The mechanic’s lien is a unique legal remedy available to the construction industry to secure and collect on debt that arises from services furnished to a construction project. Each state has specific rules about when the lien must be filed (see Lien Deadlines) and who has the right to file. This general rule stands across the country: Entities that furnish labor, materials, equipment or services to a project where real property was being improved in any way are entitled to secure that claim by filing a lien against the property, if the document is filed relatively soon after furnishing. And what is the exact value of a mechanics lien? Why should one be filed? How exactly does it work to get the claimant paid?
Generally speaking, mechanic’s lien claims are very effective at getting claimants paid rather quickly. Since lien claims have so many consequences, however, the exact consequence that prompts payment may be different for each circumstance. For more detail, see Zlien’s White Paper, 5 Ways A Mechanics Lien Can Get You Paid.
1. A Mechanics Lien Encumbers the Property
When a mechanic’s lien is filed, the document is actually recorded with land records and appears on a title search of the property. Anyone who buys or accepts the property after the recording of the lien claim (and in some states even before the recording) accepts it subject to the claim. As a practical measure, this means the property will not be sold, refinanced, or otherwise transferred without the mechanic’s lien claim being paid or addressed.
2. A Mechanic’s Lien Gets the Lenders Attention
Many construction projects have a construction lender. These lenders are loaning money to the project and have a mortgage against the project property to secure that claim. When a mechanic’s lien is filed, it intervenes in that security interest. In some states, a lien has priority over the lender’s interest. Lenders usually step in after a mechanic’s lien is filed to demand action.
3. A Mechanic’s Lien Gets the Owners Attention
A mechanic’s lien gains the property owner’s attention for the same reasons noted above. The property owner may not know or care whether suppliers or subcontractors have been paid. That changes when a mechanic’s lien is filed.
4. When Mechanics Liens Are Filed They Cause Contracts To Get Breached
Every construction projects has a number of contracts related to it. There usually is a contract between the property owner and the prime contractor, the prime contractor and the subcontractors, the owner and the lender, the owner and the architect, the owner and its tenant, etc. It’s common for all of these contracts have a provision that obligates a party to keep the property free and clear of liens. Once a lien is placed against a project, these contract provisions put one party in breach. This breach puts pressure on the breaching party to resolve the lien claim as soon as possible.
5. More Parties Become Obligated to the Debt
If a contractor does not get paid on a project and does not file a mechanic’s lien, it may be restricted to filing suit against the party who the contractor contracted with. For example, a supplier to a subcontractor is only able to file suit against that single subcontractor. Filing a mechanic’s lien, however, brings other parties to the table. Typically, the supplier is authorized then to file suit against the general contractor, the property owner and the land itself. The more parties obligated to pay the debt, the more likely the claimant is to get paid.
6. A Mechanic’s Lien Sets a Firm Deadline
Filing a mechanic’s lien can help expedite payment because it sets a firm deadline for resolution of the claim. Everyone dislikes litigation, and a mechanic’s lien will set a firm deadline for litigation to begin if the claim isn’t paid.
7. Fall Back On the Property For Payment
One danger whenever credit is extended is that the debtor just won’t pay or can’t pay. The mechanic’s lien gives authority to actually collect from the property. The real estate itself can be sold to pay a claim.
8. People Will Pay to Avoid Dealing With a Mechanic’s Lien
There may be a dispute preventing payment, such as the property owner or general contractor disputing the quality of workmanship. They may withhold money claiming default, but frequently fold when a mechanic’s lien is filed. Dealing with a mechanic’s lien is expensive.
9. Liens Are Hard to Challenge
Property owners and general contractors may pay up when confronted with a mechanic’s lien because they are extraordinarily difficult to challenge. If procedures when filing the lien are not followed or a technical mistake is made, the lien may be dismissed. Challenging a lien can be risky. Some states, such as Washington, will award lien claimants attorney fees if someone challenges the lien claim and fails to win.
10. Mechanic’s Lien Claims Help When Parties File For Bankruptcy Protection
When unpaid for services or materials furnished to a construction project, the reason is often because one or more of the parties on the project have sought bankruptcy protection. This puts most debts in a state of limbo and makes it challenging to collect. Mechanics lien claims help in a bankruptcy situation, though, by securing the debt to put the lien claimant towards the top of the list of those entitled to payment in the bankruptcy and/or giving the claimant the ability to proceed in court against other parties while the bankruptcy is pending.
11. Mechanic’s Lien Will Effectively Freeze Money Flow on the Project
Getting paid on a construction project can be tough because money has to be exchanged across multiple tiers of parties. When a mechanics lien is filed, it frequently forces this flow of money to stop. The lender or the owner will actually stop paying its general or certain subcontractors until it gets assurances that the claim is paid.
12. Mechanic’s Lien Claims May Force Parties Into Joint Check Agreements
Sometimes, a mechanic’s lien claim will expose a party’s financial difficulty. For example, a supplier may be providing materials to a subcontractor going through tough times. When the supplier is not paid, filing a mechanic’s lien may be the only way to get the owner and the general contractor’s attention, prompting everyone to look at the subcontractor’s situation and learn that they are not able to pay the bills. This may result in the parties agreeing to pay the supplier through a joint check on the project, allowing the supplier to continue to profit on the job, but not subject to the financial problems of the customer.
13. Lien Claims May Entitle the Claimant to Attorney Fees and Other Costs
Most states have statutes that allow claimants to add attorneys fees, collection costs, filing costs, interest and other expenses and charges on top of the lien. This makes it a lot more risky for property owners and others on the project to dispute your debt, because if they so dispute and refuse to pay, every day and every move they make subjects them to more expense.
14. Mechanic’s Liens Escalate the Situation and Prioritize the Debt
Sometimes, getting the owner or prime contractor to open the coffers and pay the debt just needs a little push. Filing a mechanic’s lien escalates collection efforts and shows the other parties on the project that the claimant is serious about getting paid.
15. Mechanic’s Lien Claims May Affect a Contractor’s Bonding
Filing a mechanics lien claim on a bonded project creates exposure to the bonding company. It will require the contractor to answer to them for the lien claim right away.
16. Lien Claims Affect Relationships
Typically, the prime contractor has a good relationship with the property owner, the property owner has a good relationship with the lender and subcontractors have good relationships with the prime contractor. There are relationships all around on a construction project, but they are all very delicate. When a party isn’t getting paid and files a mechanics lien claim, these relationships are heated up to resolve the dispute.
17. Mechanic Liens Create Leverage
When negotiating a debt, leverage is everything. Having a mechanics lien connected to a debt will significantly increase the chances of having that debt paid. A mechanics lien on the property gives the debt security, involves more parties, creates contractual breaches and is hard to remove. For these reasons it creates leverage, which becomes another way the mechanics lien can help get a claimant paid.