pay laborers and material suppliers. If a contractor or someone else places a lien against the owner's property, the threat of foreclosure by the holder of the lien makes it difficult if not impossible for the owner to sell his property or use it as collateral for a loan. Lien foreclosures can happen even if the owner has paid the prime contractor in full but the prime contractor has not paid laborers or material suppliers.
State lien laws are a firm expression of the legislature to stand behind and protect those who enhance the property of others by adding labor and materials.
Is public property subject to a lien?
Public property is not subject to statutory lien in most states. You will want to check on the exact laws for your state or location of your business. We will discuss the Miller Act in an upcoming "Grass Roots" issue. This federal law protects the contractor on federally funded projects.
Who is entitled to file a lien?
Any person who furnishes labor or materials used in the construction, alteration, or repair of any building, land, or other structure. This is the provision no matter who requests the labor or materials.
Is the land subject to the lien?
The land directly upon which any building, improvement, or structure is constructed, along with a certain amount of space around it, is also subject to the lien, if at the beginning of the work the land was owned by the person who caused the work to be performed.
How does a contractor file a lien?
First consult an attorney to get legal advise. In most states anyone entitled to file a lien has 90 days from the completion of the structure to file a claim for a lien. In some states the original contractor may have 120 days and all other parties may have 90 days to file, so research or investigate your state laws regarding this critical point.
The lien claim must be filed with the County Clerk or County Recorder of the county in which the property is located. The claim must state the following information:
- Owner or reputed owner of the property
- Name of the person by whom the person claiming the lien was employed
- Time when the first and last labor was performed or materials were furnished
- Name of the person to whom materials were furnished
- Statement of the terms, time, conditions of the contract
- Property legal description
- Claim for lien must be verified by oath - notarized
Does the lien have a time limitation?
A lien can bind a building for a limited time during which a suit must be filed in court. Otherwise the lien expires. Again, be informed about the time limit in your state. Some states limit the time for a lien to 6 months, others 1 year.
What is lien ranking?
When an owner or contractor causes a project to become lienable, the wise subcontractor will have information in hand to file the liens. If the matter goes to foreclosure, suit, court judgment and final settlement, then "ranking of liens" becomes important. Usually not everyone will get all the money he or she has tied up in the project.
Here is the order of payment. First, all persons other than the original contractors and subcontractors; then, subcontractors; then, original contractors (those who contract directly with the owner).
This information is very important to your business because not all jobs are the "give-price, do-work, send-invoice, get-paid, all-happy" type. Many contractors who take bids do not want to hear about liens when payments stop. They exert pressure on subcontractors or material suppliers to delay filing liens because the "owner is one of our good customers." This can be a detriment to your business if you are caught up in this game. Know your rights. Be informed. An informed contractor is a profitable contractor. A profitable contractor will be around to bid tomorrow's jobs.
When I first began my contracting business, I was eager to do a good job and I was eager to do any job that came along. The business community was aware of this, and it was not long before requests for "prices" came my way. I was informed as to lien requirements in my state. I informed one of my prospective contractors of my right to file a "notice of intent to lien" as part of the contract process (no work performed yet). It didn't take this contractor long to inform me that if I were to include this "notice of intent to lien" as part of my signed contract, I could expect no further work from him. He was afraid that this document would send a negative message to his customers and would thus hurt HIS business. That contractor was not interested in my business and was ignorant of lien laws. I no longer give "prices" to that contractor. I've found many others glad to work within the rights and privileges of the contracting community.
Staying informed has been profitable for my business. I take time to educate my prospective customers about lien law requirements. Many of my customers fully accept and appreciate the information when it is given prior to construction activity.
Test Taking Tip
When taking an exam for a license, quickly read the entire exam before answering any questions. This will give you an over view of the scope of the exam. You may find that some questions will actually answer other questions on the exam.
www.contractorexam.com
