It’s every contractor’s worst nightmare: You’ve spent months on a job, wrapped everything up in a nice bow, but haven’t seen any payment for your work. Sadly, a breach of contract like this is not uncommon in construction, but that doesn’t mean you’re out of luck just yet. This is why we have construction liens (a.k.a. mechanic’s liens).
When you experience nonpayment (or underpayment) on a project, you likely have lien rights to file a construction lien which can make sure you get the compensation you’re owed. Below, we’ll walk you through the ins-and-outs of construction liens, how they’re used, and what you’ll need to file one.
Key Takeaways
Simply speaking, a lien is a legal claim made against an asset. In the construction industry, a construction lien is placed against a real estate property or asset to make sure the people who have worked on that property are paid appropriately for that work. Think of it as a protective measure that ensures all tradespeople are compensated for their involvement on a construction project.
Construction liens don’t just apply to general contractors. Subcontractors and material suppliers can file liens as well. Outside of a construction lien, subcontractors can also access extra protective measures in the form of performance or payment bonds. These are either posted by the owner or GC when a sub needs money outside of scenarios where a lien is filed.
Every state has its own rules, requirements, and deadlines around lien filings, and depending on where you’re working, there are several different mechanisms, such as providing 20 day notices that have to be in place to file one correctly. We won’t get into the weeds here, but your state’s website should outline the requirements, pre-notices, and last day deadlines required for your state. And while there’s no substitute for sound legal advice from an attorney, most will point you towards these state guidelines as a starting point, so read your states rules before you rack up a ton of attorney’s fees.
Unless you’re the luckiest contractor alive, you’re always going to face some financial risks in your work. Typically, construction companies operate on very tight cash flows, and most companies’ profit margins are very low. If anyone above you goes out of business, construction liens secure your ability to get paid on the job so you (hopefully) don’t suffer the same fate, hopefully.
Construction liens also provide some secondary assurance on the fact you’re building or improving on a real property, an asset, that has value. This means that if a property owner or homeowner ever wants to sell the property, they have to clear all liens first. As long as you keep the lien in place, you’ll be paid – though it might not happen overnight.
One big caveat to mention here: Some states have rules against how long construction liens can be held on a property. For example, contractors in Florida have 90 days from the termination of a contract to file a mechanics lien claim, while those in North Carolina have 180 days. At the same time, these states also require owners to clear liens by a certain deadline, so it ultimately evens out. Still, if you’re not staying on top of all the legal processes and deadlines, it can be easy for subcontractors and suppliers to fall by the wayside. State regulations are very clear on the amount of time that you have to file liens and by not doing it in a timely manner you’re giving up most of your leverage.
The main parties involved in a construction lien include the assignee (lien claimant), owner, and lender.
General contractor (prime contractor)/ subcontractor/material supplier: This is the “assignee” filing the construction lien. Note: if the General Contractor isn’t the claimant on the lien, your state might still require the GC’s information. If you are a subcontractor you will want a copy of the prime contract (direct contract) between the owner and general contractor which would have many of the items needed, such as the property address, description of the property, and other written contract details.
Owner of the property: The person or company holding the property title, also referred to as the “assignor”. Once a lien is filed, the owner’s legal rights to the property are in jeopardy until final payment is issued.
Lender: Depending on the state you’re in, the claimant might be required to list the lender, or the bank/company financing the construction project.
Like we mentioned earlier, every state is going to want you to file a lien slightly differently. But to give you a general overview of how the filing process works, here’s a quick outline of how you’d file a general lien:
Some states might require notarized affidavit, and some might require a lien to be sent via certified mail. You could possibly file a lien at a county clerk or county recorder’s office in some jurisdictions. Make sure to double-check your state’s unique requirements before filing.
One last thing we should mention here is the idea of “perfecting your lien”. Perfecting your lien means you have followed the process correctly from end to end. When a construction lien is perfected, it can then be attached to the property or asset it was filed against. As a subcontractor, when you aren’t paid for materials and labor to install them, it’s a good idea to hold payment to materialmen (suppliers) and let them file a lien to the general contractor. This typically get’s the ball rolling.
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Along with requirements on how to file a mechanics lien form, some states will require specific forms and notices. They may require you to submit a preliminary or pre-lien notice before you can actually file a lien. Other documents can include a release of lien form, or payment remittance. Most states offer construction lien templates you can use that will outline everything you need to file successfully. If your state doesn’t offer one, working with a lawyer specializing in construction law and knowledge of mechanic lien laws can help you through the process. Make sure you’re using someone knowledgeable in your state, California processes are considerably different from the state of Virginia.
Before starting on a construction contract, many owners and GCs will have people fill out conditional lien waivers when submitting a progress payment application, which state that they have been paid through a specific date for a specific scope of work. If a lien ends up being filed later, this waiver can render it invalid.
One final disclaimer before we leave you: Mechanics lien laws vary by state, and that means the information we’ve provided here will of course be subject to those requirements. If you need to file a construction lien, make sure to review your own state’s specific rules and regulations.
Looking for more resources on how to protect your construction business? Check out our guide to construction insurance.