Liens are creatures of statute and, as such, have been held to be in derogation of common law. The practical effect of the preceding sentence is that lien statutes that allow construction professionals to file liens to protect their right to payment are strictly construed and the slightest mistake can result in a completely invalid lien. It is therefore critical for a construction professional to comply with the lien filing statute in the subject state to the letter, or risk not getting paid.
A brief overview of the general requirements and considerations associated with perfecting a lien can be a helpful guide as construction professionals navigate this heavily-regulated aspect of the industry.
Who can file a lien?
As a starting point, who is entitled to file a lien related to a construction project? All states provide that the prime contractor, subcontractors and material suppliers have lien rights. Typically, however, the claimant must be within three “tiers” of the property owner.
There are exceptions to this rule. Some states also allow equipment renters, workers, architects, engineers, surveyors and anyone else who contributes services to the project to file a lien claim for the value of their work. In Texas, for example, any person who performs labor or furnishes labor or materials in connection with a construction project may file a lien.
In addition, if the claim is based on supplying a physical product or material, that product or material must become a permanent part of the project before any lien rights will attach. Finally, as a general rule, even in states that recognize broader lien rights than the “three tier” model, lien rights do not extend to suppliers of suppliers. Only the first material supplier to a subcontractor enjoys lien rights under most states’ statutory frameworks.
When does a lien need to be filed? What requirements are associated with the filing?
The first step in the lien-filing process is usually notice of some form to the owner. Different states have different notice requirements, in terms of both the required content of the notice and the time for filing the notice, so it is important for construction professionals to familiarize themselves with their particular state’s requirements.
However, most states require, at a minimum, what is called a preliminary notice of the lien. This document is usually either filed with the clerk of the court where the project is located or delivered to the owner, either before any labor or materials are provided on the project or within some specified time thereafter. The purpose of this document is to provide property owners and potential purchasers of the property with notice that certain contractors or suppliers will be providing services or materials in connection with the project.
Every state also requires a notice or “claim” on the lien after there has been a failure to make a timely payment. The deadline for asserting a claim on the lien is typically tied to the completion of the project. However, some states, like Arkansas, require that a contractor file a claim of lien within 120 days after labor or materials are furnished, regardless of the stage of completion of the project or payment made. The claim of lien is then recorded in the county office or the clerk of court’s office, and the property’s title is thereafter subject to the recorded lien (meaning that there is a cloud on the title, so the property cannot be sold unless or until the lien is satisfied and removed).
A word of caution — construction professionals should be sure to file the lien in the name of the specific corporate entity involved in the project, named in the subject contract, etc. There have been countless lawsuits filed in which courts have held that liens which are not filed in the exact name of the entity that performed the work and holds the lien rights are unenforceable.
How to enforce a lien
Most states require that a formal action be brought to enforce or foreclose the lien within a specific time period or the lien will be extinguished. There are different ways to enforce a lien, but the general framework for the process involves three steps:
- The filing of a lawsuit against the owner (or contractor and others who are involved) to obtain a judgment
- Entry of a judgment of foreclosure in favor of the lien-holder
- A sale of the property at public auction
An important consideration in terms of lien enforcement is priority. This can be a tricky concept because liens that are earlier in time are not always given priority. In some states, lien claims are given priority based on the date that work commenced on the project or when the claimant first performed work or delivered materials to the project. In other states, a construction lien is superior to all other liens or encumbrances, including construction loans, permanent mortgages, and the like.
However, in most states, all construction liens on one project have the same priority regardless of when the work was done or the claim recorded.
What if a lien is invalid?
A construction lien is beneficial because it attaches to real property, which gives the contractor security in tangible form (i.e., the property can, if necessary, be sold in an effort to satisfy the lien and get the contractor paid). If a contractor fails to properly perfect its lien, a contractor’s only recourse against a non-paying owner is to file a lawsuit to try to obtain a money judgment and then collect on the judgment. Although a contractor could ultimately, if successful, collect on a judgment arising out of any such lawsuit, the lawsuit could take many months to resolve. By the time the case is litigated and a judgment is obtained, the owner could be bankrupt, the property could be encumbered with other mortgages and debts, and the judgment could be worthless.
So although a contractor without a properly perfected lien could potentially still recover from the owner, the litigation road is much more expensive and time-consuming, and ultimately less likely to result in payment, than the lien-filing process.
Remember, the lien statute framework exists to protect construction professionals from non-payment, but it is up to construction professionals to pay attention to the details. The most important point to keep in mind is that failure to “sweat the small stuff” and comply with each and every one of the applicable procedures and deadlines associated with the filing of a lien will extinguish any lien rights and will, more importantly, prevent a contractor from being paid.